Pension Benefit Corporation Rolls the Dice at Exactly the Wrong Time

The stream of potential taxpayer sponsored bailouts grows every month. We can now safely add the Pension Benefit Guaranty Corp [PBGC] to the list.

Let's take a look at a Newsweek article PBGC downplays investment plan risks:

The federal agency charged with backstopping pension benefits for 44 million Americans has understated the risks of its new investment policy, a congressional watchdog said Monday.

The PBGC said earlier this year that it would take a more aggressive investment approach by investing more in stocks and adding new alternative investments, such as real estate and private equity funds.

The agency, which has assets of $68 billion, hopes the strategy will help it close a $14 billion gap between those assets and its liabilities. Otherwise, taxpayers could be called upon to pony up extra funding, the director of the PBGC has warned.

The PBGC has said its new approach will reduce risk because it will result in a more diversified portfolio of 45 percent stocks, 45 percent bonds, and 10 percent in alternative investments.

Previously, its targets were 75 percent to 85 percent bonds and 15 percent to 25 percent in stocks, though the actual figure reached 28 percent last year. The agency is seeking bids from Wall Street firms to help manage the switch.

Charles Millard, PBGC's director, said the report shows that even under the GAO's calculations, the new strategy takes on less risk than most institutional investors and could provide an additional $20 billion to $40 billion in investment gains over 30 years. That's enough to close the agency's deficit.

"The whole point of the new policy is to make it far less likely that Congress will have to engineer a bailout," he said.

Reduce Risk?

One does not reduce risk by investing in equities heading smack into what is going to prove to be the biggest recession since the great depression. Even if one doubts that statement, one does not reduce risk by investing in equities headed into any recession.

Here we are, smack in the early to middle innings of a housing bust, a commercial real estate bust, and a stock market that has not corrected yet to even what the average recession would produce, and the PBGC thinks now is the time to invest in equities.

And who does Charles Millard, the PBGC director, want to solicit advice from? The answer is the very same clowns that did not see the housing bust coming, the credit crunch coming, the commercial real estate bust coming, or the recession coming.

In my opinion Charles Millard should be fired.

List Of Bailouts and Proposed Bailouts

• Fannie Mae (FNM)
• Freddie Mac (FRE)
• Homebuilders
• Bank of America (BAC) (via Countrywide)
• JPMorgan (JPM) (Fed guarantee of Bear Stearns)
• GM (GM)
• Ford (F)
• PBGC

Expect more to be added to the list.

Comments

[jackh:]

Swap PGBC for CPP. Same story. The Canada Pension Plan who runs one of Canada's main streams of Social Security has also invested big time in order to reduce it's projected shortfall.

It almost looks as if there is a plan to run the pensions into the ground ..... or would that be greed ....... a way to tap into the piles of cash invested in/for our future.

2008 Aug 25 09:52 AM

[Augustus:]

This article is normal for the Shedlock analysis. The fund is buying into stocks at a 15% to 20% discount from the October, 2007 prices. They are increasing the allocation from 28% now to 45%. Portfolios as large as the PBGC have a difficult time with market timing. The large reliance upon low bond returns is almost assured to leave the taxpayer with a huge bailout bill.

I would be much more interested in seeing the investment performance of the money managed by Shedlock. Is it possible that the PBGC has had superior returns?

2008 Aug 25 11:12 AM

[Muzie:]

Augustus: Imagine you have a portfolio, have no other source of income, and owe more money than the value the income from your portfolio.

So you decide to change your tactical allocation to more stocks, hoping that'll pay the bills for you.

That sound like a good idea to you?

It seems odd that they are saying this is "less risky", when it's obvious the main trigger for their strategy is they need more income than they have now.

2008 Aug 25 09:21 PM

[eddie2b4u:]

How could it be that even I saw the real estate crash coming. I saw the mortgage crisis coming. I know just waht a housing glut would mean to our economy. I knew that sooner, not later, no one would be able to afford to buy.

This tells me there are many who also knew, in fact, they encouraged the continuation of the foolish, greedy and dangerous behavior that is the cause of the "consequences" we all are facing today.

When I read headlines telling me that the managers at Fanny and Freddy concider themselves innocent and NOT RESPONSIBLE due to the Governmental "pressure" put on them from the Senate, I become not only angry but very , very confused. Where have all the great minds gone?

2008 Aug 25 10:02 PM

[Augustus:]

Muzie,
You have used a flawed analysis.
An example illustrating this is to consider BRK.A as a portfolio holding.

That part of the portfolio pays no dividend, and the portfolio would have no income from it. BRK.A has never paid a dividend.

Would you consider a long term holding of that security to have been a poor investment? Under your example it would have been terrible as it did not generate any "income."

2008 Aug 26 10:53 AM

[je:]

This Augustus cat must be one of the boyz.

All that Schedlock is saying is that none-NONE-of the people who have administrated this fiasco can be trusted either because of incompetence or fraud(and fraud is too mild of a word in many cases).

Schedlock wants this guy fired and I agree and along with it - how the hell did he get the job in the first place. Manpower can provide better people than this.

2008 Aug 26 12:44 PM