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**Mega** · September 26, 2013, 04:38 PM

Re: Taibbi Strikes Again

**don** · September 26, 2013, 04:44 PM

Re: Taibbi Strikes Again

Wall Street and the TBTFs get rich off workers' savings?

Say it ain't true . . . just can't be . . . . conspiracy theory, conspiracy theory . . . bawk!

**Forrest** · September 26, 2013, 09:41 PM

Re: Taibbi Strikes Again

Even asleep I only see the nightmare. And I'm trying really hard to get a good nights sleep!

**GRG55** · September 26, 2013, 11:37 PM

Re: Taibbi Strikes Again

Originally posted by Forrest View Post

Even asleep I only see the nightmare. And I'm trying really hard to get a good nights sleep!

I have the same problem. Apparently melatonin pills are the answer.

Or good Scotch...

**thriftyandboringinohio** · September 27, 2013, 09:36 AM

Re: Taibbi Strikes Again

one of my favorite bits:

...There's $2.6 trillion in state pension money under management in America, and there are a lot of fingers in that pie. Any attempt to make a neat Aesop narrative about what's wrong with the system would inevitably be an oversimplification. But in this hugely contentious, often overheated national controversy � which at times has pitted private-sector workers who've mostly lost their benefits already against public-sector workers who are merely about to lose them � two key angles have gone largely unreported. Namely: who got us into this mess, and who's now being paid to get us out of it...

**BadJuju** · September 27, 2013, 11:53 AM

Re: Taibbi Strikes Again

The cutthroat bastards need to hang.

**flintlock** · September 27, 2013, 04:48 PM

Re: Taibbi Strikes Again

Originally posted by Mega View Post

Best speech I've ever heard.

**lektrode** · September 28, 2013, 11:07 AM

Re: Taibbi Strikes Again

Originally posted by flintlock View Post

Best speech I've ever heard.

next to the "7 words you cant use on TV" but just not as funny...

Originally posted by T&BinO

one of my favorite bits:

Originally posted by matt

...There's $2.6 trillion in state pension money under management in America, and there are a lot of fingers in that pie. Any attempt to make a neat Aesop narrative about what's wrong with the system would inevitably be an oversimplification. But in this hugely contentious, often overheated national controversy � which at times has pitted private-sector workers who've mostly lost their benefits already against public-sector workers who are merely about to lose them � two key angles have gone largely unreported. Namely: who got us into this mess, and who's now being paid to get us out of it...

and here's mine:

Originally posted by matt/thestone

Everybody following this story should remember what went on in the immediate aftermath of the crash of 2008, when the federal government was so worried about the sanctity of private contracts that it doled out $182 billion in public money to AIG. That bailout guaranteed that firms like Goldman Sachs and Deutsche Bank could be paid off on their bets against a subprime market they themselves helped overheat, and that AIG executives could be paid the huge bonuses they naturally deserved for having run one of the world's largest corporations into the ground. When asked why the state was paying those bonuses, Obama economic adviser Larry Summers said, "We are a country of law. . . . The government cannot just abrogate contracts."

so they just 'tweak' the laws - when they dont workout for them - starting with the repeal of glass-steagall, engineered by summers himself, right on up to 'the affordable care act' - when the same clowns that helped ram that nightmare thru suddenly discover that it'll cost THEM money - so another little 'tweak' to let the political class off the hook and the big (union) employers delay its implementation. (or then use the power of the majority, if any of should be bold to challenge their status quo )

but its HILARIOUS that when 'contract law' is at stake, that bankruptcy (read: stiff everybody BUT the bankers/lawyers) is then the only way out - that is, when there's no taxpayer-funded bailout to be had - or when there's no dem-inclined voter base to pander to, ala the auto/municipal unions - that its perfectly reasonable to allow 'market mechanisms' to inflict hundreds of billions worth of damage - and then say stuff like "from 40000feet, none of that looks illegal..." as that same group rides of into the sunset with TRILLIONS in funny money bernanke bux, calling it a 'recovery'

**don** · September 28, 2013, 12:57 PM

Re: Taibbi Strikes Again

primed for the slaughter

How To Maximize Your Investment Losses In 5 Easy Lessons

FRIDAY, SEPTEMBER 27, 2013 3:29 PM

I was (and still am) working on a story about - new-found - poverty, but then this morning I saw Matt Taibbi's latest on the looting of US pension funds, and I find it such an integral part, along with earlier articles I wrote, like The Global Demise of Pension Plans and The Last Remaining Store Of Real Wealth of - upcoming - American poverty and the machinery that fabricates it, that I want to include it. An appetizer from Taibbi:

Looting the Pension Funds

There's $2.6 trillion in state pension money under management in America, and there are a lot of fingers in that pie. Any attempt to make a neat Aesop narrative about what's wrong with the system would inevitably be an oversimplification. But in this hugely contentious, often overheated national controversy which at times has pitted private-sector workers who've mostly lost their benefits already against public-sector workers who are merely about to lose them two key angles have gone largely unreported. Namely: who got us into this mess, and who's now being paid to get us out of it.

So the poverty piece is delayed a bit and therefore today here's a little gem based on a comment at The Automatic Earth by regular commenter Viscount St. Albans which I liked for its educational entertainment value, an innocent piece of "for amusement purposes only", for those who are not yet poor and still think investing is a good idea. As in "Feel Lucky, Punk?"
Viscount, take it away:

Let's invest.
In other words: Let's do the Olympic Hammer Throw with a glass chain linking us -- the twirling Dr. Manfred Hoeppner Frankenstein -- to our 16 pound steel asset projectile.
Let's invest, and let's keep it simple. Basic. We'll count the links in our glass chain connecting us with our money.

Us
Link #1: The Investment Manager
Link #2: The Broker-Dealer
Link #3: The Clearing Firm
Link #4: The Exchange
Link #5: The Custodial Bank
Our Money

What could go wrong? Shall we count the ways?

