Friday, December 19, 2014

Mass Looting of U.S. Pensions?

J.D. Heyes of Global Research reports, The Mass Looting of Pension Plans Begins as Federal Law Altered to Reduce Pension Payouts:
No doubt in a sop to their corporate masters, a bipartisan group of lawmakers reached a deal just days ago to allow, for the first time, pension benefits of current retirees to be severely cut.

As reported by The Washington Post and MSN, the deal was necessary, say its backers, in order to save some of the most distressed pension plans. But what it will really do is pull the economic rug out from underneath millions of aged retirees when the economy remains sluggish and they are at their most vulnerable.

2014 Spending Bill last-minute attachment saves pension plans, not pensioners

The Post reported:
The rule would alter 40 years of federal law and could affect millions of workers, many of them part of a shrinking corps of middle-income employees in businesses such as trucking, construction and supermarkets.
The amendment was attached – without prior publication or announcement, of course – to the $1.01 trillion spending bill just passed by the House and Senate.

The rule change will “apply to multi-employer pensions, where a group of businesses in the same industry join forces with unions to provide pension coverage for employees. The plans cover some 10 million U.S. workers,” said the Post.
Millions will lose benefits when they can least afford to

The paper reported that, overall, there are about 1,400 multi-employer pension plans in existence, and many still remain in good fiscal condition. Those would not be affected by the deal. But several dozen plans have failed while several more larger plans are facing insolvency.

Over the next 20 years, as many as 200 multi-employer plans that cover 1.5 million workers are in danger of running out of funds. And half are believed to be in such bad shape that they are likely to ask for permission to reduce pension payments to recipients in the very near future.

“We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable,” said Rep. George Miller, D-Calif., who, with Rep. John Kline, R-Minn., led efforts to hammer out a deal. Naturally no congressional pension plans are in danger of running out of funds – not as long as taxpayers continue to fund them.

As you might have guessed, the provision has angered retirement security advocates. They say that giving pension plans permission to cut benefits and payments will only lead to additional cuts later.

“After a lifetime of hard work to earn their pensions, retirees don’t deserve to receive a bad deal, in which they have had no say, cut behind closed doors and excluding the very people who would be impacted the most,” Joyce Rogers, a senior vice president for AARP, the lobbying giant lobbying group for older Americans, said in a statement, as reported by the Post.

Worse, there are some unions and retirement fund managers – those who supposedly stand up “for working Americans” – supporting this deal (the Post said they are “reluctantly” supporting it, but it is support nonetheless). They have said they see the deal as necessary to prevent the plans from running out of money (which, as our editor Mike Adams, the Health Ranger, says will happen anyway – more on that in a moment).

“This bipartisan agreement gives pension trustees the tools they need to maintain plan solvency, preserves benefits for the long haul, and protects the 10.5 million multiemployer participants,” Randy G. DeFrehne, executive director of the National Coordinating Committee for Multiemployer Plans said in a statement, according to the Post. “With time running out on the retirement security of millions of Americans, moving this bipartisan proposal forward now is not only timely, but necessary.”
Predictable results

A year-and-a-half ago, in a piece for Natural News, Adams predicted the decline and fall of pensions – private, for sure, but also public pensions. With the declaration of bankruptcy by the city of Detroit in the headlines, Adams wrote:
Yes, Detroit owes former government employees – teachers, firefighters, cops and more – a whopping $3.5 billion in current and future payments. Except Detroit doesn’t have $3.5 billion to pay the pensions. The city is in a state of economic collapse. Remember, the U.S. government used billions in taxpayer money to help General Motors move its manufacturing offshore to countries like China. As a result of economically-insane actions and criminal mismanagement, a city that used to be the hub of industrial output in America has become a ghost town of abandoned buildings, crumbling infrastructure and financial destitution.

But even as all this was becoming apparent, the government workers there continued to collect fat paychecks and pensions, all based on the promise that endless population growth would outpace the rise in pension obligations. Many pensioners are owed over $100,000 a year from the government, and this is true across California, Illinois and many other states as well.

Chicago, for example, owes $19 billion in pension payments that it doesn’t have, and the city of Los Angeles is more than $30 billion in the hole. The story is much the same in every major U.S. city.
Read the Health Ranger’s full report here.
Last Friday, I wrote a lengthy comment on how Congress just nuked pensions, stating my thoughts on the pathetic display of bipartisan butchering of pensions:
I don't know why Joshua Gotbaum is so ecstatic. This bill deals a retirement death blow to millions of blue collar workers and will propel the United States of Pension Poverty to the top spot of countries with the worst retirement system among developed nations.

And never mind all the political posturing, both Democrats and Republicans voted in these changes with little or no regard to the plight of these workers. It's basically more of the same, bailouts for Wall Street and austerity for Main Street.

Having said this, there is no question that these multi-employer plans were poorly managed and were in desperate need of reforms. The problem is that instead of implementing more sensible reforms to try to bolster these plans or try saving them -- like maybe have the state public pension funds manage them or just bailing them out like it did for Wall Street back in 2008 -- Congress took out the guillotine and chopped them, effectively spreading the message that the pension promise is worthless.

Think about it, these people worked thirty or forty years and thought their pension benefits were safe and secure, allowing them to retire in dignity. Instead, they got the royal pension shaft as Congress just pulled the rug under their feet.
To my surprise, very little or no media attention has been given to the implications of Congress's decision to chop pensions for these multi-employers plans. Even worse, most financial blogs, including Zero Hedge, didn't even cover this topic. To her credit, Yves Smith of naked capitalism did post on how Cromnibus pensions provisions gutted forty years of policy, allowing existing pensions to be slashed.

Mark Miller of Reuters reports, What Retirees Need to Know about the New Federal Pension Rules:
Only a small percentage of retirees are directly affected by the new rule. But future legislation may lead to more pension cutbacks.

The last-minute deal to allow retiree pension benefit cuts as part of the federal spending bill for 2015 passed by Congress last week has set off shock waves in the U.S. retirement system.

Buried in the $1.1 trillion “Cromnibus” legislation signed this week by President Barack Obama was a provision that aims to head off a looming implosion of multiemployer pension plans—traditional defined benefit plans jointly funded by groups of employers. The pension reforms affect only retirees in struggling multiemployer pension plans, but any retiree living on a defined benefit pension could rightly wonder: Am I next?

“Even people who aren’t impacted directly by this would have to ask themselves: If they’re doing that, what’s to stop them from doing it to me?” says Jeff Snyder, vice president of Cammack Retirement Group, a consulting and investment advisory firm that works with retirement plans.

The answer: plenty. Private sector pensions are governed by the Employee Retirement Income Security Act (ERISA), which prevents cuts for retirees in most cases. The new legislation doesn’t affect private sector workers in single-employer plans. Workers and retirees in public sector pension plans also are not affected by the law.

Here are answers to some of the key questions workers and retirees should be asking in the legislation’s wake.

Q: Cutting benefits for people who already are retired seems unfair. Why was this done?

A: Proponents argue it was better to preserve some pension benefit for workers in the most troubled plans rather than letting plans collapse. The multiemployer plans are backstopped by the Pension Benefit Guaranty Corp (PBGC), the federally sponsored agency that insures private sector pensions. The multiemployer fund was on track to run out of money within 10 years—a date that could be hastened if healthy companies withdraw from their plans. If the multiemployer backup system had been allowed to collapse, pensioners would have been left with no benefit.

Opponents, including AARP and the Pension Rights Center, argued that cutting benefits for current retirees was draconian and established a bad precedent.

Q: Who will be affected by the new law? If I have a traditional pension, should I worry?

A: Only pensioners in multiemployer plans are at risk, and even there, the risk is limited to retirees in “red zone” plans—those that are severely underfunded. Of the 10 million participants in multiemployer plans, perhaps 1 million will see some cuts. The new law also prohibits any cuts for beneficiaries over age 80, or who receive a disability pension.

Q: What will be the size of the cuts?

A: That is up to plan trustees. However, the maximum cuts permitted under the law are dramatic. Many retirees in these troubled plans were well-paid union workers who receive substantial pension benefits. For a retiree with 25 years of service and a $25,000 annual benefit, the maximum annual cut permitted under the law is $13,200, according to a cutback calculator at the Pension Rights Center’s website.

The cuts must be approved by a majority of all the active and retired workers in a plan (not just a majority of those who vote).

Q: How do I determine if I’m at risk?

A: Plan sponsors are required to send out an annual funding notice indicating the funding status of your program. Plans in the red zone must send workers a “critical status alert.” If you’re in doubt, Snyder suggests, “just call your retirement plan administrator,” Snyder says. “Simply ask, if you have cause for concern. Is your plan underfunded?”

The U.S. Department of Labor’s website maintains a list of plans on the critical list.

Q: How quickly would the cuts be made?

A: If a plan’s trustees decide to make cuts, a notice would be sent to workers. Snyder says implementation would take at least six months, and might require “a year or more.”

Q: Am I safe if I am in a single employer pension plan?

A: When the PBGC takes over a private sector single employer plan, about 85% of beneficiaries receive the full amount of their promised benefit. The maximum benefit paid by PBGC this year is $59,320.

Q: Does this law make it more likely that we’ll see efforts to cut other retiree benefits?

A: That will depend on the political climate in Washington, and in statehouses across the country. In a previous column I argued that the midterm elections results boost the odds of attacks on public sector pensions, Social Security and Medicare.

Sadly, the Cromnibus deal should serve as a warning that full pension benefits aren’t a sure thing anymore. So having a Plan B makes sense. “If you have a defined benefit pension, great,” Snyder says. “But you should still be putting money away to make sure you have something to rely on in the future.”
Indeed, I warn all of you who foolishly believe your pensions are "sacred" and 'untouchable" to have a Plan B, C and D because if my worst fear comes true and deflation comes to America, many of you are in for a rude awakening.

And it's not just private pensions that will get slashed, public pensions are extremely vulnerable and are unlikely to be able to weather another financial crisis. Both Warren Buffett and Bridgewater have sounded the alarm but nobody seems to notice or care until their pensions get slashed.

The worst of the bunch, states like Kentucky and Illinois, are already reeling and on the edge of a public pension disaster. The Economist just published a comment on America's Greece, discussing Illinois' public pension woes and the standoff between unions and the sate government.

Folks, it's going to get ugly and when deflation hits America, it's going to get even uglier. And instead of implementing much needed reforms to bolster defined-benefit plans, politicians are cutting them and replacing with crappy defined-contribution plans, leaving more workers to fend for themselves in crazy, volatile markets, effectively condemning them to pension poverty.

Finally, it's important to note the mass looting of American and global pensions started a long time ago, as big banks and their big hedge fund and private equity clients figured out ways to rip off public and private pensions directly or indirectly by charging them exorbitant fees for "sophisticated alternative investments" which are long on promises but short on results.

And make no mistake, the Federal Reserve is in on this alternatives Ponzi too. Despite the linguistic acrobatics, it's committed to keeping rates low for a protracted period, effectively forcing public and private pensions to keep taking more risks in stocks, corporate bonds and alternative investments. QE and low rates are necessary to fight deflation but the biggest winners are big banks and big alternative investment managers, not pensioners.

