Wall Street’s Next Ticking Time Bomb: Pensions

Make no mistake, the criminality and fraud of most, if not all, DC politicians that is being exposed now is also occurring in corporate America and at pension funds, especially with regard to fraudulent financial reporting. As an example, Exxon is now being investigated by the SEC over its asset valuation and accounting practices. The same concept can be applied to pension funds (public and private). The Dallas Fireman and Police Pension fund is the postcard example of both investment and accounting fraud: LINK.

The pension time bomb has been activated for a long time but it’s now in the final countdown. Pensions are woefully underfunded even if we give them the benefit of doubt on their current use of market-to-market. Every pension fund under the sun in this country – because rates are so low – has monthly negative outflows of cash: beneficiaries are being paid more money than is flowing into the fund. If the stock market declines more than 10% for an extended period of time, nearly every pension fund in the country would blow up. This is why the last two stock plunges, which took the S&P 500 down over 10%, were met by heavy, if not blatant, Fed intervention which produced a steep V-bounce in the stock market both times.

Yesterday I spoke to a friend/colleague who works at a public pension fund. He said the latest fad in pension management land is to shift money out hedge funds – which are woefully underperforming the market – and to put even more money into private equity funds. This allows the pension funds to subject that capital to a quarterly mark to market test rather than an daily or monthly valuation accounting. The only problem: private equity investments are highly illiquid and the valuation of the underlying investments is an “art” that is not at all based on actual market transactions. This private equity investment mark-to-market “Picasso” leads to extreme “over-marking” of private equity investment valuations at pension funds.

This is also one of the primary reasons that the Fed can not raise interest rates even if it were true that the economy was improving and the labor market was tight, both conditions of which we know are not even remotely close to accurate but everyone seems content to play along with the joke.

Many pensions have now allocated as much as 20% of the fund to private equity. This is because they can control to a degree where the investments are marked and as long as the stock market does not decline, they never have to market them down. But with the example of the Dallas pension fund above, if the beneficiaries are allowed to withdraw all of their money, the fund will have to unload its illiquid private equity investments to meet the outflow requests. Good luck getting anything close to where those investments are marked in the fund. The beneficiaries won’t receive anything close to the current stated value of their pension account.

If the status quo in the markets were to continue for the foreseeable future – which it won’t – pensions funds will run out of cash to pay beneficiaries well in advance of the “foreseeable future.” Without cutting benefits drastically or, in the case of public pension funds raising taxes steeply to cover pension beneficiary outflows, some public pensions will hit the wall within 12-24 months. If you are worried about this and want to know more about building your retirement funds without solely relying on pensions, then you can find more information by clicking on the link.

Away from private equity investing – which is just another of the many asset bubbles spawned by the Fed’s near-zero interest rate and money printing policy (by the way, the Fed unbeknownst to many is still printing money) – Wall Street has been busy stuffing a plethora of high-fee generating asset-backed “investment” securities into the market. These securities exploit the need by pensions to generate much higher investment income. When you hear the term “reach for yield,” think: pigs are greedy, hogs get slaughtered. These securities are hog food.

The only problem is that interest rates are so low now the risk embedded in the underlying asset pools are much greater than the interest rate compensating the investor for buying these securities. Ratings agency fraud is also present again. This is another instance of the current period of financial insanity “rhyming” with the Wall Street-fueled insanity that led to the 2008 financial collapse.

A perfect example is the latest “brain child” of Wall Street in which the payables from cell-phone bills (the mobile carrier’s receivables) are packed into pools and securitized into “bonds” – LINK. Verizon is the first to do a deal like this. It’s receivables from cell-phone bills were packaged into bonds, received a triple-A rating and were priced at 55 basis points over the benchmark triple-A corporate index. That means it was issued around a 2.67% yield.

Think about this way, would you lend money to a stranger to pay his cellphone bill in exchange for receiving the amount you loaned plus receive a 2.67% annualized rate of interest on the loan next month? There’s a reason the bonds were priced at 55 basis points over standard triple-A bond. If the implied reason were apparent to all, the bonds would be yielding substantially more. Eventually that reason will come to light and the bonds will tank in price.