Link #1: The Investment Manager

"Federal regulators accused a Santa Monica hedge fund manager of defrauding investors by saddling them with losing securities trades while claiming winners for himself ... Clients in two Aletheia-run hedge funds, meanwhile, suffered $4.4 million in losses ... Eichler also failed to warn clients about mounting financial problems at Aletheia until two days before the firm filed for Chapter 11 bankruptcy protection"

From: Aletheia hedge fund manager defrauded investors, SEC says

Link #2: The Broker-Dealer

"Traders and regulators have been vexed by the breakdowns, which showed that U.S. financial markets can still be paralyzed by one system's failure, despite trading now being spread across 13 stock exchanges and dozens of private, electronic marketplaces.""On a Tuesday morning earlier this month, Farhan Khan sat down for his milk and toast at his home in the Dallas suburbs. The 32-year-old engineer opened an app on his smartphone, expecting to see $380,000 in his brokerage account, nearly all his life savings. Instead his account was frozen; his Iowa-based brokerage, PFGBest, was out of business. He started to cry ... PFGBest is the most recent high-profile case but it s certainly not the only example of customers getting burned by their investments. Wendy Cross of Atlanta, who is out $360,000, is just one of dozens of investors who lost their life savings to a fraudster investment banker, Aubrey Lee Price, in July ... "Not just my money, it was my dreams, my future, my freedom, gone ..."

From: Peregrine Financial Collapse Cost Farhan Khan His Life Savings

Link #3: The Clearing Firm

"A recent research note from Sandler O'Neill analyst Richard Repetto set traders' and investors' nerves on edge when he detailed clearing-outfit Penson Worldwide's revelation that it held $42.6 million of possibly illiquid bonds issued by a horse-racing-track operator linked to a Penson director ... We witnessed a failure in mid-2008, when North American Clearing went under, tangling trades for its brokerage clients and their customers for a month."

From: Clearing Firm Rattles Investors

Link #4: The Exchange

Even the WSJ has begun to notice the weekly occurrence of "technical glitches" that leave major exchanges like Nasdaq and the Options Exchange shuttered for anywhere between 10 minutes and several hours.Zero hedge has documented the striking bias with which these technical failures occur on down days.And still, years after the event, there's no satisfactory explanation for 2010's Flash Crash. Official message:Look away, keep moving forward. Keep Calm, And Carry On.
Money Quote:

"Traders and regulators have been vexed by the breakdowns, which showed that U.S. financial markets can still be paralyzed by one system's failure, despite trading now being spread across 13 stock exchanges and dozens of private, electronic marketplaces."

From: NYSE, Nasdaq Consider Cooperating to Address Glitches

Link #5: The Custodial Bank

Do you like scary movies?
Google: "custodian bank failure"
Have you ever heard of the term "Custodian Bank"? Read-up and Sleep tight, if you dare.
I love this quote from a link to one the world's largest mutual fund providers, Vanguard. Here's the money quote, and please do note the usage of the term, "generally":

"Will Vanguard fund investments be in jeopardy if the funds custodian bank fails? U.S. banking laws generally provide that segregated mutual fund assets held by a bank custodian arent subject to the liens or claims of the custodians creditors or of the Federal Deposit Insurance Corporation (FDIC). To further mitigate risk, Vanguard takes the precaution of using several different independent custodian banks. These banks include The Bank of New York Mellon, Brown Brothers Harriman & Co., JPMorgan Chase Bank, and State Street Bank and Trust Company. "

From: Your security is a top priority for us

And don't let's be beastly to the ETF investors. I'd hate to spoil the beauty winks, but this article on structural risks easily supplants my evening fix of heart-quickening bodice ripper novella:

"In the event of the bankruptcy of a custodian to an Irish ETF, the assets of the ETF are not available to the liquidator and must be returned to the ETF. The board of directors must arrange for a replacement custodian in this case. However, depending on the location of those assets, the time involved in the return of assets cannot be ascertained."
... "A trickier question to answer is hinted at in the last sentence of the Irish regulator's reply. It is unclear how long an investor might have to wait for the return of his or her assets in the case of a custodian bank failure."

From: Structural Risks in ETFs

For a few more giggles:

"Connecticut Community Bank, is the type of Main Street bank found in Anytown U.S.A. ... But to more than 200 individual investors, it was the bank that should have stood sentry over their money. A lawsuit brought by investors who lost a combined $60 million in the Madoff Ponzi scheme seeks to show that the bank failed at its job as the custodial bank in charge of their money ... The bank, however, said it had no obligation to catch the Madoff fraud and that its custodian contract limited its obligations to "ministerial duties."

From: Madoff Case Puts Focus on Duties of Custodial Banks

Risk and Reward. Let's Put our Money to Work!

All of these frauds, as outrageous as they might seem in hindsight, came to light when the liquidity tides were still relatively high. Does anyone dare to guess how many seagull-pecked bones will be revealed when the liquidity tide recedes with gusto?

**don** · October 02, 2013, 10:52 AM

Re: Taibbi Strikes Again

Your Pension Is Under Attack From All Sides. Here's 10.

TUESDAY, OCTOBER 01, 2013 2:26 PM

Dorothea Lange "Georgia road signs" July 1937

Sometimes it seems you can never write enough about our various pension plans, and the threats to them. Matt Taibbi's Looting the Pension Funds brings it all back with a vengeance, the things I've written about pensions in the past year, and Nicole's recent article on Detroit etc. Put together, we get a broader context.
Over the past week, I've read yet another slew of reports on what's going wrong with pensions. You can see it happening in real time wherever and whenever you care to look. For many people that's probably not a favorite pastime, because it instills fear in their hearts. But I think it's better to look than to avert one's eyes, because the difference between what you expect and what you're actually going to receive grows bigger by the day. Negative growth, that is.
In order to get a better overview, I made a list of points that are threats to pensions. The fact that there are 10 of them is purely coincidental and it's by no means complete; do let me know what I left out. While I focused mainly on US public pension funds, most of what follows, in some degree or another, is just as valid in US private plans and in Europe and Japan. Not all plans are set up the same way, in fact there are too many differences to list, but one overall trend can be identified across the board: pension funds are irresistible to the predatory financial system, since they are what I called earlier this year: The Last Remaining Store Of Real Wealth, and what Matt Taibbi defines his way:

With public budgets carefully scrutinized by everyone from the press to regulators, the black box of pension funds makes it the only public treasure left that's easy to steal ...

I would say probably pensions are not just "the only public treasure left that's easy to steal", they're more like the only public treasure left, period. And much of it is already gone. Just about everything else has already been either financed with credit or sold to private interests. And pension funds are not far behind. Any and all public treasures are fair game in today's societies, and unless we find ourselves a large group of politicians and judges that cannot be bought, everything will end up being sold to the highest bidder. This doesn't mean that every single pension plan is under attack from all the points below in equal fashion, and some plans may - still - be in fine health. But it just might be wise for you to check.