Ironically, all this doesn't really matter because when deflation rears its ugly head, it's game over for global (not just U.S.) pensions, Wall Street, hedge funds and private equity funds. So enjoy the liquidity party while it lasts because the Titanic is still sinking and all policymakers are doing is rearranging the deck chairs.

Below, CNBC's Rick Santelli and Bradley Belt, former Pension Benefit Guaranty Corp. CEO, discuss the federal pension insurance system and risk to taxpayers. I predict the PBGC and many state pensions will need taxpayer relief in the not too distant future, unless of course, Congress just keeps on nuking pensions, which is pretty much what I expect it to do.

Thursday, December 18, 2014

Madam Chairman, Are You Serious?

The Editors at Bloomberg View aren't happy, putting out an op-ed, Can Janet Yellen Be Serious?:
Sometimes you have to wonder if the Federal Reserve's governors are just laughing at the analysts who pore over every statement to find crucial hidden meanings in their blandest phrases. If they aren't laughing, they should be.

For days before the publication of this afternoon's Federal Open Market Committee statement, discussion had centered on the phrase "considerable time." What did the FOMC mean when it previously said that it would hold short-term interest rates close to zero for a "considerable time"? Would that pivotal phrase be removed from the December statement? If it were, what would its absence mean?

In something of a conceptual if not linguistic breakthrough, the Fed both dropped the phrase and retained it. The new language says that the Fed "can be patient in beginning to normalize the stance of monetary policy." On the other hand, it pointed out that this new formula is "consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October."

Splendid. Analysts can now spend the holiday season debating whether the Fed will merely be patient or will be patient for a considerable time, or some combination thereof; how long a "considerable time" is, exactly (at least that's a comfortingly familiar question); what it means, monetarily if not spiritually, to be "patient"; and indeed, whether the change in language signifies anything at all.

Does anyone else think this is all a bit -- what's the right word -- excessive? Here's a more plausible theory: The change in language signifies nothing. That does raise the question of why the Fed changed it anyway.

Chairman Janet Yellen actually addressed this point when she spoke to the media after the statement had been released. Fed policy hadn't changed, she affirmed. But the language had. Why? Because the FOMC wanted to remove the link between the Fed's words and the end of its policy of quantitative easing -- which happened in October. This makes sense.

But then she said, most unwisely, that "patient" should be taken to mean that the Fed didn't expect to announce higher interest rates at the next two meetings. Analysts can now obsess over what that means. Will the two be changed to one or three in subsequent statements, modified in some other way, or simply dropped? Adding a wrinkle to that completely pointless discussion, Yellen said that interest-rate decisions don't need to be confined to meetings followed by pre-scheduled news conferences. One wonders what she meant by that.

Here's the point, and it's really quite simple: The Fed doesn't know when it will start to raise interest rates, nor should it have to know, nor should it indulge analysts' misconceived determination to find out. Interest-rate changes are not, and should not be, on a schedule. They depend entirely on what happens in the economy, and the Fed -- like every last one of those analysts -- doesn't know what will happen. What it can and should do is draw attention to the economic indicators it is following -- in particular, indications of inflation pressure in the labor market. The rest just sows confusion.

For some reason, the Fed refuses to learn this lesson. Over time, supposedly in pursuit of clarity, Fed statements have grown ever longer and more complicated. The new statement follows the familiar pattern of seeking to clarify by means of introducing fresh complications and debating points.

The whole purpose of a phrase like "considerable time" is that it's meaningless. Embrace that, Janet. In future, for the sake of clarity, keep it short and respond to all questions with, "We'll get back to you when we know."
Ouch, this criticism is quite harsh! In my personal opinion, Chairman Yellen is doing an outstanding job communicating Fed policy in one of the most difficult and eerily uncertain economic periods in post-war history.

The December FOMC statement was a bit long but it provides clear guidance as to the Committee's concerns and there were quite a few dissenters (added emphasis is mine):
Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.
The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.

Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.
You'll notice I highlighted all the inflation passages in the FOMC statement. Why? Because in my mind, even though they will never publicly admit it, some members of the FOMC are petrified of deflation coming to America, increasing the likelihood of a loss of credibility at the Fed and creating more panic at other central banks that are already panicking.

Interestingly, during the press conference (see below), Chairman Yellen said she's not worried about falling oil prices and dismissed the drop in "inflation compensation" saying it mostly reflects "safe haven liquidity flows" into U.S. bonds.

Huh? That was the part that confounded me. While many economists openly question the use of inflation expectations in projecting actual inflation, the drop in these expectations are pronounced and could signal a price shock that the world has hereto never experienced before.

Obviously, I didn't expect the Fed Chairman to come out and publicly worry about the huge drop in inflation expectations as measured by the five-year breakeven inflation expectations (click on chart below), but to dismiss the plunge in oil as purely "transitory" and good for America is to ignore pronounced economic weakness abroad.


And as Sober Look has rightly noted, the Fed's policy trajectory is tied to the global recovery and it is increasingly concerned about importing disinflation. Moreover, in a fascinating comment, Sober Look notes the Fed launched a reverse repo program "experiment" and has been aggressively testing the various monetary tools that will give it additional flexibility during the rate normalization process:
For those who still track the Fed’s total balance sheet, don’t – the balance sheet doesn't tell you much about the monetary stance when you have these new forms of “sterilization”. Of course all this is viewed as temporary and the reserves may yet return to their peak levels next year. And judging from current disinflationary pressures (see chart), the actual liftoff - when these tools are going to be implemented on a more permanent basis - may be as long as a year away. For now however these monetary experiments have been sufficiently large to raise short-term interest rates.
Very interesting indeed. And what message did the Fed send to the stock and bond market? Pretty much that it won't raise rates till it meets its inflation target which is why I still see a huge melt-up in the stock market (ex energy and commodities) and agree with those who see a melt-up in the bond market too.

For now, all stocks are viewing patience as a virtue and melting up, especially beaten down oil drillers and service shares (click on image):


But as I warned you before, these countertrend short covering/ relief rallies in energy and commodity shares are nothing more than that and investors should use them to exit or underweight positions, not add to their existing positions. Smart money will use these violent rallies to short these stocks.

Below, take the time to listen to the press conference with Chairman Yellen keeping in mind my comments above. I also embedded an excellent CNBC interview with Larry Summers who discusses the Fed's balancing act and why he thinks oil is out of sync with other commodities (Really? Copper prices have plunged too, which doesn't bode well for the global recovery).



Wednesday, December 17, 2014

CalPERS Mulls New PE Benchmark?

Michael B. Marois of Bloomberg reports, California Pension Fund May Change Benchmark for Private Equity:
The California Public Employees’ Retirement System, the biggest U.S. pension, may change the benchmark it uses to measure private equity performance as $31.3 billion in investments underperform.

The $294 billion pension, known as Calpers, currently uses a custom benchmark its staff designed based on global and U.S public equity plus 300 basis points. That benchmark is imprecise in measuring private equity performance and encourages riskier investments to meet the goal, officials said.

Calpers’ current staff-designed benchmark creates “unintended active risk for the program, as well as for the whole fund,” Réal Desrochers, the system’s senior investment officer in charge of private equity, said in a report today to the fund’s governing board. Calpers’ 10-year return on private equity of 13.3 percent as of June 30 fell short of its own benchmark by 2.1 percentage points, according to the pension system’s data. The performance also missed in one-, three- and five-year periods.

Calpers has been working to reduce risk in its portfolio after the global financial crisis wiped out more than a third of its wealth, forcing it to increase contributions from taxpayers to cover losses.

As public pension funds have poured money into private equity in search of higher returns, they have sometimes struggled to set accurate benchmarks to determine the holdings’ value. Some benchmarks are devised by firms such as Prequin Ltd. and State Street Corp. One, called AARM-FOIA Global PE Benchmark, uses data on private equity performance reported by pension funds such as Calpers, the California State Teachers’ Retirement System, or Calstrs, and those in Florida, New York and Wisconsin.
Internal Benchmark

Calstrs, the second biggest with $190 billion, in August switched from an internal benchmark to the GX Private Equity Index offered by State Street, which services institutional investors and manages financial assets worldwide.

“After seeking a better private equity benchmark for years, we have decided that State Street’s Private Equity benchmark has achieved enough mass and history to replace our own internal index,” Calstrs Chief Investment Officer Christopher Ailman said in a statement at the time.

Private-equity firms use borrowed money to buy companies, improve profits and resell them. The top 25 percent of private-equity funds delivered better returns than the Standard & Poor’s 500 stock index by 37 percent over the life of the fund, according to a 2011 study that looked at 450 buyout funds from 1984 to 2010.
Peer Group

Pension funds typically use peer group and public benchmarks of private equity performance, according to a study by Kellogg School of Management at Northwestern University. Public market benchmarks are based on time-weighted returns of private equity funds and public market equivalent indexes or an index plus a premium, such as the one now used by Calpers. Because private equity lags public markets, a lagged benchmark may be preferable, according to the report.

Calpers announced in September that it was divesting from hedge funds, saying they are to complex and too expensive while contributing too little to returns.

The Calpers board is scheduled to review all its benchmarks in 2015.
State Legislation

Calpers board members today were also urged to seek state legislation allowing the fund to bypass competitive bidding rules when it hires some types of investment services.

Current state law requires that agencies seek competitive bids when seeking to buy most goods and services. The pension fund needs an exemption so it can be more nimble and timely when considering potential investment opportunities, Danny Brown, the fund’s chief of legislative affairs, told the pension’s investment committee.

“It just doesn’t make sense” for the fund to require a request for proposals to rehire top-performing money managers or to pay for an RFP process that can take as long as nine months, Brown said.

California seeks bids for everything from building roads and schools to buying portable toilets and fire extinguishers. The process is used to ensure that the state pays a fair price for goods and services.

Calpers paid Wall Street firms almost $1.2 billion to manage investments in the fiscal year that ended June 30, 2013.

California grants a blanket exemption from bidding requirements for the state’s Health Benefits Exchange and the California Housing Finance Agency. Calpers already has exemptions for health, vision, and long term care benefits and services.
FINalternatives also reports, CalPERS Mulls New P.E. benchmark:
Having dealt with its hedge-fund investments by abandoning them, the nation’s largest public pension fund is turning its eye to its private-equity portfolio.

The California Public Employees Retirement System isn’t considering an end to its p.e. program. In fact, it’s considering lowering the bar for its managers by abandoning its custom benchmark for those investments.

That benchmark is based on the stock market plus 300 basis points. CalPERS, which is seeking to reduce risk across its $294 billion portfolio, believes that such a high hurdle creates “unintended active risk for the program” by encouraging riskier investments to meet the level. The pension is set to review all of its benchmarks next year.

CalPERS’ review follows the California State Teachers Retirement System’s substitution of a State Street private-equity index for its own.