The Dallas police and firemen had the right instinct: if you are eligible, contact your pension administrator and demand to receive any pension money that can claw out of fund now. Your alternative is to face substantial payment cuts at some point. Eventually your fund will collapse and you will otherwise receive nothing more than an “Oops, Our Bad” letter from your pension fund.

20 thoughts on “Wall Street’s Next Ticking Time Bomb: Pensions

  1. Well that really sucks. I’ve only got a year to go before I can start drawing full pension from the municipality with which I am employed, and there might be dick on a stick waiting for me instead. So what you’re saying, Dave, is that I should go for a lump sum if possible?

  2. Those in crumbling pension funds are probably no worse off than those of us who invested in IRAs and 401ks. I cashed out my IRA, paid the taxes, and loaded up with silver and gold.

    My intention is now to sell my house in Florida, take the proceeds, buy some more Goldmoney and silver, and move to the Denver area. I’ll rent till things blow over and hopefully buy something after prices come down.

    Denver seems like the logical choice for me as I travel for business, and DIA is a convenient airport for travel to either coast or anywhere in between.

    I’m hoping for the best, yet preparing for the worst. I think that is the best we can do in these times.

  3. Yo Dave. What struck me above this article was loss of faith in “the system” that it represents. Im glad you wrote about it because it it really struck me and ive been thinking of it since i read it. Thus is the type of cascading loss in confidence in the system that accompanied the collapse of the Ussr. Taken in conjunction with our many other challenges it definately puts people on edge and makes one wary of the many “promises” that supposedly undergird “the system”.

  4. Such a fraudulent market. Cash and physical silver are the only way to go for me – hopefully muppet retail short volatility and living well beyond their means in debt get wiped out mercilessly soon. Central bank criminality is out of control.

  5. I watched The Big Short last night for the first time. After seeing the last crisis explained in such clarity, I got a good laugh out of the cell phone bills being securitized into bonds. Wow, we really are at peak greed and insanity. The collapse is going to be amazing.

  6. Dave:

    With regards to the whole securitization of Cell Phone bills. I’m pretty sure they will be given a higher rating than mortgage bonds. Modern morons will live in a box before they give up their phones. Case in point from a recent article in a Staten Island Newspaper about the installation of free charging stations in the Ferry Terminal:

    “Sal Inzauto, 52, is homeless and lives at the St. George ferry terminal. He thinks that riders will eventually fight over the new charging stations, just like they did with outlets on the boats.

    “It’s just what happens,” Inzauto said with his own phone plugged into one of the new outlets. “There’s still not that many of these.””

    Not one person, that I shared this article with, saw anything wrong with the above statement…I still can’t believe I read it.

    Best Regards,
    Sofa King

    1. We’ll see. Be very easy for someone who’s squeezed for money to transfer their ATT iphone acct to Cricket for 1/2 the monthly cost and default on ATT

  7. If the stock market declines more than 10% for an extended period of time, most pension funds in the country would NOT “blow up”. Most pension funds have only about 50 % in stocks. A 10% decline, which we did have one less than a year ago, did not “blow up” any pension funds that I know of. It would probably take a severe bear market in stocks to “blow up” most pension funds.

    1. Nope. Have you studied the industry? Every single pension fund has severe negative monthly cash flows because beneficiary payouts exceed current monthly contributions. Every pension fund sells stocks and some bonds to make monthly outflow requirements. Most have 20% of their fund in private equity. Can’t sell that very easily. If the SPX went down over 10% and continued down like for several months, pensions would not be able to meet outflows.

      1. Well we just had stocks go down over 10% for a couple of months last year. Oh, I see you added “and continued down”, like may be in a bear market as opposed to a typical 10% correction. Yeah, if stocks dropped 10% and kept falling for a number of months then you may be right.

        1. Go argue with someone else. Technically, any pension fund that is paying out more than it takes in has already hit the wall. Now they’re all just one big Ponzi scheme. I’m sorry if you are dependent on a 401k plan that is going to implode. Life can be unfair that way.

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