Here goes: 10 threats to your pension plans :

1 - They were always Ponzi schemes to begin with

Unless a rising stream of new members pay in, day after day after day, the plans go bust. Today, as baby boomers start to cash in, the numbers of people who pay into the funds vs those who claim benefits is changing radically. Where once the ratio was 5 or 10 to 1, it's now often 2 to 1. And those who do pay in today are supposed to build up their own pensions as well, not just pay for present retirees. Who never paid in enough to justify the benefits they now receive, much was supposed to come from their respective governments, and generated by brilliant(ly honest) and god-fearing fund managers.
So yes, fundamentally, the fact that pension plans were set up as Ponzi schemes would have doomed them no matter what. But they did get a lot of help along the way to speed up that process.

2 - They have consistently been underfunded

On this topic, and it's not the only one, there's so much material not even a book would suffice. The picture that emerges makes it very clear that both companies and governments on a large scale showed very little respect whatsoever for the laws that are supposed to define the extent of their contributions. Here are a few choice quotes from an article I wrote in 2012:

The Global Demise of Pension Plans

� S&P Dow Jones Indices said that the underfunding of S&P 500 companies' defined-benefit pensions had reached a record $354.7 billion at the end of 2011, more than $100 billion above 2010's deficit.
� Fitch Ratings later released its own study of 230 U.S. companies with defined-benefit pension plans and found that median funding had dropped to 74.4% in 2011 from 78.5% in 2010, and that corporate pension assets grew just 2.9% in 2011 amid sluggish returns and a 6% decline in contributions.
� In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations ... a funding level in the 70% zone is considered dangerously low. The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring ... "The American dream of a golden retirement for baby boomers is quickly dissipating ... "
� ... public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.
� At least three of the nation's largest U.S. public pension funds have already announced returns of between 1% and 1.8%, far below the 8% that large funds have typically targeted.
� Ratings agency Moody's Investors Service calculated this month that if it used a 5.5% discount rate, a rate closer to the way private corporations value their pensions, it "would nearly triple fiscal 2010 reported actuarial accrued liability" for the 50 states and rated local governments to $2.2 trillion. Other estimates put the shortfall even higher.

State Budget Solutions estimated it in a recent study at $4.6 trillion as of 2011.

3 - "Normal" financial crisis losses

A huge source of losses for pension funds has been the 2007-present financial crisis, of course. But how can we fault the fund managers for this if and when their governments and banking sectors issue no warnings at all, when after the fact the overall mantra out of Washington and Wall Street remains that "no-one could have seen this coming", and when even their legal obligation to invest in AAA-rated paper only is rendered useless by complicit ratings agencies who rate all the nation's wet tissues, baby napkins and old newspapers investment grade? You can't expect pension fund managers to be smarter than the entire politico-financial system.

4 - Low interest rates imposed by central banks and Treasury departments

The most obvious point perhaps: with pensions plans historically hugely invested in sovereign bonds, pushing down their yields is severely punishing for fixed income, and in more than one way. This was for example discussed in Britain earlier this year:

QE has left companies with a �90 billion pension bill, MPs told

The Bank of England's �375 billion policy of quantitative easing has left companies having to find �90 billion to fill pension fund deficits, MPs were told. Mark Hyde-Harrison, chairman of the National Association of Pension Funds, said inflexible pension regulations meant companies had to pay down these deficits, leaving them unable to use the funds to strengthen their balance sheets.
QE has raised the price of gilts, lowered yields and reduced the returns on pension investments, helping push final-salary schemes into large deficits. Government bonds are used by pension fund to ensure they have the necessary funds to payout members in future. Low gilt yields, along with low interest rates, has meant that pension schemes have had to hold more assets to meet those obligations. Mr Hyde Harrison said schemes needed to find �9bn a year over the next ten years to fill the gap.
Pensions expert Ros Altman told the committee that QE had been a "tax on pensions" and "savers". She said the policy was meant to be expansionary but not for pensioners. "Asset purchase have raised the cost of annuities," she said, adding that the consequences of QE on pensions had been "overlooked".

5 - (Mostly illegal) appropriation of funds by various levels of government before financial crisis

An issue that is very closely connected to the next one, since there's a thin line between a government not paying into a fund and one taking money out.
This first item is from January 2013, and it's of course eerily reminiscent of today's government shutdown.

U.S. Debt Ceiling: Government "Borrows" Pension Funds to Avoid Default

The U.S. Treasury, in order to avoid default, has resorted to an eyebrow-raising move: it has borrowed from the federal employee pension fund as the country nears its debt ceiling. The U.S. government stopped investing in the federal employee pension fund Tuesday "to avoid breaching the statutory debt limit," according to a letter Treasury Secretary Timothy Geithner sent to Congress.
Geithner said that the move will free up some $156 billion in borrowing authority, while policy leaders in Washington wrangle over raising the $16.4 trillion debt limit. Geithner promised the fund would be "made whole once the debt limit is increased," and maintains that federal employees and retirees would not be affected by the action.
But an IOU from the federal government isn't very settling for those relying on the fund for retirement.

Of course it's not just the US; indeed, it seems to be a fairly common practice. One way to go about it, undoubtedly a popular one, is to force pension funds into buying more of your sovereign bonds. This is also from January:

Spain Drains Fund Backing Pensions

Spain has been quietly tapping the country's richest piggy bank, the Social Security Reserve Fund, as a buyer of last resort for Spanish government bonds, raising questions about the fund's role as guarantor of future pension payouts.
Now the scarcely noticed borrowing spree, carried out amid a prolonged economic crisis, is about to end, because there is little left to take. At least 90% of the �65 billion ($85.7 billion) fund has been invested in increasingly risky Spanish debt, according to official figures, and the government has begun withdrawing cash for emergency payments.

And obviously, this doesn't only happen on a federal level. It may well be much more common at lower levels where there is less scrutiny.