Earlier this year, CalPERS said it would redeem its entire hedge-fund portfolio, saying it is too large and its hedge-fund allocation too small to make an impact.
Whenever CalPERS does anything, it's big news. For example, when it dropped a hedge fund bomb back in September, everyone had an opinion. I defended this decision based on their reasons and based on my personal knowledge that CalPERS never dedicated sufficient resources to their hedge fund investments to justify keeping that program alive.

Other large pension funds, like Ontario Teachers and the Caisse are still investing in hedge funds and couldn't care less about what CalPERS is doing in that space. They've been investing in hedge funds for a long time, have dedicated important resources to these investments and see it as another way to generate alpha and gain timely market insights from the best alpha managers across the globe (ie. knowledge leverage).

Of course, high fees and low performance is a huge concern for all limited partners investing in hedge funds and I think many institutional investors should follow CalPERS and exit these investments altogether while they still can. Too many of them simply don't understand the risks and complexities of these investments and they typically rely on useless investment consultants placing them in the hottest "brand name funds" which end up underperforming on an absolute and relative basis.

I would also ignore big billionaire hedge fund gurus like Elliott Management's Paul Singer who criticized CalPERS decision to axe hedge funds stating: "We are certainly not in a position to be opining on the 'asset class' of hedge funds, or on any of the specific funds that were held or rejected by CalPERS, but we think the decision to abandon hedge funds altogether is off-base." Singer doesn't have a clue of what he's talking about in this regard and he should worry more about his hedge fund and his ongoing dispute with Argentina.

Enough about hedge funds. Let me get back to the topic of this comment and discuss why CalPERS is reviewing its private equity benchmarks. I was contacted in January 2013 by Réal Desrochers, their head of private equity who I know well, to discuss this issue. Réal wanted to hire me as an external consultant to review their benchmark relative to their peer group and industry best practices.

Unfortunately, I am not a registered investment advisor with the SEC which made it impossible for CalPERS to hire me. I did however provide my thoughts to Réal along with some perspectives on PE benchmarks and told him unequivocally that CalPERS current benchmark is very high, especially relative to its peers, making it almost impossible to beat without taking serious risks.

Almost two years later, we now find out that CalPERS is looking to change its private equity benchmark to better reflect the risks of the underlying portfolio. Yves Smith of Naked Capitalism, aka Susan Webber, came out swinging (again!) stating CalPERS is lowering its private equity benchmark to justify its crappy performance:
By contrast, CalPERS is the largest public pension fund investor in private equity, and generally believed to be the biggest in the world. And in the face of flagging performance, CalPERS, like Harvard, appeared to be rethinking its commitment to private equity. In the first half of the year, it cut its allocation twice, from 14% to 10%.

But is it rethinking it enough? Astonishingly, Pensions & Investments reports that CalPERS is looking into lowering its private equity benchmarks to justify its continuing commitments to private equity. Remember, CalPERS is considered to be best of breed, more savvy than its peers, and able to negotiate better fees. But look at the results it has achieved (click on image to enlarge):


And the rationale for the change, aside from the perhaps too obvious one of making charts like that look prettier when they are redone? From the P&I article:
But the report says the benchmark — which is made up of the market returns of two-thirds of the FTSE U.S. Total Market index, one-third of the FTSE All World ex-U.S. Total Market index, plus 300 basis points — “creates unintended active risk for the program, as well as for the total fund.”
In effect, CalPERS is arguing that to meet the return targets, private equity managers are having to reach for more risk. Yet is there an iota of evidence that that is actually happening? If it were true, you’d see greater dispersion of returns and higher levels of bankruptcies. Yet bankruptcies are down, in part, as Eileen Appelbaum and Rosemary Batt describe in their important book Private Equity at Work, due to the general partners’ success in handling more troubled deals with “amend and extend” strategies, as in restructurings, rather than bankruptcies. So with portfolio company failures down even in a flagging economy, the claim that conventional targets are pushing managers to take too many chances doesn’t seem to be borne out by the data.

Moreover, it looks like CalPERS may also be trying to cover for being too loyal to the wrong managers. Not only did its performance lag its equity portfolio performance for its fiscal year ended June 30, which meant the gap versus its benchmarks was even greater. A Cambridge Associates report also shows that CalPERS underperformed its benchmarks by a meaningful margin. CalPERS’ PE return for the year ended June 30 was 20%. By contrast, the Cambridge US private equity benchmark for the same period was 22.4%. But the Cambridge comparisons also show that private equity fell short of major stock market indexes last year, let alone the expected stock market returns plus a PE illiquidity premium.

The astonishing part of this attempt to move the goalposts is that the 300 basis point premium versus the stock market (as defined, there is debate over how to set the stock market benchmark) is not simply widely accepted by academics as a reasonable premium for the illiquidity of private equity. Indeed, some experts and academics call for even higher premiums. Harvard, another industry leader, thinks 400 basis points is more fitting; Ludovic Philappou of Oxford pegs the needed extra compensation at 330 basis points

So if there is no analytical justification for this change, where did CalPERS get this self-serving idea? It appears to be running Blackstone’s new talking points. As we wrote earlier this month in Private Equity Titan Blackstone Admits New Normal of Lousy Returns, Proposes Changes to Preserve Its Profits.
I stopped reading this comment right after that last paragraph. There are things I agree with but her lengthy and often vitriolic ramblings just annoy the hell out of me. She didn't bother to mention how Réal Desrochers inherited a mess in private equity and still has to revamp that portfolio.

More importantly, she never invested a dime in private equity and quite frankly is far from being an authority on PE benchmarks. Moreover, she is completely biased against CalPERS and allows this to cloud her objectivity. Also, her dispersion argument is flimsy at best.

Let me be fully transparent and state that neither Réal Desrochers nor CalPERS ever paid me a dime for my blog even though I asked them to contribute. I am actually quite disappointed with Réal who seems to only contact me when it suits his needs but I am still able to maintain my objectivity.

I remember having a conversation with Leo de Bever, CEO at AIMCo, on this topic a while ago. We discussed the opportunity cost of investing in private markets is investing in public markets. So the correct benchmark should reflect this, along with a premium for illiquidity risk. Leo even told me "while you will underperform over any given year, you should outperform over the long-run."

I agreed with his views and yet AIMCo uses a simple benchmark of MSCI All Country World Net Total Return Index as their private equity benchmark (page 33 of AIMCo's Annual Report). When I confronted Leo about this, he shrugged it off saying "over the long-run it works out fine." Grant Marsden, AIMCo's former head of risk who is now head of risk at ADIA, had other thoughts but it shows you that even smart people don't always get private market benchmarks right.

And AIMCo is one of the better ones. At least they publish all their private market benchmarks and I can tell you the benchmarks they use for their inflation-sensitive investments are better than what most of their peers use.

Now, my biggest beef with CalPERS changing their private equity benchmark is timing. If we are about to head into a period of low returns for public equities, then you should have some premium over public market investments. The exact level of that premium is left open for debate and I don't rely on academic studies for setting it. But there needs to be some illiquidity premium attached to private equity, real estate and other private market investments.

Finally, I note the Caisse's private equity also underperformed its benchmark in 2013 but handily outperformed it over the last four years. In its 2013 Annual Report, the Caisse states the private equity portfolio underperformed last year because "50% of its benchmark is based on an equity index that recorded strong gains in 2013" (page 39) but it fails to provide what exactly this benchmark is on page 42.

Also, in my comment going over PSP's FY 2014 results, I noted the following:
Over last four fiscal years, the bulk of the value added that PSP generated over its (benchmark) Policy Portfolio has come from two asset classes: private equity and real estate. The former gained 16.9% vs 13.7% benchmark return while the latter gained 12.6% vs 5.9% benchmark over the last four fiscal years. That last point is critically important because it explains the excess return over the Policy Portfolio from active management on page 16 during the last ten and four fiscal years (click on image):



But you might ask what are the benchmarks for these Private Market asset classes? The answer is provided on page 18 (click on image):


What troubles me is that it has been over six years since I wrote my comment on alternative investments and bogus benchmarks, exposing their ridiculously low benchmark for real estate (CPI + 500 basis points). André Collin, PSP's former head of real estate, implemented this silly benchmark, took all sorts of risk in opportunistic real estate, made millions in compensation and then joined Lone Star, a private real estate fund that he invested billions with while at the Caisse and PSP and is now the president of that fund.

And yet the Auditor General of Canada turned a blind eye to all this shady activity and worse still, PSP's board of directors has failed to fix the benchmarks in all Private Market asset classes to reflect the real risks of their underlying portfolio.
All this to say that private equity, real estate, infrastructure and timberland benchmarks are all over the map at the biggest best known pension funds across the world. There are specific reasons for this but it's incredibly annoying and frustrating for supervisors and stakeholders trying to make sense of which is the appropriate benchmark to use for private market investments, one that truly reflects the risks of the underlying investments (you will get all sorts of "expert opinions" on this subject).

Below, Joseph Baratta, global head of private equity at Blackstone Group LP, talks about oil prices, financial markets and the firm's investment strategy. Baratta speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers" stating Blackstone sees opportunity amid slumping oil prices.

I wish Blackstone good luck with these energy investments and totally disagree with his views on the plunge in oil being a "supply-side issue" but listen carefully to their approach.

Tuesday, December 16, 2014

1998 All Over Again?

Olga Tanas and Anna Andrianova of Bloomberg report, Russia Defends Ruble With Biggest Rate Rise Since 1998:
Russia took its biggest step yet to shore up the ruble and defuse the currency crisis threatening its stricken economy.

In a surprise announcement just before 1 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100 percent and the government defaulted on debt.

The ruble lost 2.5 percent to 66.0985 against the dollar as of 12:53 p.m., reversing an early gain prompted by the news.

The announcement, as well as its timing, underscored the financial straits in which Russia now finds itself. If sustained, the new higher rates would squeeze an economy that is already being hurt by sanctions led by the U.S. and European Union, and by a collapse in oil prices. Some analysts said they doubted the economy could withstand such high rates for long.

“This move symbolizes the surrender of economic growth for the sake of preserving the financial system,” said Ian Hague, founding partner at New York-based Firebird Management LLC, which oversees about $1.1 billion, including Russian stocks. “It’s the right move to make, and it wasn’t easy to make it.”

‘Ruble Zone’

The ruble, which has depreciated 50 percent this year against the dollar, is the worst performer among more than 170 currencies tracked by Bloomberg. It gained almost 11 percent today, before weakening to a record.

“In order to limit the negative effects of such depreciation of the national currency on the Russian economy, we decided to increase the key rate,” Russian central bank Governor Elvira Nabiullina said on state TV channel Rossiya 24. “We really must learn to live in the ruble zone, rely to a large extent on our own sources of financing.”

So far this year, Russia has spent $80 billion of its foreign-exchange reserves in an unsuccessful attempt to prop up the ruble, which tumbled past 66 against the dollar for the first time. The currency’s collapse has evoked the turmoil of the 1998 Russian crisis, an event that reverberated through financial markets around the world.
Emergency Gathering

The Russian central bank announced the increase -- the sixth this year -- after policy makers gathered for an unscheduled meeting.

