Pension Benefit Corporation Rolls the Dice at Exactly the Wrong Time

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Includes: BAC, F, FMCC, FNMA, GM, JPM
by: Michael Shedlock

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 (NYSE:BAC) (via Countrywide)
  • JPMorgan (NYSE:JPM) (Fed guarantee of Bear Stearns)
  • GM (NYSE:GM)
  • Ford (NYSE:F)
  • PBGC

Expect more to be added to the list.

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