6 - (Mostly illegal) lower payments from cash-strapped levels of government before and after the financial crisis

This is closely connected to both (mis)appropriation of funds as well as to pension plans being underfunded, though it's not the only cause of either. Some quotes from Taibbi:

Among the worst of these offenders are Massachusetts (made just 27% of its payments), New Jersey (33%, with the teachers' pension getting just 10 percent of required payments) and Illinois (68%). In Kentucky, the state pension fund [..] has paid less than 50% of its Annual Required Contributions (ARCs) over the past 10 years, and is now basically butt-broke- the fund is 27% funded, which makes bankrupt Detroit, whose city pension is 77% full, look like the sultanate of Brunei by comparison.
In Rhode Island, some cities have underfunded pensions for decades. In certain years zero required dollars were contributed to the municipal pension fund. "We'd be fine if they had made all of their contributions," says Stephen T. Day, retired president of the Providence firefighters union. "Instead, after they took all that money, they're saying we're broke. Are you f***ing kidding me?"
There's an arcane but highly disturbing twist to the practice of not paying required contributions into pension funds: The states that engage in this activity may also be committing securities fraud. Why? Because if a city or state hasn't been making its required contributions, and this hasn't been made plain to the ratings agencies, then that same city or state is actually concealing what in effect are massive secret loans and is actually far more broke than it is representing to investors when it goes out into the world and borrows money by issuing bonds. Some states have been caught in the act of doing this, but the penalties have been so meager that the practice can be considered quasi-sanctioned.

7 - Bad investments, often through "advisors"

It is no secret that Wall Street firms - literally - made out like bandits in the years leading up to Bear Stearns, Lehman and AIG by selling everyone who had a dime to spare boxes full of opaque financial instruments that the ratings agencies stubbornly kept on rating AAA. There is so much bad faith involved in all this - if not something much worse - that looking back today it's still hard to understand why no-one was ever truly taken to task for it.
There are a few only seemingly large fines, and some settlements in the same vein, though typically without any admission of wrongdoing. But there's no denying that people paying into pension funds, all over the world, were robbed blind. And it was sanctioned. In other words: crime pays, especially when everyone looks the other way or it's even outright legalized.
Is it a criminal act to sell someone "assets" under false pretenses? Apparently not. Is it a criminal act to rate "assets" investment grade when they're clearly nothing of the kind? Apparently not. The sellers pay fines, and don't see jail. It's like getting a speeding ticket. Except that it's the firm who pays the fine, not the actual perpetrator. he gets a bonus. The rating agencies simply claimed their AAA assessments were not legally binding, that everyone should do their own research. Not even a fine for them.

UBS says it's settling with U.S. over MBS offerings

UBS AG, Switzerland's largest bank, said it's close to a settlement over U.S. mortgage-backed bond sales.
The bank reached an agreement in principle with the U.S. Federal Housing Finance Agency to settle claims related to residential mortgage-backed securities offerings between 2004 and 2007, according to the UBS statement, without disclosing the cost of the settlement. The company is booking about 865 million Swiss francs ($918.5 million) of pre-tax charges, provisions and writedowns in the quarter related to the settlement and a Swiss-U.K. tax agreement.
The FHFA sued UBS in 2011 over $4.5 billion in residential mortgage-backed securities that UBS sponsored and $1.8 billion of third-party RMBS sold to Fannie Mae and Freddie Mac, claiming the bank misstated the securities' risks. These suits alleged losses of at least $1.2 billion plus interest.

Dutch Pension Fund ABP Says It Settled MBS Case With JPMorgan

Stichting Pensioenfonds ABP, the biggest Dutch retirement fund, said it settled a lawsuit with JPMorgan Chase over sales of residential mortgage-backed securities.
�ABP is very content to have reached this settlement and is pleased that JPMorgan was willing to reach a mutually satisfactory conclusion of this litigation,� the Heerlen, Netherlands-based fund said today in an e-mailed statement. Harmen Geers, a spokesman for ABP, declined to comment on the amount of the settlement.
The suit, filed in state court in Manhattan in December 2011, accused the bank of negligent misrepresentation, alleging the sales were based on false and misleading statements. New York-based JPMorgan has denied and continues to deny these claims, ABP said in today�s statement.
ABP has sued other banks in the same court over similar allegations, including Deutsche Bank AG, Credit Suisse Group AG, Morgan Stanley and Goldman Sachs Group Inc.

Pension and Union Funds Were Upside Down the Moment They Bought MBS

... Remember that these are NOT just �institutional investors� like banks � they are pension funds, unions, cities, counties and states that invested in what was thought to be investment grade securities Triple A rated and insured.
So it isn�t surprising that the investors are now going on the attack. It is obvious that the banks and servicers are having a field day feeding off the carcass of what was purported to be good collateral � the homes of the borrowers. The starting insult though was the money the banks took out of the funds advanced by investors before they started funding mortgages.
In some cases the percentage is a staggering 40%. So for each million dollars that your pension fund put in, the banks immediately removed $400,000 and booked it as trading profits. Now with only $600,000 left, the pool was supposed to make enough money to pay the interest expected by investors plus the principal.
Those figures don�t work and Wall Street knew it. So all they needed was to place bets that the pool would fail and that is what they did under the guise of merely covering the �minor� risk of loss with yet another hedge.

Of course MBS are not the only bad investment made. And of course one might blame the pension funds themselves for their gullibility in this man eat dog world. But regulatory oversight before this came to light, and the legal system's reaction after, have been found so stunningly lacking one can no longer claim we live under a rule of law. Government agencies settle cases for ridiculously low fines, leaving pension funds not just to fend for themselves, but having to do so with the severe handicap of what can realistically only be seen as low-ball jurisprudence.
If you take a step back and look at where the attacks on the pension funds began for real, you'd probably want to go back to the 1990s, when the Blythe Masters JP Morgan crew started to "invent" new forms of "securities". That allowed for Wall Street to start selling paper the managers had no way of understanding, and for which they had to trust the sellers on their bright blue eyes.
But as I said, it's not all MBS. Here's an example of bad investment losses from the black box that is Detroit:

Real estate investments cost Detroit pension funds more than $144 million over 2 years

Detroit Police and Fire Retirement System and General Retirement System real estate investments have cost the city's two pension funds more than $144 million during the past two fiscal years, according to an audit of the funds requested by Emergency Manager Kevyn Orr. The preliminary findings are part of an auditor general and inspector general report released Thursday afternoon.
The pension funds were too heavily invested in real estate in 2010-11 and 2011-12, the report says. The General Retirement System had 12.22% of its assets in real estate in 2010-11 and 13.99% in 2011-12, higher than the fund's self-imposed limits of 10%. The GRS annual report documented more than $73 million in losses.
Likewise, the Police and Fire system had 14.33% in real estate in 2010-11, more than double the 7% limit. In 2011-12, there was 12.6% in real estate, higher than the 8% limit it had for that year. The total of losses for the system was more than $71 million. [..]
The audit first focused on the pension funds' real estate investments because of ongoing investigations into alleged criminal activity. [..] The audit also found that 13% of the city's unemployment compensation claims processed between July 2011 and March 2013 were "likely fraudulent."
In addition, there were questionable interest rates applied to GRS annuities and overtime pay included in the average final compensation calculation, the report's executive summary says. [..] Orr estimates that the pension funds are a combined $3.5 billion underfunded.