“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the central bank said in the statement. President Vladimir Putin, whose annexation of Ukraine’s Crimean peninsula in March prompted the U.S. and its allies to strike back with sanctions, this month called for “harsh” measures to deter currency speculators.

“While such drastic tightening measures will inflict more pain on the economy, we have been arguing for a while that it is not about preventing recession, but full-scale financial turmoil caused by the precipitous ruble fall,” said Piotr Matys, a currency strategist at Rabobank International in London.

Brent, the grade of oil traders look at for pricing Russia’s main export blend, lost as much as 3.3 percent to $59.02 on the London-based ICE Futures Europe exchange, trading below $60 a barrel for the first time since July 2009.
Losing Steam

Russia derives about 50 percent of its budget revenue from oil and natural gas taxes. As much as a quarter of gross domestic product is linked to the energy industry, Moody’s Investors Service estimated in a Dec. 9 report.

The economy may shrink 4.5 percent to 4.7 percent next year, the most since 2009, if oil averages $60 a barrel under a “stress scenario,” the central bank said yesterday. Net capital outflow may reach $134 billion this year, more than double last year’s total.

Others were more optimistic, saying the action was big enough to arrest the ruble’s record decline. “The central bank is trying to stop the avalanche, and such a massive hike may be sufficient,” said Slava Breusov, an analyst at Alliance Bernstein in New York. “No one seems to be thinking what it will do to the economy, as the priority is to stop the ruble plunge.”
If the massive rate hike by Russia's central bank was "to stop the avalanche" then it backfired in a spectacular fashion. The ruble faced intense selling pressure Tuesday falling at one stage by a whopping 20 percent to historic lows despite a massive pre-dawn interest rate hike from the country's central bank.

Welcome to 1998 all over again with important key differences:
Developing countries have allowed their exchange rates to fluctuate, moving away from the fixed exchange-rate regimes prevailing during the crisis in the late 1990s. While weaker currencies fuel inflation, they can also stimulate economic growth by making exports cheaper.

*Foreign Reserves

Developing countries’ foreign reserves dwarf the amount they had in the late 1990s, which will help them weather the volatility in financial markets. As a group, emerging markets hold $8.1 trillion, compared with $659 billion in 1999, according to data compiled by the International Monetary Fund.

*Debt

Instead of borrowing in dollars, the governments now mostly raise financing in local currencies, allowing them to pay back the debt without having to draw down foreign reserves. External debt amounted to 26 percent of developing nations’ gross domestic product last year, down from 40 percent in 1999, the IMF data show.

One caveat is that companies have replaced governments as a source of concern on debt issuance. Corporations in developing countries sold about $375 billion of international debt between 2009 and 2012, more than double the amount in the four years before the 2008 financial crisis, the Bank for International Settlements said in September.

*Interest Rates

While rates are rising in some developing nations, they remain a fraction of the levels seen in 1998. Russia raised its benchmark rate 6.5 percentage points to 17 percent effective Dec. 16 at a late-night meeting. Some short-term rates soared over 100 percent back in 1998. In Brazil, policy makers have raised benchmark rates to 11.75 percent. That’s still less than half the rate levels from 1998.
I just finished writing a comment on how the plunge in oil won't crash markets via the credit markets and then Russia blows up, sending a jolt across global financial markets.

Why are Russian woes unnerving markets? Because investors are worried of another full blown emerging markets crisis. Bank of England Governor Mark Carney said the selloff in emerging markets may harm more core markets:
Bank of England Governor Mark Carney said the selloff in emerging markets may worsen, posing the risk of higher borrowing costs and weaker growth in core markets.

Even as U.K. banks’ exposure to Russia is “very modest,” and ties between the two countries “relatively limited,” Carney said the central bank was “not complacent at all about the dynamics in the global economy.”

“We do see there is some prospect for a sharper adjustment across emerging markets and that could rebound back into core markets, and raise risk premia and challenge financial conditions, with some impact for financial stability and ultimately for growth,” Carney told reporters in London today.
Carney is absolutely right, central banks can't ignore the carnage in Russia and other emerging markets which also experienced a commodity boom/ bust. Have a look at this chart of the iShares MSCI Emerging Markets (EEM) over the last year (click on chart to enlarge):


The rout in emerging markets has nothing to do with Russia's problems. This will exacerbate the pain ahead but it's got more to do with the plunge in oil and commodity prices and the slowdown in China, which just experienced its first contraction in manufacturing activity in seven months.

And if you think things are bad in Russia, look at the charts of Petrobras (PBR) and Vale (VALE) and you'll see an eerily similar picture to the Russian stock market (RSX) which has been plunging lately. When it comes to emerging markets, I agree with those that warn to prepare for more pain ahead.

Skeptics will say "So what? The US economy is humming along fine. Why should the Fed care about Russia and a possible crisis in emerging markets?". I can show you the reason in one chart Sober Look tweeted last night (click on image to enlarge):


This is the chart which keeps Janet Yellen, James Bullard and other Fed officials up at night. This is why the Fed can't ignore the plunge in oil and turmoil in emerging markets unless it wants to see deflation in America, which is coming no matter what the Fed does. At least that's what inflation expectations and the bond market are telling me right now.

We shall see if the Fed bursts the bubble on Wednesday but in my humble opinion, if it doesn't take a more dovish stance pointing to global weakness, it risks making the biggest policy mistake of all time.

Below, Richard Haass, president at Council on Foreign Relations, and Bloomberg’s Henry Meyer and Hans Nichols discuss the fallout from the ruble reversing the biggest gain in 16 years against the U.S. dollar following a rate hike to 17 percent by the Russian Central Bank and whether or not the Russian economy is heading for a repeat of the default of 1998. They speak on “Bloomberg Surveillance.”

And Georgetown University Professor Angela Stent discusses the ruble and Russian economy on “Bloomberg Surveillance,” also stating why it looks like 1998 all over again but there's an "element of unpredictability" that should worry all of us as the U.S. and its allies pushes Russia further into isolation.

Finally, Gary Shilling, founder of A. Gary Shilling, discusses why the U.S. could catch Russia's cold. “The markets are telling us there is something else there,” warns Shilling. I think he's right.


Monday, December 15, 2014

Will the Plunge in Oil Crash Markets?

Mike Whitney wrote a comment for CountePunch over the weekend, Will Falling Oil Prices Crash the Markets?:
Crude oil prices dipped lower on Wednesday pushing down yields on US Treasuries and sending stocks down sharply. The 30-year UST slipped to a Depression era 2.83 percent while all three major US indices plunged into the red. The Dow Jones Industrial Average (DJIA) led the retreat losing a hefty 268 points before the session ended. The proximate cause of Wednesday’s bloodbath was news that OPEC had reduced its estimate of how much oil it would need to produce in 2015 to meet weakening global demand. According to USA Today:
“OPEC lowered its projection for 2015 production to 28.9 million barrels a day, or about 300,000 fewer than previously forecast, and a 12-year low…. That’s about 1.15 million barrels a day less than the cartel pumped last month, when OPEC left unchanged its 30 million barrel daily production quota…

The steep decline in crude price raises fears that small exploration and production companies could go out of business if the prices fall too low. And that, in turn, could cause turmoil among those who are lending to them: Junk-bond purchasers and smaller banks.” (USA Today)
Lower oil prices do not necessarily boost consumption or strengthen growth. Quite the contrary. Weaker demand is a sign that deflationary pressures are building and stagnation is becoming more entrenched. Also, the 42 percent price-drop in benchmark U.S. crude since its peak in June, is pushing highly-leveraged energy companies closer to the brink. If these companies cannot roll over their debts, (due to the lower prices) then many will default which will negatively impact the broader market. Here’s a brief summary from analyst Wolf Richter:
“The price of oil has plunged …and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.

And the erstwhile booming leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have conniptions. Even Fed Chair Yellen singled them out because they involve banks and represent risks to the financial system. Regulators are investigating them and are trying to curtail them through “macroprudential” means, such as cracking down on banks, rather than through monetary means, such as raising rates. And what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning…

“If oil can stabilize, the scope for contagion is limited,” Edward Marrinan, macro credit strategist at RBS Securities, told Bloomberg. “But if we see a further fall in prices, there will have to be a reaction in the broader market as problems will spill out and more segments of the high-yield space will feel the pain.”…Unless a miracle happens that will goose the price of oil pronto, there will be defaults, and they will reverberate beyond the oil patch.” (Oil and Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next, Wolf Ricter, Wolf Street)
The Fed’s low rates and QE pushed down yields on corporate debt as investors gorged on junk thinking the Fed “had their back”. That made it easier for fly-by-night energy companies to borrow tons of money at historic low rates even though their business model might have been pretty shaky. Now that oil is cratering, investors are getting skittish which has pushed up rates making it harder for companies to refinance their debtload. That means a number of these companies going to go bust, which will create losses for the investors and pension funds that bought their debt in the form of financially-engineered products. The question is, is there enough of this financially-engineered gunk piled up on bank balance sheets to start the dominoes tumbling through the system like they did in 2008?

That question was partially answered on Wednesday following OPEC’s dismal forecast which roiled stocks and send yields on risk-free US Treasuries into a nosedive. Investors ditched their stocks in a mad dash for the exits thinking that the worst is yet to come. USTs provide a haven for nervous investors looking for a safe place to hunker down while the storm passes.

Economist Jack Rasmus has an excellent piece at Counterpunch which explains why investors are so jittery. Here’s a clip from his article titled “The Economic Consequences of Global Oil Deflation”:
Oil deflation may lead to widespread bankruptcies and defaults for various non-financial companies, which will in turn precipitate financial instability events in banks tied to those companies. The collapse of financial assets associated with oil could also have a further ‘chain effect’ on other forms of financial assets, thus spreading the financial instability to other credit markets.” (The Economic Consequences of Global Oil Deflation, Jack Rasmus, CounterPunch)
Falling oil prices typically drag other commodities prices down with them. This, in turn, hurts emerging markets that depend heavily on the sale of raw materials. Already these fragile economies are showing signs of stress from rising inflation and capital flight. In a country like Japan, however, one might think the effect would be positive since the lower yen has made imported oil more expensive.
But that’s not the case. Falling oil prices increase deflationary pressures forcing the Bank of Japan to implement more extreme measures to reverse the trend and try to stimulate growth. What new and destabilizing policy will Japan’s Central Bank employ in its effort to dig its way out of recession? And the same question can be asked of Europe too, which has already endured three bouts of recession in the last five years. Here’s Rasmus again on oil deflation and global financial instability:
“Oil is not only a physical commodity bought, sold and traded on global markets; it has also become an important financial asset since the USA and the world began liberalized trading of oil commodity futures…

Just as declines in oil spills over to declines of other physical commodities…price deflation can also ‘spill over’ to other financial assets, causing their decline as well, in a ‘chain like’ effect.

