Monday, September 6, 2010


Want to know why many public pension funds are sucking wind these days? While the right wing blogosphere wants you to think it's due to spiraling costs and overly generous pension plans this simply is not true. Corporate arrogance, market fraud, and our recent market collapse have done more to underfund and rob pensions of their market value than anything else.

Here's how it happened ...

Take My Pensions, Please
In the area of corporate theft - what William C. Black might call "control fraud" - we need to begin by understanding that when large firms file for bankruptcy protection they can, and they will, dump their pension obligations on the federal government, through the Pension Benefit Guaranty Corporation (PBGC). 

But dumping private obligations on the American taxpayer isn't necessarily the problem. The PBGC has traditionally been a conservative investor and trustee of pensions (more on this below). What we've learned is that in an effort to boost their bottom line corporate chieftains would deliberately pay less into their employee's pension plans.

This tactic boosted profits, allowed corporate executives to pay themselves more in the short-term, and helped keep stock prices artificially high. But it also left the federal government with big financial holes to fill when "private" pension plans were dumped on to the American taxpayer during corporate bankruptcy proceedings (as I pointed out last year).

These financial holes - again, made possible because the private sector deliberately underfunded pensions - now make it appear that underfunded government guaranteed pensions are out of control. In fact, many of these once private plans were underfunded to begin with, and became a burden for the federal government American taxpayer only after companies like Bethlehem Steel, U.S. Air, Nortel Networks, etc. declared bankruptcy and dumped them on us.

I'm From Wall Street & I'm Smart ... Seriously
Today the federal government is now left trying to fill in shortfalls with new investment strategies that don't always pan out. Apart from the general risk of market collapse, the American taxpayer has to deal with overly zealous market players in key government positions who make extremely dumb investment decisions, as the following makes abundantly clear.

If ever there was a story that should put an end to the "Public-Pensions-Are-Too-Expensive/Let's-Cut-Benefits" crowd, this is it.

WASHINGTON - Just months before the [2008] stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

Got that? Believing in the magic of the market - in spite of red flags that were going up all around him - Bush administration PBGC director, Charles E.F. Millard, implemented a new aggressive market strategy. He began directing billions of dollars in public retirement funds away from safe government bonds and into the stock market, right before the market collapsed.

Guess who has to live with the consequences of this decision after 2008? Not Mr. Millard.

On the bright side, for Wall Street and the institutional players who were able to get their hands on these retirement funds, many of Wall Street's fat cats and investment firms won big fees and, no doubt, even bigger bonuses for bringing in these accounts.

I'm Not Just Ignorant, I'm Arrogant Too
We now know that corporate America deliberately underfunded private pension plans. We also know that they dumped their underfunded pensions on the American taxpayer when they declared bankruptcy. Then, in an effort to make up anticipated shortfalls, Mr. Millard - a former managing director of Lehman Brothers - took public funds and dumped them on to Wall Street right before the market collapsed (no word on whether Millard shoveled the money into Lehman Brothers, or toward other institutions where his buddies worked).

It was like throwing money down a drain.

Not only was this a classic case of "Heads you win, tails we lose", but it was a case of corporate welfare and public subsidies at its finest.

Incredibly, Mr. Millard isn't too concerned over the losses. As a former Wall Street genius, Millard said that his "new investment policy is not riskier than the old one." Asked whether the stock over bonds strategy was a mistake, especially given the subsequent decline in stock and real estate prices, Millard offered the classic sociopath's "Don't blame me" response,

Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it.

I don't know which is worse. Millard's arrogance or his ignorance.

Either way, putting more public money - like trillions of dollars in social security funds - into our current market environment would be little more than an undeserved market reward, and another bailout, for Wall Street.

At the end of the day, they don't deserve it. And we can't afford it.

- Mark

Update: Here's an update, which focuses on the implications of the market crash and total obligations as they compare to corporate pensions.

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