8 - Higher risk investments (chasing yield) - to make up for losses

The losses from the financial crisis, whether they were directly related to securities or not, have made it necessary for pension fund managers to "double up". And that means increasing their risk. Even if the natural reaction to such vast losses might be to become risk-averse for a while, and even though the yield-chasing attitude that led them into MBS etc. was such a disaster. A move from bonds to stocks must seem obvious for most of them.

The great pension shift: Goodbye safe, dull government bonds

Keith Ambachtsheer has made a living advising pension funds on the best way to meet their obligations to retirees. In 2000, he warned funds to reduce their exposure to stocks, which had reached nose-bleed valuations after a two-decade bull run, and add long-term government bonds. Since then, bond prices have risen about 10% a year on average, while stock markets have treaded water.
Today, his advice has flipped around. With the yield from long-dated bonds barely outpacing the inflation rate, the director of the Rotman International Centre for Pension Management says the safer investment for pension funds � and any long-term investor � is blue chip stocks.
�In this environment, it�s plausible that for long-term investors, their safest investment is buying and holding a diversified international portfolio of dividend-paying stocks� � companies such as Nestl� SA, pipeline utilities and Canadian banks, he said. �It takes a while to wrap your head around that.�
Indeed, it does. Trading in dull but dependable government bonds for inherently riskier stocks seems contrary to sound risk management. Yet, Mr. Ambachtsheer has a lot of company. The Caisse de d�p�t et placement du Qu�bec and GMO LLC, the Boston asset manager led by famed investor Jeremy Grantham, recently have said they are substantially reducing their holdings of bonds with long maturities.
�I�m pretty sure the odds of making money on bonds over a five-year horizon are zero,� added Leo de Bever, head of Alberta Investment Management Corp., the province�s public investment fund manager. �I agree being in high quality stocks is probably a better alternative to bonds. Five years ago I wouldn�t have said that.�

However, as Matt Taibbi says:

A study by noted economist Dean Baker ... reported that, had public pension funds not been invested in the stock market and exposed to mortgage-backed securities, there would be no shortfall at all. [..] Baker said, had public funds during the crash years simply earned modest returns equal to 30-year Treasury bonds, then public-pension assets would be $850 billion richer than they were two years after the crash. [..]

I guess the managers think it'll be different this time. Never is. But most are still stuck with expectations - if not legal obligations - of 8% annual returns, even if that's profoundly unrealistic; it's more chasing rainbows than chasing yields. Still, the result will be that they are driven, voluntarily or not, into the hands of the same kind of advisors that were instrumental in in the losses in the first place. A move that is facilitated by the next point:

9 - "Reforms"

Here we get into what Matt Taibbi really focuses on in his article: a politically driven movement, led by the likes of right wing billionaire John Arnold and the Pew Charitable Trusts, aiming to reform pensions plans in such a way there'll be little left of them.

Rhode Island [..], led by its newly elected treasurer, Gina Raimondo, a 42-year-old Rhodes scholar and former venture capitalist - [..] declared war on public pensions, ramming through an ingenious new law slashing benefits of state employees with a speed and ferocity seldom before seen by any local government.
Called the Rhode Island Retirement Security Act of 2011, her plan would later be hailed as the most comprehensive pension reform ever implemented. The rap was so convincing at first that the overwhelmed local burghers of her little petri-dish state didn't even know how to react. "She's Yale, Harvard, Oxford- she worked on Wall Street," says Paul Doughty, the current president of the Providence firefighters union. "Nobody wanted to be the first to raise his hand and admit he didn't know what the f**k she was talking about." [..]
What few people knew at the time was that Raimondo's "tool kit" wasn't just meant for local consumption. The dynamic young Rhodes scholar was allowing her state to be used as a test case for the rest of the country, at the behest of powerful out-of-state financiers with dreams of pushing pension reform down the throats of taxpayers and public workers from coast to coast. [..]

In an interview about his article last week, Taibbi said::

... among the problems here is that state and municipal pension funds are actually not covered ERISA which is the federal law governing pensions. So if there is no prudent man rule that requires a certain level of reasonability or prudence in investment, hedge funds probably would not have been a typical public or municipal investment a long time ago, but now they are being used in some cases 10%, 15 to 20% of these state funds are being put into these alternative investments.
If you look on the prospectuses of a lot of these investments, they say right in the front, in huge letters, these are high risk investments, you may lose everything. It is exactly the opposite of what you want to put public money into.

And about John Arnold:

John Arnold is a former Enron energy commodities trader who became a billionaire, one of the world's most successful commodity traders after the collapse of Enron and he is sort of the new Koch Brothers figure. He is on a crusade. He has created something called the Arnold Foundation which is funding pension reform efforts in multiple states all across the country from Montana to Kentucky to Florida to Rhode Island where I spend a lot of time.
In Rhode Island Arnold donated a lot of money to a 501(c)4 organization called Engage Rhode Island which helped promote the pension reform policies of the sort of Wall Street friendly treasurer they have in that state. And this is sort of the new formula, you have in the Citizen�s United age you have some person, a hedge fund guy like John Arnold, who gives a whole bunch of money to some shadowy organization which advertises this crisis that we can�t afford to pay workers any more so we have to do things differently. We gotta make cuts and then we gotta put all the money in Wall Street managed funds. That is sort of his playbook.