That chain like effect is not dissimilar to what happened with the housing crash in 2006-08. At that time the deep contraction in the global housing sector ( a physical asset) not only ‘spilled over’ to other sectors of the real economy, but to mortgage bonds…and derivatives based upon those bonds, also crashed. The effect was to ‘spill over’ to other forms of financial assets that set off a chain reaction of financial asset deflation.

The same ‘financial asset chain effect’ could arise if oil prices continued to decline below USD$60 a barrel. That would represent a nearly 50 percent deflation in oil prices that could potentially set in motion a more generalized global financial instability event, possibly associated with a collapse of the corporate junk bond market in the USA that has fueled much of USA shale production.” (CounterPunch)
This is precisely the scenario we think will unfold in the months ahead. What Rasmus is talking about is “contagion”, the lethal spill-over from one asset class to another due to deteriorating conditions in the financial markets and too much leverage. When debts can no longer be serviced, defaults follow sucking liquidity from the system which leads to a sudden (and excruciating) repricing event. Rasmus believes that a sharp cutback in Shale gas and oil production could ignite a crash in junk bonds that will pave the way for more bank closures. Here’s what he says:
“The shake out in Shale that is coming will not occur smoothly. It will mean widespread business defaults in the sector. And since much of the drilling has been financed with risky high yield corporate ‘junk’ bonds, the shale shake out could translate into a financial crash of the US corporate junk bond market, which is now very over-extended, leading to regional bank busts in turn.” (CP)
The financial markets are a big bubble just waiting to burst. If Shale doesn’t do the trick, then something else will. It’s just a matter of time.

Rasmus also believes that the current oil-glut is politically motivated. Washington’s powerbrokers persuaded the Saudis to flood the market with petroleum to push down prices and crush oil-dependent Moscow. The US wants a weak and divided Russia that will comply with US plans to increase its military bases in Central Asia and allow NATO to be deployed to its western borders. Here’s Rasmus again:
“Saudi Arabia and its neocon friends in the USA are targeting both Iran and Russia with their new policy of driving down the price of oil. The impact of oil deflation is already severely affecting the Russian and Iranian economies. In other words, this policy of promoting global oil price deflation finds favor with significant political interests in the USA, who want to generate a deeper disruption of Russian and Iranian economies for reasons of global political objectives. It will not be the first time that oil is used as a global political weapon, nor the last.” (CP)
Washington’s strategy is seriously risky. There’s a good chance the plan could backfire and send stocks into freefall wiping out trillions in a flash. Then all the Fed’s work would amount to nothing.

Karma’s a bitch.
Indeed, karma's a bitch but the article above wrongly conveys the message that the current oil rout was politically motivated to destroy Russia's economy. This is pure nonsense. OPEC's decision not to cut oil production was economically, not politically motivated.

Importantly, the world's power elite are worried about deflation spreading throughout the world. In this environment, the most rational thing to do was not to cut oil production, hoping lower oil prices will mitigate deflation by stimulating global demand.

Having said this, Washington’s strategy is seriously risky but not for the reasons cited above. As Michael Hudson brilliantly argues, the U.S. New Cold War policy has backfired – and created its worst nightmare:
The world’s geopolitics, major trade patterns and military alliances have changed radically in the past month. Russia has re-oriented its gas and oil trade, and also its trade in military technology, away from Europe toward Eurasia.

The result is the opposite of America’s hope for the past half-century of dividing and conquering Eurasia: setting Russia against China, isolating Iran, and preventing India, the Near East and other Asian countries from joining together to create an alternative to the U.S. dollar area. American sanctions and New Cold War policy has driven these Asian countries together in association with the Shanghai Cooperation Organization as an alternative to NATO, and in the BRICS moves to avoid dealing with the dollar area, the IMF and World Bank austerity programs.

Regarding Europe, America’s insistence that it join the New Cold War by imposing sanctions on Russia and blocking Russian gas and oil exports has aggravated the Eurozone’s economic austerity, making it even more of a Dead Zone. This week a group of Germany’s leading politicians, diplomats and cultural celebrities wrote an open letter to Angela Merkel protesting her pro-U.S. anti-Russian policy. By overplaying its hand, the United States is in danger of driving Europe out of the U.S. economic orbit.

Turkey already is moving out of the U.S.-European orbit, by turning to Russia for its energy needs. Iran also has moved into an alliance with Russia. Instead of the Obama administration’s neocons dividing and conquering as they had planned, they are isolating America from Europe and Asia. Yet there has been almost no recognition of this in the U.S. press, despite its front-page discussion throughout Europe and Asia. Instead of breaking up the BRICS, the dollar area is coming undone.

This week, President Putin is going to India to negotiate a gas and arms deal. Last week he was in Turkey diverting what was to be the South Stream pipeline away from southern Europe to Turkey. And Turkey is becoming an associate of the Shanghai Cooperation Organization integrating the BRICS in a defensive alliance against the United States, now that it is obvious that it has no chance of joining the EU.

A few months earlier, Russia announced the largest oil and gas trade and pipeline investment ever, with China – along with a transfer of missile defense technology.
I will leave it up to you to read Michael Hudson's entire comment here. Michael also spoke to to The Real News Network's Sharmini Peries where he discussed the Russian pivot (see below).

Getting back to the article above, there is a lot of confusion and hysteria surrounding the plunge in oil prices and the contagion effects it has on global markets via the credit markets.

The reality is the collapse in oil will rock some markets and economies a lot more than others. Brazil, Mexico, Russia and especially Venezuela, will be among the hardest hit, but the plunge in oil will also hit Canada, albeit nowhere near as badly.

In my opinion, the credit contagion arguments have been blown way out of proportion. To compare the contagion effects of the plunge in oil to that of the decline in the U.S. housing market between 2006-2008 is pure fantasy and sloppy investment analysis.

Make no mistake, the plunge in oil markets will not roil credit markets and cause another financial crisis anywhere near what we saw back in 2008. To even think this is ludicrous.

What is happening right now is a major shakeout in the energy industry which will likely last for years. As I've repeatedly argued, lower oil and commodity prices are here to stay, and those betting on a major recovery in energy (XLE), commodities (GSC), materials (XLB) and other sectors that benefited from the boom like industrials (XLI) are going to be waiting a very, very long time.

Will there be relief rallies? Absolutely, and they can be violent relief rallies, but the trend is inexorably down as global deflationary headwinds pick up. Also, in this environment, we will see a pickup in mergers and acquisitions activity and I await more deals like Halliburton's (HAL) acquisition of Baker Hughes (BHI) and Repsol's recent bid for Talisman Energy (TLM).

As I've repeatedly argued, the biggest risk for stocks in 2015 is a major melt-up unlike anything you've ever seen before. The plunge in oil will do nothing to stop this. Markets can easily take off even if oil and commodity prices stay low (financials, retail, healthcare and technology make up a bigger proportion of the S&P 500 than energy, materials and industrials).

Are there going to be corrections along the way and unforeseen or even foreseen black swans that will cause major disruptions? Sure but in my opinion, the only thing that can derail this endless rally is a significant pickup in global deflationary headwinds.

And if deflation does hit America, that's when you'll see central banks really panic, putting an end to the old adage, "Don't fight the Fed." In my opinion, even though this time is indeed different, we are not yet at the precipice of a total, systemic loss of confidence. There is still plenty of liquidity and faith in central banks to drive risk assets much, much higher. You just have to be careful before plunging into stocks or you risk getting slaughtered.

Interestingly, CNBC's Dominic Chu reported this morning that 30% of companies in the S&P 500 energy sector are down 60% or more in the last three months and over 80% are down 10% or more in the last month. The hardest hit are  Denbury Resources (DNR) and TransOcean (RIG), a major holding of Carl Icahn. No wonder so many hedge funds are closing like it's 2009. Only some top quant/ commodity funds got the oil rout right.

It's also worth noting the Fed might be forced to act if oil keeps falling. Bill Gross told Bloomberg Surveillance's Tom Keene the Fed would have to take lower oil prices “into consideration” and that “it moves towards a dovish stance relative to what the market expected a few days ago.”

Below, Didier Duret, CIO at ABN Amro Private Banking, says the low oil price will be a boost for the global economy, while Patrick Legland, global head of research at Societe Generale, argues that the plunge in oil is signalling trouble ahead.

And my favorite economist, Michael Hudson, discusses the Russian pivot with The Real News Network's Sharmini Peries. Michael is an intellectual powerhouse and I strongly suggest you read all his books, especially Super Imperialism, The Bubble and Beyond and Finance Capitalism and its Discontents. They don't teach you this stuff in academia or on Wall Street!


Friday, December 12, 2014

Did Congress Just Nuke Pensions?

Evan Halper of the Los Angeles Times reports, Congress poised to allow cuts to private pension payouts:
More than 1 million Americans who were promised secure, predictable retirement income probably will see part of their monthly benefit checks evaporate as Congress moves to stabilize some private pension systems veering toward insolvency.

The expected congressional action to allow previously promised private-sector pensions to be cut is another sign that decades-old assurances that workers were given about retirement income are rapidly fading.

The move comes after San Jose, Detroit and other cities have partially reneged on long-established contracts with government workers and retirees, shrinking benefit checks that were supposed to only increase over time.

Traditional political alliances have fractured as the pension measure — attached to a massive money bill needed to keep the government open — has moved toward a final vote.

Unions are bitterly split. Some are so panicked by the possibility that the entire system could collapse that they have joined with business leaders to implore Congress to act.

"This is the only realistic way to avoid insolvency and preserve as much of the promised pension benefits as possible," Joseph Hansen, international president of the United Food and Commercial Workers, wrote in a letter to lawmakers earlier this week.

Other unions and retiree groups, including the AARP, have denounced the plan as a betrayal of a promise, enshrined in federal law for four decades, that vested pension benefits would not be cut.

The retirees whose pensions are at stake are mostly blue-collar workers, including mechanics, truckers and construction workers, who participate in what are known as multi-employer pension plans.

The plans were designed to allow workers flexibility to switch companies with ease, guaranteeing them a stable retirement in fields where they were likely to move frequently between employers.

Retirees in all 50 states are affected, although the biggest of the pension plans in danger of collapse is the Teamsters-affiliated Central States Pension Fund, which has some 410,000 participants in the Midwest and South. The average pension for Central States members is $15,000 per year.

Federal officials have warned for years that multi-employer plans covering as many as 1.5 million workers were dangerously unstable. Shifts in the economy have left fewer workers paying into the plans, even as more retirees take money out of them.

Stock market losses during and after the financial crisis of 2008 worsened the problems.

Last month, federal pension officials reported the crisis had escalated, with a high likelihood that not only would the funds go broke within a decade, but the federal insurance program created as a backstop would crash along with them.

"This is the last chance that labor unions and their members have to gain some control over the future of their pensions," said Rep. George Miller (D-Martinez). A Bay Area liberal, Miller has reluctantly helped push a rollback of federal retirement protections after 40 years of fighting to get blue-collar workers more income.

"This reform would give them the tools they need to rescue themselves," Miller said during brief debate on the House floor Thursday.

For many workers, the medicine is bitter. The nonprofit Pension Rights Center warns that some workers could see their retirement checks cut by as much as 60%.