A final quote from the interview, about why he did the article in the first place:

The primary focus of my piece, there were a couple of things. Number one, how did these funds come to be broke the first place? I think everyone realizes that states are in fiscal crises or having trouble paying out their obligations to workers. One of the reasons is that at least 14 states have not been making their annual required contributions to the pension fund for years and years and years. So essentially, they have been illegally borrowing from these pension funds, sometimes going back decades.
Another focus of the piece was the solution that a lot of sort of Wall Street funded think tanks are coming up with now is to get higher returns by putting these funds into alternative investments like hedge funds. In a lot of cases what I'm finding is that the fees that states are paying for these new hedge funds and these new types of alternatives investments are actually roughly equal to the cuts that they are taking from workers. Like in the state of Rhode Island, for instance, they have frozen the cost of living adjustment and the frozen COLA roughly equals the fees that they�re paying to hedge funds in that state. So essentially it is a wealth transfer from teachers, cops, and firemen to billionaire hedge-funders.

With the introduction of hedge funders, we can seamlessly move on to the last point, number 10:

10 - Wall Street and hedge funds

As you see, when we bring up the recent spate of "reforms" proposed - and executed - for pensions, we fall face first into the cesspool that is hedge funds' growing interest in and interference with "the only public treasure left that's easy to steal". Because that's what these reforms aim for: bring in Wall Street, hand them huge payments for "managing" pension funds, and cut the latter to the bone while you're at it. Matt Taibbi:

In Rhode Island, over the course of 20 years, [Edward Siedle, a former SEC lawyer] projects that the state will pay $2.1 billion in fees to hedge funds, private-equity funds and venture-capital funds. Why is that number interesting? Because it very nearly matches the savings the state will be taking from workers by freezing their Cost of Living Adjustments - $2.3 billion over 20 years. "They pretty much took the COLA and gave it to a bunch of billionaires," hisses Day, Providence's retired firefighter union chief.

By the way, this sort of thing is by no means limited to the US. Just this morning I read that Dutch pension funds saw their costs for external "wealth management" rise by a third from 2012, to $6 billion. Same act, same difference.
Now you might think that they seek out hedge funds for good reasons: they make big profits. But what you would have to recognize first of all is that they make good money anyway through fees:

Hedge funds have good reason to want to keep their fees hidden: They're insanely expensive. The typical fee structure for private hedge-fund management is a formula called "two and twenty," meaning the hedge fund collects a two percent fee just for showing up, then gets 20% of any profits it earns with your money.
Some hedge funds also charge a mysterious third fee, called "fund expenses," that can run as high as half a percent- Loeb's Third Point, for instance, charged Rhode Island just more than half a percent for "fund expenses" last year, or about $350,000. Hedge funds will also pass on their trading costs to their clients, a huge additional line item that can come to an extra percent or more and is seldom disclosed. There are even fees states pay for withdrawing from certain hedge funds. [..]

Second, that they operate in secret, so you can't see where your own money is going:

Most pension-reform proposals required that states must go after higher returns by seeking out "alternative investments," which sounds harmless enough. But we are now finding out what that term actually means- and it's a little north of harmless.[..] ... in recent years more than a dozen states have carved out exemptions for hedge funds to traditional Freedom of Information Act requests, making it impossible in some cases, if not illegal, for workers to find out where their own money has been invested.

And third, that the big profits for hedge funds are a fairy tale:

... underperforming is likely. Even though hedge funds can and sometimes do post incredible numbers in the short-term- Loeb's Third Point notched a 41% gain for Rhode Island in 2010; the following year, it earned -0.54%. On Wall Street, people are beginning to clue in to the fact- spikes notwithstanding- that over time, hedge funds basically suck.
In 2008, Warren Buffett famously placed a million-dollar bet with the heads of a New York hedge fund called Protg Partners that the S&P 500 index fund- a neutral bet on the entire stock market, in other words- would outperform a portfolio of five hedge funds hand-picked by the geniuses at Protg.
Five years later, Buffett's zero-effort, pin-the-tail-on-the-stock-market portfolio is up 8.69% total. Protg's numbers are comical in comparison; all those superminds came up with a 0.13% increase over five long years, meaning Buffett is beating the hedgies by nearly nine points without lifting a finger.

In other words, bringing in hedge funds and other external managers is insanely costly:

.... investing with hedge funds is infinitely more expensive than investing with simple index funds. On Wall Street and in the investment world, the management price is measured in something called basis points, a basis point equaling one hundredth of one percent. So a state like Rhode Island, which is paying a two percent fee to hedge funds, is said to be paying an upfront fee of 200 basis points.
.How much does it cost to invest public money in a simple index fund? "We've paid as little as .875 of a basis point," says William Atwood, executive director of the Illinois State Board of Investment. "At most, five basis points." So at the low end, Atwood is paying 200 times less than the standard 2% hedge-fund fee. [..]
.The fees aren't even the only costs of "alternative investments." Many states have engaged middlemen called "placement agents" to hire hedge funds, and those placement agents - typically people with ties to state investment boards - are themselves paid enormous sums, often in the millions, just to "introduce" hedge funds to politicians holding the checkbook. [..]
In California, the Apollo private-equity firm paid a former CalPERS board member named Alfred Villalobos a staggering $48 million for help in securing investments from state pensions, and Villalobos delivered, helping Apollo receive $3 billion of CalPERS money. Villalobos got indicted in that affair, but only because he'd lied to Apollo about disclosing his fees to CalPERS. [..]

All of which leads Taibbi to surmise:

So when you invest your pension money in hedge funds, you might be paying a hundred times the cost or more, you might be underperforming the market, you may be supporting political movements against you, and you often have to pay what effectively is a bribe just for the privilege of hiring your crappy overpaid money manager in the first place.

And to reach this conclusion:

Politicians quietly borrow millions from these funds by not paying their ARCs, and it's that money, plus the savings from cuts made to worker benefits in the name of "emergency" pension reform, that pays for an apparently endless regime of corporate tax breaks and handouts. [..]
"This whole thing isn't just about cutting payments to retirees," says syndicated columnist David Sirota, who authored the Institute for America's Future study on Arnold and Pew. "It's about preserving money for corporate welfare." Their study estimates states spend up to $120 billion a year on offshore tax loopholes and gifts [..] and other subsidies - more than two and a half times as much as the $46 billion a year Pew says states are short on pension payments.
The bottom line is that the "unfunded liability" crisis is, if not exactly fictional, certainly exaggerated to an outrageous degree. Yes, we live in a new economy and, yes, it may be time to have a discussion about whether certain kinds of public employees should be receiving sizable benefit checks until death. But the idea that these benefit packages are causing the fiscal crises in our states is almost entirely a fabrication crafted by the very people who actually caused the problem.
Everybody following this story should remember what went on in the immediate aftermath of the crash of 2008, when the federal government was so worried about the sanctity of private contracts that it doled out $182 billion in public money to AIG. That bailout guaranteed that firms like Goldman Sachs and Deutsche Bank could be paid off on their bets against a subprime market they themselves helped overheat, and that AIG executives could be paid the huge bonuses they naturally deserved for having run one of the world's largest corporations into the ground.
When asked why the state was paying those bonuses, Obama economic adviser Larry Summers said, "We are a country of law ... The government cannot just abrogate contracts." Now, though, states all over the country are claiming they not only need to abrogate legally binding contracts with state workers but also should seize retirement money from widows to finance years of illegal loans, giant fees to billionaires like Dan Loeb and billions in tax breaks to the Curt Schillings of the world. It ain't right.

Our worlds have increasingly turned into man eat dog, and many of us have been so preoccupied with work and bills to pay and worries and fears for those closest to us that we have hardly noticed. And now we find ourselves here, where many of those those worries and fears have become reality, and we just get more afraid. Many of us perceive things that make us think: "It ain't right". Few so far have acted on that, though. But if we don't stand up for ourselves, for our loved ones, and for what we think is rightfully ours and theirs, everything will be taken away from us. It's simply how things work in man eat dog. That we can't change. What we can do is ask ourselves if that's the kind of world we want to live in. If we decide we don't, a change may still come, but it won't be free.

Bruce Springsteen defined man eat dog like this years ago:

Poor man wanna be rich
Rich man wanna be king
And a king ain't satisfied
Till he rules everything

But most of us don't really aspire to be kings, even as we've become accustomed to living like kings of old. And in our urge to try and hold on to that lifestyle, we've become fearful of losing what we've become dependent on, and we neglect to protect what is most important: our freedom and the basic necessities of life. Well, they're busy taking your pension away as we speak. What else are you going to let them take before you stand up?

One more Matt Taibbi quote:

... what did Willie Sutton say about why he robbed banks? That�s where the money is. Look, pension funds are sort of the last great big unguarded piles of money in this country and there are going to be all sorts of operators trying to get their hands on that money.

It should increasingly be clear that you can't count on your government to protect you and what's yours, for the very simple reason that it is not going to protect you from itself.

**don** · October 08, 2013, 06:39 AM

Taibbi Strikes Again & Again

Rhode Island State Treasurer Gina Raimondo, a Democrat, has declared war on public pensions

A few weeks ago, I wrote a feature on pension reform in states like Rhode Island for Rolling Stone. Since the piece was sharply critical of alternative investments like hedge funds, I expected a heated response, and got one right away. In fact, a series of raving/chest-thumping emails from one Manhattan Institute hedge fund billionaire appeared in my email inbox about four and a half seconds after the piece went live on the Rolling Stone website.

This colorful personage calmed down eventually, though, and I figured a more sophisticated, for-public-consumption response would come from those quarters later on.

It finally showed up this week in GoLocalProv, when Aaron Henn, an "opinion-leading urban affairs analyst" who appears in striking tie-and-folded-arms pose in his column photo, wrote a piece in defense of the Rhode Island Treasurer profiled in the piece called "Matt Taibbi's Deceptive Hatchet Job on Gina Raimondo."

Henn discloses up top that he's written in the past for the Manhattan Institute (again, a think-tank created by hedge funds to further industry objectives), so there's that. I'm not going to go through his article line-by-line, because this dispute is surely already becoming tiresome to many, but there are one or two points in it worth responding to.

For one, Henn complained that I didn't mention in my article that Raimondo is a Democrat. Through this omission, he says, I was trying to "obscure the severity of America's municipal pension crisis by portraying reform efforts as driven by right-wing ideology."

Well, it is right-wing ideology, for sure. Ayn Rand herself would have loved the idea of unilaterally imposing cuts to the "unsustainable" benefits of parasitic workers. But that doesn't mean it hasn't been advanced by Democratic Party politicians. That's something I have no problem admitting.

Anyone who covers the finance sector knows Democrats over the years have been in bed with Wall Street every bit as much as Republicans. In some ways, the finance industry is actually closer, especially on a cultural level, to the Democrats (many prominent financiers, former Goldman chief Bob Rubin being a great example, are social liberals).

This dates back to the Nineties, when two of the signature deregulatory moves that led to the financial crisis � the final repeal of the Glass-Steagall Act and the Commodity Futures Modernization Act deregulating derivatives � were pushed by the Clinton administration and its ballyhooed Rubin/Summers economic advisory team, famously lauded on the cover of Time as the "Committee to Save the World." (Even back then, politicians were casting Wall-Street friendly reforms as technocratic decisions designed to save regular people from financial ruin.)

More recently, I've written many times about the failure of Democratic Party politicians like Barack Obama to do anything about the outrageous carried interest tax break, under which hedge fund billionaires like the ones manning the board of the Manhattan Institute and making millions managing the pensions of states like Rhode Island pay a maximum personal tax rate of 15 percent.

In fact, not only have Democrats not done anything about that outrage, there have been many prominent ones � like for instance Cory Booker and Bill Clinton, two politicians who both benefitted from finance-sector largesse in their respective careers � who stood up and defiantly took bullets for the industry when Obama offered highly muted criticisms of Mitt Romney's finance-sector past last summer.

In a way, I should probably thank Henn, because had he not written his piece, I wouldn't have remembered this key point. Not only are states like Rhode Island paying millions in fees to outrageously expensive money managers, but those millions will be taxed at a rate far below what the teachers and police and sanitation workers who are being forced to swallow cuts in those states pay on their dwindling incomes. This is thanks in large part to a tax loophole preserved for years by cowardly Wall Street-supplicating politicians hailing, as Henn correctly notes, from both parties, Republican and Democrat.

There's another section of Henn's piece that coincides with another industry-friendly online criticism of the Rolling Stone piece, an article written by Andrew Biggs for the American Enterprise Institute. I've actually also seen the following argument in a few letters sent to me from pro-industry types in just the last few days, so it feels like a collectively-agreed-upon talking point of very recent vintage. And it's really, really weird stuff.