Some employees in the private sector have seen pensions shrivel before. Many airline pilots, for example, saw six-figure annual retirement payouts drop to $25,000 when their plans failed amid company bankruptcies. But the scale of the multi-employer plan problem is unprecedented in recent decades.

"These deeply distressed plans are likely to fail without congressional action," Mary Kay Henry, president of the Service Employees International Union, told lawmakers in a letter. "An insolvent fund cannot pay full benefits."

By contrast, the Teamsters are demanding Congress retreat. Talking points sent to members Thursday declared "this bill is the ugly side of political backroom dealings."

At the headquarters of the International Assn. of Machinists and Aerospace Workers in suburban Washington, D.C., union President Thomas Buffenbarger said he was bewildered to see some unions and liberals supporting the plan.

"I was on the phone with [House Democratic leader] Nancy Pelosi earlier this week, and I asked her, 'Why do the Democrats want to have their fingerprints on this?'" he said.

Buffenbarger said there is an alternative. The federal government could backfill the shortfall at a cost of about $100 billion.

"Let's measure this against other things the government has done," Buffenbarger said. "They bailed out Wall Street so those guys can keep their yachts. But we can't come up with the equivalent to bring solvency to the entire nation's pension systems?"

On Capitol Hill, however, the idea of a federal bailout is dismissed as impossible. Most Americans no longer are offered the security of a guaranteed pension, and using tax funds to bolster those who are is a political non-starter.

To avoid any need for taxpayer bailouts, private pensions are supposed to be backed by a federal insurance system administered by the Pension Benefit Guaranty Corp., which typically would pay pensions at a reduced rate to people covered by plans that fail. But the fund that insures multi-employer plans is too small to cope with the scale of the shortfall, both sides in the debate agree.

The Employee Retirement Income Security Act, passed in 1974, was supposed to protect pensions. To keep retirement funds from being raided by employers, the law doesn't allow workers and retirees the option to approve pension reductions.

The plan now before Congress would amend that law and allow members of distressed pension plans to vote on any reductions suggested by their plan's trustees. Pensioners older than 80 would be protected from any cuts. Those over 75 would have benefits cut less than younger retirees.

"We should give [workers] the opportunity and responsibility of trying to save their own pensions," Miller said. "These plans are losing altitude every day they cannot make adjustments."

The problems facing the Central States Fund illustrate the overall picture. In 1980, the fund had four workers contributing money for every retiree collecting payments. Now it has five retirees for every worker paying in, according to congressional testimony last year by Executive Director Thomas Nyhan.

Hundreds of trucking companies that were part of the fund have gone bankrupt, dissolving before paying their share of the pension costs. The recession severely compounded the problem, as the value of the fund's investments plunged. So did the number of workers paying into the fund, amid widespread layoffs.

With the federal pension insurance program unable to backstop the funds, Nyhan said the 410,000 participants in his pension plan confronted a "stark reality" without some congressional action.

"Even though they were told repeatedly their benefits were guaranteed," he said, "their pension checks could be eliminated entirely."
Michael Fletcher of the Washington Post also reports, Congressional leaders hammer out deal to allow pension plans to cut retiree benefits:
A measure that would for the first time allow the benefits of current retirees to be severely cut is set to be attached to a massive spending bill, part of an effort to save some of the nation’s most distressed pension plans.

The rule would alter 40 years of federal law and could affect millions of workers, many of them part of a shrinking corps of middle-income employees in businesses such as trucking, construction and supermarkets.

The measure is now before the House Rules Committee and is likely to be moved as an amendment to a massive $1.01 trillion spending bill, perhaps by late Wednesday. It is expected to pass the Senate by Thursday.

If passed, the change would apply to multi-employer pensions, where a group of businesses in the same industry join forces with unions to provide pension coverage for employees. The plans cover some 10 million U.S. workers.

Overall, there are about 1,400 multi-employer plans, many of which remain in good fiscal health and would be untouched by the deal. But several dozen have failed, and several other large ones are staggering toward insolvency.

As many as 200 multiemployer plans covering 1.5 million workers are in danger of running out of money over the next two decades. Half of those are thought to be in such bad shape that they could seek pension reductions for retirees in the near future.

“We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable,” said Rep. George Miller (D-Calif.), who along with Rep. John Kline (R-Minn.) led efforts to hammer out a deal.

But the measure in Congress is also outraging retirement security advocates, who argue that allowing cuts to plans paves the way to trims for other retirees later.

“After a lifetime of hard work to earn their pensions, retirees don’t deserve to receive a bad deal, in which they have had no say, cut behind closed doors and excluding the very people who would be impacted the most,” said Joyce Rogers, a senior vice president for AARP, the lobbying giant lobbying group for older Americans in a statement.

The idea of cutting benefits is reluctantly supported by some unions and retirement fund managers who see it as the only way to salvage pensions in plans that are in imminent danger of running out of money.

“This bipartisan agreement gives pension trustees the tools they need to maintain plan solvency, preserves benefits for the long haul, and protects the 10.5 million multiemployer participants,” Randy G. DeFrehne, executive director of the National Coordinating Committee for Multiemployer Plans said in a statement. “With time running out on the retirement security of millions of Americans, moving this bipartisan proposal forward now is not only timely, but necessary.”

But it also has stirred strong opposition from retirees who could face deep pension cuts and from advocates eager to keep retiree pensions sacrosanct, even in cases when funds are in a deep financial hole.

“We thought our pension was secure,” said Whitlow Wyatt, a retired trucker who lives in Washington Court House, a small city in central Ohio. “That was always the word. Now they are changing that.”

Wyatt, 70, retired with a $3,300-a-month pension in 2000 after working more than 33 years as a long-haul driver. He could face pension reductions of 30 percent or more if Congress permits trustees of the hard-pressed pension fund to slash benefits.

The deal is aimed at helping plans such as the Teamsters’ Central States fund.

The pensions earned by truckers in the fund are among the best enjoyed by working-class people anywhere: After 30 years on the road, many of its participants are entitled to upward of $3,000 a month for the rest of their lives.

But now the fund, rocked by steep membership declines, an aging workforce and downturns in the stock market, is in dire financial straits, putting the retirement benefits of 400,000 participants in jeopardy.

In its annual report last month, the Pension Benefit Guaranty Corp., the federal insurance program that backs private-sector pensions, warned that the problems facing multi-employer pensions could cause the safety net that secures them to collapse within the next decade.

If that happens, retirees depending on multi-employer plans for their pensions would receive nothing if their plans failed. (A separate PBGC insurance fund covering single-employer private pensions is in much better financial shape.) Even if the insurance fund survives, maximum coverage for people in multi-employer plans is minimal — about $13,000 a year.

Although it has issued similar alerts in the past, the PBGC’s latest warning seems to have pushed Congress to move from studying a policy change to actively negotiating for one in recent weeks.

The abrupt action has alarmed some pension rights advocates, who are concerned about a decline in retirement security for all Americans. They also worry about a creeping trend toward trimming pensions, citing retirement benefit cuts for government employees in Detroit and elsewhere.

But managers of deeply troubled funds say that absent a federal bailout, which they call politically infeasible, cutting benefits is the only way to save them. Last week, more than 1,300 employers sent letters to members of Congress urging lawmakers to back the proposal to allow benefit cuts.

“The longer we wait to take action, the more severe the impact on retirees and workers in the plans in the worst financial shape will become,” business leaders wrote. “The longer we wait, the heavier the burden will become on employers struggling to fund and extend these pension plans.”

That is the situation confronting the Central States plan, which was notorious in the 1960s and ’70s for being used as a slush fund for organized crime. Since then it has operated under federal court supervision and with the help of professional fund managers. Yet that has not been enough to overcome demographic and other trends that have weakened its finances.

In 1980, the Central States fund had four active participants for every retiree. Now, there are nearly five retirees or inactive members for every worker, because many unionized trucking firms have gone out of business in the decades since deregulation, Thomas C. Nyhan, executive director of Central States, told Congress earlier this year.

The fund has about $18 billion in assets and pays out annual benefits of $2.8 billion to retirees. But it receives just $700 million each year from employers. Even given the strong stock market returns of recent years, that puts the plan on course to run out of money within the next 10 to 15 years, Nyhan has said.

The fund ran into trouble during the dot-com crash of the early 2000s. Also, United Parcel Service, once the largest firm in Central States, paid more than $6 billion to drop out of the fund in 2007. Much of that money was lost when the market tanked in 2008, leaving the fund in perilous condition.

Some see cutting benefits preemptively as the only way to keep troubled plans such as Central States afloat. Under the agreement reached by congressional negotiators, retirees over age 75 as well as those who are disabled would be shielded from any reductions. Also, any benefit cuts would be subject to a vote of plan participants.

Nonetheless, many retirees feel betrayed. “I never dreamed they would pull the rug out from under us,” said Greg Smith, 66, a retired shipping clerk who retired in 2011 with a $3,000-a-month pension after 42 years on the job. “I actually retired because I was worried about them cutting pensions. I thought I would be grandfathered in with protections. But I guess not.”
Reuters reports that late Thursday evening, the House of Representatives averted a government shutdown by narrowly passing a $1.1 trillion spending bill despite strenuous Democratic objections to controversial financial provisions.

What do the cuts in private pensions mean? Mark Miller of Reuters reports,
Congress’ No-Bailout Pension Plan Is No Solution for Retirees:
The cuts to promised benefits for current retirees would roll back a landmark law protecting pensions—and opens the door to further cutbacks.

Wall Street banks, automakers and insurance giants got bailouts during the economic meltdown that started in 2008. But when it comes to the pensions of retired truck drivers, construction workers and mine workers, it seems that enough is enough.

The $1.1 trillion omnibus spending bill moving through Congress this week adopts “Solutions Not Bailouts,” a plan to shore up struggling multiemployer pension funds—traditional defined benefit plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing.

A bailout, it is not. The centerpiece is a provision that would open the door to cutting current beneficiaries’ benefits, a retirement policy taboo and a potential disaster for retirees on fixed incomes.

Developed by the National Coordinating Committee for Multiemployer Plans (NCCMP), a coalition of multiemployer pension plan sponsors and some major unions, the plan addresses a looming implosion of multiemployer pension plans. Ten million workers are covered by these plans, with 1.5 million of them in roughly 200 plans that are in danger of failing over the next two decades. Two large plans are believed to be much closer to failure—the Teamsters’ Central States fund and the United Mine Workers of America fund.

The central premise is that Congress won’t—and shouldn’t—prop up the multiemployer system.

“The bottom line is, we’ve been told since the start of this process that there isn’t going to be a bailout—Congress is tired of bailouts,” says Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans (NCCMP).

The problem is partly structural. Multiemployer pension plans were thought to be safer than single employer plans, owing to the pooling of risk. As a result, the level of Pension Benefit Guaranty Corporation (PBGC) insurance protection behind the multiemployer plans is lower. But many industries in the system have seen declining employment and have a growing proportion of retirees to workers paying into the pension funds. And many of the pension funds still have not fully recovered from the hits they took in the 2008-2009 market meltdown.