Both writers essentially say that the central thesis of the RS piece � that hedge funds are pushing reform because it's in their own financial self-interest � is "illogical" or a "non-sequitur," despite the undeniable fact of the hundreds of millions in fees paid out to money managers who have gone to great lengths to keep the details of their compensation secret.
Henn's argument went like this:

I agree with Taibbi that having pensions invest in hedge funds is a dubious practice, though I could quibble with his method of using simply fees paid as reason why it's bad. But that misses the much bigger issue, which is that cutting pension liabilities actually reduces, not increases, the justification for investing in hedge funds.

Taibbi rightly shows how governments systematically underfunded pensions for years and then attempted to deal with the resulting deficits through high risk investment strategies like hedge funds. But if you reduce the liability, you reduce the incentive to gamble with the funds. So it's absolutely anti-sensical to suggest anyone acting at the behest of peddlers of such risky plans would take action to reduce the very liability that gives any sort of a fig leaf to investing in them. His central thesis is a complete non-sequitur.

You can get a contact high just from staring at those paragraphs for too long. I think Henn here is saying the following:
States are turning to hedge funds because they have an unfunded liability problem and need to address it by earning higher returns. But if those high returns go on to actually reduce the liability, this will therefore reduce the justification for hiring hedge funds in the first place.

Therefore, nobody acting at the behest of hedge funds would actually hire a hedge fund.

Right? Or something like that. Incidentally, I didn't point to fees "simply" as the only argument against hedge funds. I also noted that they are underperforming blind bets on the market at two or three hundred times the cost, that many of the funds being chosen to manage union money have anti-union histories, and a few other things. In any case, Biggs, from the American Enterprise Institute, echoed Henn:

What strikes me is [the Rolling Stone article's] basic illogic. Taibbi's thesis is apparently a) the high fees charged by hedge funds are ripping off public pensions; and b) think tanks and other groups are pushing to shut down DB pensions.

I'm not sure whether either of these claims is true, but the problem is that � as Taibbi goes to lengths to argue � these shadowy groups are themselves supported by current or former hedge fund managers. In other words, the very people Taibbi claims are profiting the most from the public pension gravy train � and profiting they are, as public plans are the largest single investors in hedge funds and private equity in the country � are the ones trying to stop it. My spider-sense tells me the story might be a little more complicated than Taibbi lets on.

Biggs leaves out the fact that pension-reform advocates are not trying to "stop" pensions, they're mainly trying to convert them from a defined-benefit model to a defined-contribution model. The gravy train they're trying to "stop" is for workers, not money managers, who will actually earn more under reform, as states move more toward alternative investments. In no way is the financial services sector campaigning for an end to its pension gravy train. This is a pretty big thing to forget in this particular argument. It's actually the whole argument, isn't it? Readers, if I'm missing something, please let me know.

Read more: http://www.rollingstone.com/politics...#ixzz2h85t52Gv

**charliebrown** · October 08, 2013, 07:27 AM

Re: Taibbi Strikes Again & Again

A while ago I got a financial summary of the illinois teachers retirement system, and saw a huge return on the portfolio.
Digging into the holdings which are available on line, I saw a lot of holdings I did not understand. I bet they were
hedge fund/derivative products. They are probably pools of crappy bonds with an insurance wrapper or some other such nonsense. The illinois system is woefully underfunded and if/when another 2008 occurs, you can kiss another 25% of the principle goodbye that are in these exotic instruments.

A pension fund does not need a money manager who skims off big profits. There are numerous examples of couch potato portofolios out there who beat a lot of money managers and are managed for extreemly low costs. A smart
guy with a spread sheet could do it.

My ill informed thoughts are that politicians and bureaucrats need to keep their jobs. It was easier to promise the unions low pay and fat pensions. Yields on bonds are artificially repressed, a lot of baby boomers retiring, a need to shift assests from growth to income has led to this state. Of course the promise now - pay later system has been in place for 30 years too, and now the bills are due.

I have sympathy for the workers who probably took less pay for the promise of a pension. But I am the one
going to have to pay that pension. The pension was accrued even before I was of age. Each year my
wages are stagnant and my costs keep climbing. Will I have to work the weekends to pay for this mess?

**Thailandnotes** · October 08, 2013, 07:42 AM

Re: Taibbi Strikes Again & Again

I worked briefly for the state of Virginia, mid 20's to early 30's, had about 10,000 dollars of deducted pay when I cashed out. It had earned 2 -3 % interest in years where CD's were earning 10 %.

**dcarrigg** · October 08, 2013, 09:36 AM

Re: Taibbi Strikes Again & Again

Originally posted by Thailandnotes View Post

I worked briefly for the state of Virginia, mid 20's to early 30's, had about 10,000 dollars of deducted pay when I cashed out. It had earned 2 -3 % interest in years where CD's were earning 10 %.

Everyone caught in this Rhode Island mess who left had given up 8.75% of their pay every check as a no-interest loan to the state for years by the time she was done. They send employees back with exactly the amount they deducted from their checks, no interest at all.

What's worse is the employees who weren't vested yet ended up losing a decade where they had no 401(k) access and now will not earn a pension.

Instead they can either take the cash back as is or roll over without any investment into the new system that only will cost new workers 3.75% of their pay. So employees have a choice of leaving and cashing out without interest, or taking the same thing that new employees will get for 3.75% per check, but having paid 8.75% for it.

Basically, either she retroactively takes 5% of the paycheck going back to the date an employee started work, or employees can let them steal all of the interest their money ever would have earned. And that's not counting the fact that by removing COLA's for older folk, the benefit is cut in half. But the sweet-cola pension was already gone for people born after '78 anyways. They changed that 10 years before.

All-in-all it's just another step towards destroying the middle class for the benefit of a few. I know that probably the majority of people at this site cheer and froth at the mouth whenever public workers are punished. For those of you who have not yet chosen sides in the great engineered war of one half of the poor vs. the other half, I'd like you to imagine something:

Imagine you or your kid working hard for a decade doing everything right, then someone comes and gives you a choice. Give them the 8.75% of your earnings you diligently saved for a decade and keep working, starting over with nothing in your retirement account. Or quit, keep the 8.75%, but none of the interest it earned, and walk away. And the kicker is that if you stay, you will get to pay 5% into a 401(k) that is only matched at 1% moving forward, and you start saving in your 30s with an account of $0 because you had been paying hundreds of dollars per week into a pension you no longer will receive. What would you do?

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