These problems pose a major threat to the PBGC. The agency reported recently that the deficit in its multiemployer program rose to $42.2 billion in the fiscal year ending Sept. 30, up from $8.3 billion the previous year. If big plans fail, the entire multiemployer system would be at risk of collapse.

The fix moving through Congress would revise the Employee Retirement Income Security Act (ERISA) to grant plan trustees broad powers to cut retired workers’ benefits if they can show that would prolong the life of the plan. That would mark a major change from current law, which calls for retirees to be paid full benefits unless plan assets are exhausted; then, the PBGC steps in to pay benefits, albeit at a much lower level. The bill also would increase PBGC premiums paid by sponsors, from $13 to $26 per year.

The legislation does prohibit benefit cuts for vested retirees over 80, and limited protections for retirees over 75—but that leaves plenty of younger retirees vulnerable to cuts. And although workers and retirees would get to vote on the changes, pension advocates worry that the interests of workers would overwhelm those of retirees. (Active workers rightly worry about the future of their plans, and many already are sacrificing through higher contributions and benefit cuts.)

The big problem here is that the plan fails to put retirees at the head of the line for protection. When changes of this type must be made, they should be phased in over a long period of time, giving workers time to adjust their plans before retirement. For example, the Social Security benefit cuts eneacted in 1983 were phased in over 20 years and didn’t start kicking in until 1990.

“It’s a cruel irony that in the year we’re celebrating the 40th anniversary year of ERISA, Congress is trying to reverse its most significant protections,” said Karen Friedman, executive vice president of the Pension Rights Center (PRC), an advocacy group that has been battling with NCCMP on some of the proposed changes to retired workers’ benefits.

Friedman’s organization, AARP and other advocates reject the idea that solvency problems 10 to 15 years away require such severe measures. They have pushed alternative approaches to the problem; one that is included in the deal, DeFrehn says, is an increase in PBGC premiums paid by sponsors, from $13 to $26 per year. Advocates also have called for other new revenue sources, such as low-interest loans to PBGC by the once-bailed-out big banks and investment firms.

There are no easy answers here. But cutting the benefits of today’s retirees should be the last solution we try—not the first.
Peter Coy of Bloomberg also reports, Congress Says It Has to Cut Pensions to Save Them:
Joshua Gotbaum doesn’t like telling retirees that their pensions are about to be cut. After all, until August he was the director of the Pension Benefit Guaranty Corporation (PBGC), the federal insurance fund that’s supposed to safeguard pensions. But yesterday Gotbaum interrupted a vacation in Madrid to return my call asking about a bill working its way through Congress that would allow multi-employer pension plans to cut benefits. He’s a huge supporter of the legislation.

“The alternative is that the plans would collapse. It’s reorganize rather than die,” says Gotbaum, a former Lazard investment banker who is now a guest scholar at the Brookings Institution.

On Dec. 9, lawmakers agreed on pension reforms as part of a $1.1 trillion spending bill to keep the federal government from shutting down. Inclusion in that bill almost ensures the provision’s passage. The bill applies to roughly 10 million participants in multi-employer pension plans, typically found in construction, trucking, and other industries in which several employers, often small businesses, negotiate collectively with unions to cover a group of workers in a region. They tend to be in much worse condition than single-employer plans, because many of the companies in them have gone out of business, leaving the survivors to pick up the slack for workers who never even worked for them. About 1.5 million of those participants are in plans that could run out of money in the next two decades if nothing is done.

The legislation would allow the plans’ trustees to cut benefits without having to shut down and be taken over by the PBGC. The bill is bipartisan and supported by some—but not all—labor unions. As explained by Bloomberg News, “The provision reflects an agreement by House Education and the Workforce Committee Chairman John Kline, a Minnesota Republican, and senior Democrat George Miller, a California Democrat.”

Allowing these plans to cut benefits is strongly opposed by the Pension Rights Center, an organization backed by foundations and unions. It’s “a huge breach of Erisa,” the Employment Retirement Income Security Act of 1974 whose 40th birthday was celebrated in September, says Karen Friedman, the center’s policy director. “We’re totally outraged by this legislative deal, which was done in the middle of the night.” She says it sets a precedent that could weaken the protections of single-employer pension plans and even Social Security.

As Friedman notes, it’s been a tough year or two for pensions. In October, a federal bankruptcy judge ruled that the California Public Employees’ Retirement System doesn’t deserve special protection when cities turn to bankruptcy court. Retired city workers in Detroit took benefit cuts in that city’s bankruptcy.

Alicia Munnell, director of Boston College’s Center for Retirement Research, says the change to multi-employer plans “is letting the genie out of the bottle. Once it becomes legal to cut accrued benefits, then it’s a different world. It’s really precedent-making change.” While not opposed to giving trustees flexibility, she said, “It needs to be applied very, very judiciously.”

Gotbaum and others say that there was no alternative to letting trustees of trouble plans cut benefits. “To me, it’s the natural and predictable evolution of a long-running problem,” says Olivia Mitchell, executive director of the Pension Risk Council at the University of Pennsylvania’s Wharton School. “The fact is the PBGC has never had any government backing, and it’s never been set up so [that] the premiums are sufficient. The Erisa Act of 1974 didn’t price the insurance right, and this is the result.”

Multi-employer plans are in particularly poor shape. Mitchell says the PBGC reported assets for them of $1.8 billion and liabilities of $44 billion. The worst off among the major plans, the Teamsters’ Central States pension fund, has just one worker for every five retirees or inactive members collecting benefits, a dramatic reversal from the four-to-one employee-to-retiree ratio it had in 1980, the Washington Post reported.

The bill in Congress has some safeguards built in for retirees. Those older than age 80 would be spared cuts, and workers 75 to 80 would suffer only part of the cut. Retirees and current workers have the right to reject cuts, although Friedman said that veto can be overridden by the plan’s trustees. Trustees would not be allowed to cut benefits to less than 1.1 times the minimum provided by plans that are taken over by the PBGC. So employers will bear some of the pain: Their premiums will double to $24 per worker per year.

Says Gotbaum: “When I started doing this, no one thought this bill could pass. I’m ecstatic. It’s great.”
I don't know why Joshua Gotbaum is so ecstatic. This bill deals a retirement death blow to millions of blue collar workers and will propel the United States of Pension Poverty to the top spot of countries with the worst retirement system among developed nations.

And never mind all the political posturing, both Democrats and Republicans voted in these changes with little or no regard to the plight of these workers. It's basically more of the same, bailouts for Wall Street and austerity for Main Street.

Having said this, there is no question that these multi-employer plans were poorly managed and were in desperate need of reforms. The problem is that instead of implementing more sensible reforms to try to bolster these plans or try saving them -- like maybe have the state public pension funds manage them or just bailing them out like it did for Wall Street back in 2008 -- Congress took out the guillotine and chopped them, effectively spreading the message that the pension promise is worthless.

Think about it, these people worked thirty or forty years and thought their pension benefits were safe and secure, allowing them to retire in dignity. Instead, they got the royal pension shaft as Congress just pulled the rug under their feet.

In a personal finance survey published yesterday, 18 percent of American respondents said they expect to be in debt for the rest of their lives. That is double the percentage who expected that in May 2013, the last time the survey was conducted. That's one fifth of Americans who don't plan on paying off their debt because they can't afford to.

And now Congress is basically telling them that they can't count on their measly pension benefits during their golden years. At any point in time, their benefits can be drastically cut.
 
Let me once again state my solution to this big mess which I discussed in the United States of Pension Poverty:
My solution is to bolster defined-benefit plans for all Americans, not just public sector workers, and have the money managed by well-governed public pension funds at a state level.

I emphasize well-governed because a big part of America's looming pension disaster is the mediocre governance which has contributed to poor performance at state pension funds. I edited my last comment on the Pyramis survey of global investors to include this comment:
The other subject I broached with  Pam is how the governance at the large Canadian public pension funds explains why they make most of their decisions internally. Public pension fund managers in Canada are better compensated than their global counterparts and they are supervised by independent investment boards that operate at arms-length from the government.
Of course, good governance isn't enough. States need to introduce sensible reforms which reflect the fact that people are living longer and they need to introduce some form of risk-sharing in these state pension plans.

As far as 401(k)s, RRSPs, and other forms of defined-contribution plans, you know my thoughts. They might help people save but the brutal truth is they're not pension plans with guaranteed benefits to help people retire in dignity and security. This is why despite their existence, America's new pension poverty keeps growing.

It's high time U.S. policymakers start tackling the domestic retirement (and jobs) crisis. It's time to move beyond public sector pension envy and go Dutch on pensions, introducing a major overhaul of the retirement system which will provide adequate retirement income for all Americans. There will be major resistance but the benefits of defined-benefit plans far outweigh the costs.

Moreover, the real cancer of pensions is that the status quo is a surefire path to destruction. As more and more companies exit defined-benefit pensions, they leave millions of workers fending for themselves in these crazy markets. It's a looming disaster which will severely impact the United States of Pension Poverty and unless policymakers address this issue, it will come back to haunt the country (in the form of increased social welfare costs and lower government revenues).
Finally, Matthew Cunningham-Cook and David Sirota wrote an article for the International Business Times, Pension Fund Run By Wall Street Cited In Push To Cut Retiree Benefits:
Six years after the financial crisis, the economic aftershocks are still rattling the halls of Congress -- this time in a debate over an esoteric pension provision tucked into an end-of-year budget bill. Though that legislation, known as the “cromnibus,” is supposed to be about annual appropriations for government agencies, lawmakers have inserted language that would give private pension plans the power to cut benefits to thousands of current retirees whose pension savings were decimated by investment losses from the financial collapse of 2008.

If the initiative is enacted, experts say, it would be the most consequential change to retirement policy in the United States since the passage of landmark pension legislation 40 years ago. Altering the 1974 Employee Retirement Income Security Act to permit benefit cuts could prompt a slew of efforts to chip away at formerly untouchable guarantees of income to millions of retirees.

The $1.1 trillion spending bill that includes the pension provision was made public Tuesday night and a vote is expected on Thursday. Lawmakers are under pressure to pass the cromnibus by Thursday at midnight to avoid a government shutdown, so there is little time for further changes or negotiations.

The debate over the bill's pension language centers around multiemployer retirement plans -- the large, union-backed funds created in the explosion of labor unions after the Great Depression. The government-insured plans cover an estimated 10 million Americans from the private sector workforce. Many of those funds now face unfunded liabilities.

Lawmakers pushing to allow benefit cuts are citing the example of the $18.7 billion Teamsters' Central States Fund, which has 410,000 members and is the nation’s second-largest multiemployer pension plan. There’s an estimated $22 billion gap between assets in the Central States Fund and promised benefits to the system’s current and future retirees -- a shortfall that legislators point to as a rationale to pass a new law permitting multiemployer plans to slash promised retirement benefits.
“We have to do something to allow these plans to make the corrections and adjustments they need to keep these plans viable,” said Democratic Rep. George Miller in pushing the plan.

But critics of the provisions say the plight of the Central States Fund is not a cautionary tale about unsustainable benefits but an example of Wall Street mismanagement. They note that Central States is the only major private pension fund where all the discretionary investment decisions are made by financial firms rather than by the fund’s board. Roughly a third of the pension system’s shortfalls -- or almost $9 billion -- can be traced to investment losses accrued during the financial industry’s 2008 collapse. Those losses were in addition to more than $250 million in fees paid by the plan to financial firms in just the last 5 years.

Many pension funds followed strategies that involved high fees for Wall Street companies while producing “financial returns that trailed plain vanilla investment strategies,” said Jay Youngdahl, a fellow with the Initiative for Responsible Investment at Harvard University. Central States appears to be a prime example, he said. “Before cutting benefits, we need to examine what exactly has happened.”

Financial firms came to manage the Central States Fund thanks to a 1982 federal consent decree that stripped the Teamsters of its power to oversee retirees’ money. In recent years, the decree divided a portion of the pension assets into low-cost index funds, and gave the rest of the fund’s assets to firms including Morgan Stanley, Northern Trust, JPMorgan Chase and Goldman Sachs.

From 2009 to 2013, Goldman Sachs and Northern Trust collected over $31 million in fees from the fund. In all, the fund paid more than a quarter-billion dollars in fees during that period. At the same time, firms like Goldman Sachs and Northern Trust have delivered investment returns that dragged down the fund’s performance.

“The 1982 consent decree created what is arguably the clearest conflict of interest in an industry that is riddled with them,” said Edward Siedle, a former SEC attorney and a leading expert on pensions. “The Wall Street fiduciaries have a clear interest in pursuing investment strategies that will generate fees for themselves.”

As with many cash-strapped pension systems, 2008 was the moment the Central States Fund found itself in crisis. That year, the fund’s portfolio dropped by more than 29 percent -- a bigger decline than the median large pension fund, and one that effectively converted a stable system into one on the brink of insolvency. In total, the fund lost more than $8.8 billion during the 2008 financial crisis.

The decline was fueled by huge losses in the assets managed by the financial industry at the center of that crisis. For example, the holdings managed by Goldman Sachs and Northern Trust lost more than a third of their value. Had the accounts controlled by Goldman Sachs and Northern Trust delivered returns similar to the median for large pension plans from 2008 to 2012, there would be at least $500 million more in the system.

Goldman Sachs and Northern Trust did not respond to IBTimes request for comment.

“The extreme underperformance of the Goldman and Northern Trust portfolios in 2008 alone has had a major negative impact on the plan that continues to this day,” said Chris Tobe, an investment consultant and a former pension trustee in Kentucky.

The financial firms that managed the Central States Fund not only raked in management fees from the fund, they also invested retiree money in their own companies.

In 2009, for example, the Central States Fund had purchased $20 million of Goldman securities, when Goldman shared in the running of the fund with Northern Trust. By 2010, Goldman’s last year as a named fiduciary, the Fund owned $43 million in Goldman stocks and bonds. Similarly, this past year, Northern Trust directed the Central States Fund to purchase $400,000 in Northern Trust corporate bonds.

While Congress responded to the 2008 financial crisis by rescuing the banking industry with an $700 billion bailout, there's no rescue on the way for retirees. Lawmakers are offering no bailout to close multiemployer plans’ aggregate $42 billion deficit. Instead, sponsors of the legislation want to empower pension trustees to make pension funds whole exclusively by cutting promised retirement benefits. Retirees and members would lose their right to contest such cuts in court. Though the proposed language in the cromnibus bill would give retirees the right to vote on any reductions in benefits, it would empower the Secretary of the Treasury to overrule them and to slash benefits if the secretary deems the plan to be “systemically important.”

The original consent decree that removed Teamsters representatives from the Central States Fund’s board came in the wake of corruption allegations, and was supposed to rid the pension system of self dealing. But Greg Smith, a Teamsters retiree who has analyzed the Central States Fund, said the opposite has happened.

“The fund pays out over $60 million a year in fees,” he told IBTimes. “The Justice Department seems only concerned about whether or not the pension fund is caught up in casino investments, like in the '70s. The Justice Department doesn’t seem interested in looking into whether or not Wall Street is on the take.”

Ken Paff, the national organizer for Teamsters for a Democratic Union, which has been pressuring the Teamsters union for a more aggressive stance against the “cromnibus” changes, says attaching the pension provision to a larger must-pass bill is an underhanded way to harm retirees.

“We regard this as a sneak attack for a major change to pension laws,” Paff told IBTimes. “The problems of the pension funds should not be solved on the backs of people who worked their whole life and earned these pensions.”

Democratic Sen. Tom Harkin, the chairman of the Senate Health, Education, Labor and Pensions Committee, issued a statement Tuesday opposing the pension language.

“More than one million people could see their pensions cut,” Harkin said. The legislation “asks retirees to take potentially enormous cuts to benefits that were earned and promised, without effectively preserving the pension system going forward.”
Cunningham-Cook also wrote a comment which Al Jazeera America published, The real threat to pensions is Wall Street:
If you believe what the Pew Foundation or Brookings Institution has to tell you or The New York Times or The Wall Street Journal, unfunded pension liabilities threaten to sink state and local governments nationwide. Liabilities are painted as the issue the public needs to know about when it comes to retirement.

Estimates of the debt facing public sector pension plans range from $2 trillion to $4 trillion. Those seem like big numbers — and they are — but those obligations are to be paid out over the next 30 years. It’s for good reason that only one public sector pension fund has run out of money since the Great Depression. Yet editorial pages across the country use the unfunded liability argument to advance a right-wing agenda of cutting people’s benefits.

In Detroit, public sector retirees have lost cost-of-living adjustments, meaning that they will get poorer as they age. In San Jose, California, pension reform there has led to massively increased turnover as experienced public sector workers depart for parts of the state where their pensions will be secure.

What the obsession with unfunded liabilities misses, however, is the actual and current emergency facing pension funds: Wall Street grifting. Valued at more than $5.3 trillion, public pension funds have for decades been a cash cow for finance. Pensions buy up shares in private equity and hedge funds, complex derivatives and foreign currency at prices higher than what they are worth — earning Wall Street billions in profits, according to Edward Siedle, a leading expert on public pensions. Leading banks have recently been caught in scandal for manipulating foreign exchange prices for their pension fund clients.

The most underreported data point in this regard is a 2007 dispatch from the Governmental Accountability Office (GAO), Congress’ investigative arm. It examined 24 pension investment consultants, by far the most influential actors when it comes to where pension assets are invested.

The report found that 13 of the 24 — including the largest players in the business — had significant conflicts of interest, largely consisting of accepting fees and other considerations from investment firms the consultants recommended. Those 13 had, at the time, over $4.5 trillion in assets under advisement. The GAO found that the average return by the pension funds advised by conflicted consultants was 1.3 percent lower than other plans.

The report’s enduring salience prompted Rep. George Miller, D-Calif., the top Democrat on the House Education and Labor Committee, to request in June that the Department of Labor further investigate conflicts of interest among investment consultants.

Besides underperformance caused by conflicted investment consultants, management problems are widespread. The mortgage-backed securities and complex derivative products that caused the financial crisis were bought in massive quantities by public pension funds, which were left holding the bag when the schemes imploded.

There’s also the problem of overcharging. The top 25 hedge fund managers make an average of $1 billion annually, much of that drawn from the outsize fees paid by public pension funds. Fees for hedge funds, private equity and real estate managers are typically 2 percent of assets committed and an additional 20 percent on profits earned, as opposed to fees as low as 0.01 percent on assets for index funds. Yet hedge funds typically fail to offer superior performance, and most of the studies that show good results for private equity suffer from significant problems.

A slew of scandals has hit public pension funds, from the former comptroller of the state of New York, who was sent to prison, to the former CEO of the country’s largest state-based public pension fund, the California Public Employees’ Retirement System. Both were implicated for their roles in placing investments in highly opaque alternative investments such as private equity and hedge funds at the pension funds they oversaw.

Yet not even these scandals have drawn sufficient attention to the problem. The New York Times, despite having multiple reporters on the pension and investment beat, declined to cover Miller’s campaign. Pew, which has a huge pension practice (much of it funded by hedge fund manager John Arnold), has never written anything about conflicts of interest among investment consultants — or any of the other issues facing pension investments. Brookings crows about unfunded liabilities but likewise has not published anything about public pension funds’ abusive relationship with Wall Street.

And of course, the politicians most eager to cut pension benefits — notably Illinois Gov.-elect Bruce Rauner and Rhode Island Gov.-elect Gina Raimondo — have clear conflicts of interest when they clamor about the necessity of addressing their states’ unfunded pension liabilities. Rauner and Raimondo have large holdings in the private equity firms they previously managed, and the firms — GTCR and Point Judith Capital, respectively — manage millions for public pension funds in the two states.

Wall Street wants public discussion on pensions to focus on unfunded liabilities to deflect attention from the real problem: Nearly every major bank, hedge fund and private equity firm makes big money off pension funds. For a fund to run out of money is exceedingly rare. It is the mother of all red herrings — a carefully crafted plan to keep the public distracted while Wall Street walks to the bank.

The bludgeon of unfunded liabilities is then used to cut retirement benefits to teachers, firefighters and transit workers.

Pushing to cut benefits to public sector workers would be counterintuitive for Wall Street if that led to less money in the pension funds that managers make so much money on. But moves to cut benefits almost always coincide with manipulations to make pension funds seem worse funded than they are. In Detroit, the first major city to cut pension benefits in bankruptcy, the emergency manager lowered the assumed rate of return, which made the pension funds appear less funded, and mandated an additional infusion of cash from the city.

This double movement of lowered assumed rates of return and cutting benefits means that Wall Street can have its cake and eat it too, with more money in pension funds for managers to grift from and less paid out in benefits.

Fundamentally, by obsessing over long-term obligations, the corporate media and influential foundations distract from the core of the problem: Wall Street has its hand in the pension kitty. Hard-won benefits are not the problem; Wall Street is.
I don't agree with everything in Cunningham-Cook's article, especially that unfunded public pension liabilities aren't such a big deal and the assumed rate of return doesn't need to be lowered, but he raises several excellent points.

In particular, he discusses the symbiotic and parasitic relationship between Wall Street and public pensions and highlights the inherent conflicts of interests from useless investment consultants to ambitious politicians pandering to alternative investment managers.

There is a lot of information in this comment but I urge you to read it carefully and understand the politics and implications of Congress's cut to private pensions. When it comes to politics in Washington, it's more of the same from both major parties, they basically shamelessly pander to their Wall Street masters and leave Main Street out to dry.

Below, Karen Friedman, Executive Vice President and Policy Director of the Pension Rights Center discusses the implications of the pension cuts. Listen to her expose how Congress just nuked pensions with little or no regard to millions of workers that now face pension poverty.

And if you have never seen it, watch the late, great George Carlin discuss The American Dream (warning: profanity). Carlin was absolutely right, "it's called the American dream because you have to be asleep to believe it."