The Next Bailout: Pensions!

by Larry Levin

In January of 2009 President Obama said, "I don't see organized labor as part of the problem,'' he said. "To me, it's part of the solution.'' Said another way, it's time to pay back those who were essential in getting him elected. This is nothing new and happens on a local, State and Federal level all of the time but when he could help bankrupt the entire country, maybe he should "give back."

To be more specific, the title should probably read The Next Bailout: Teachers...or Illinois Teachers...or more likely: The Next Bailout: Public Union Pensions! As you surely know by now, most public union pensions are insolvent now and will surely be bankrupt in the near future. So as you read the following, just keep in mind how the President wants to pay back his union friends, which means your taxes are going up or your standard of living fall via inflation to pay for it.

Here in a Washington Post article:

http://www.washingtonpost.com/wp-dyn/content/article/2010/06/12/AR2010061204152.html?hpid=topnews

we learn that the president wants an emergency $50-BILLION to save state workers' jobs. "President Obama urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid 'massive layoffs of teachers, police and firefighters' and to support the still-fragile economic recovery."

He decries the possibility of 200 to 300,000 public union employees losing their jobs. If you are an engineer and lost your job, did the president do any specific politicking to save your job? How about you waiters, local self employed retailers, and auto workers? Oh wait, check that last one. The economy has shed 8-million jobs so far and now its time for specific targeting (read:bailouts)?

Hmm, that's odd; I have been told repeatedly that the economy was in a "V" shaped killer rebound? Not so much - I guess.

Specifically, however, I think this is about union pensions. Without the bloated pension promises there is little need for a union, so the massively underfunded pensions need to be "refunded." This underfunded problem is widespread effecting nearly all public union pensions in every state.

According to Bloomberg -Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.

The seven are Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana and Oklahoma, according to Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Combined, they added 9,700 workers to both state and local government payrolls between December 2007 and April of this year, says the U.S. Bureau of Labor Statistics.

Generous and bloated are the terms that have been used to describe them; critics have set up websites to pillory those government retirees who enjoy $100,000-plus annual pensions and other goodies, such as health-care benefits for themselves and their families for life.

“Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities” is the title of Rauh’s recent study. It’s a provocative piece of work, especially for one of its tables, titled, “When Might State Pension Funds Run Dry?”

But as you can see the table assumes an insane annual rate of return of 8%. If these pension funds average 2% they'll be lucky. Regardless, anything less than 8% means they will go bust much faster, which is a reason why you will be getting a HUGE tax bill to cover these pension obligations even though you have NOTHING to do with their insolvency.

I'm shocked that the New York public pension system isn't on the list but it surely should be. The New York legislature is still kicking their can down the road rather than slashing pension payouts and free health care for retirees. Of all the amazing shell games in a State's history, this one must be at the top. "Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund."

That's a classic!

But a major and immediate problem seems to be brewing in the Illinois Teachers Retirement System (TRS). The Illinois Teachers Retirement System, the TRS, isn't your average retirement system for widows, retirees, and orphans like it should be; oh no, the TRS is doing its best to mimic Fraud Street. So, umm, it isn't going so well. You can find the whole piece here http://news.medill.northwestern.edu/chicago/news.aspx?id=166746 and portions below. But before you r read the following you should know that the TRS is a whopping 61% underfunded and lost $4.4-billion in 2009 alone. Yes, that's the same 2009 where the FED and Treasury manipulated a 60% stock market rally...and the TRS lost a fortune. How'd that happen? Let's read...

Frank Partnoy, a law and finance professor at the University of San Diego who worked on Wall Street as a derivatives structurer in the mid-1990s, said TRS’s portfolio is an indication that investing is not about what is smart but what will generate the highest returns.

“It’s an epic illustration of how we’ve really gotten lost in financial complexities,” he said, after studying the Illinois Auditor General's 2009 audit of TRS and the fund's March 31 derivatives positions.

TRS said it uses over-the-counter, or privately negotiated, derivatives to maximize the performance of its portfolio and only allows money managers to invest in derivatives if they “have the appropriate expertise and knowledge and employ sophisticated risk management systems,” said David Urbanek, public information officer, in an e-mail.

The fact that TRS trustees and investment advisors approved the use of OTC derivatives isn’t, in itself, alarming. The financial instruments are not explicitly prohibited in the Illinois pension code, and many derivatives contracts provide protection against losses on other investments.

In the balance sheet provided to Medill News Service, TRS’s OTC derivatives portfolio showed that in addition to writing CDSs, the pension fund was selling swaptions and shorting international-based interest rate swaps. For each contract written or sold, TRS received a premium.

EXCUSE ME!??? THE PENSION FUND FOR RETIREES WAS SELLING SWAPTIONS AND SHORTING INTERNATIONAL-BASED INTEREST RATE SWAPS? AND WE TAXPAYERS WILL HAVE TO PAY FOR THESE LOSSES BECAUSE THE TRS IS A PUBLIC UNION PENSION PROGRAM???

Unfortunately for TRS, its OTC positions soured in late April when Greece’s debt woes worsened, Standard & Poor’s downgraded Spain’s debt to AA and the euro dropped to its lowest levels since the currency’s inception. The International Monetary Fund and European Central Bank orchestrated a $1 trillion bailout to ensure that Greece and the other PIIGS—Portugal, Ireland, Italy and Spain—would not default on their debts.

“As the European debt crisis worsens, TRS’ positions are going to bleed money,” the trader said.

The following is the takeaway paragraph that not only applies to Illinois, but every single public union pension in the United States, which by the way are estimated to be underfunded by $1 TRILLION.

The bottom line, experts say, is that there is no language in the Illinois pension code that prohibits pension funds and retirement systems from buying or selling OTC derivatives as an investment method. In the event of catastrophic losses, lawsuits would be filed against the fiduciaries, but ultimately taxpayers would be left holding the bag.

The union pension system reminds me of the restaurant scene in Goodfellas when Ray Liota explains how the new partner of the restaurant - Paulie the mobster - reacts to slow business. However, in today's scene we have the taxpayer (original restaurant owner) and public unions (Paulie the mobster).

Now the guy's got Paulie (Union) as a partner. Any problems (getting elected?), he goes to Paulie (Union). Trouble with the bill? He can go to Paulie. Trouble with the cops, deliveries, Tommy, (activists not towing the party line for the incumbents) he can call Paulie (the Union). But now the guy's (taxpayer) gotta come up with Paulie's (the Union's) money every week, no matter what. Business bad (stock market dropped)? F*#k you, pay me. Oh, you had a fire (CDS went bad)? F*#k you, pay me. Place got hit by lightning (swaptions lost money), huh? F*#k you, pay me.

Get ready folks, a massive bailout is coming but the USA is already broke. How are we going to pay it?

"WHO CARES," PAY ME!



Previous Day's Trading Room Results:

Trade Date: 6/14/10

E-Mini S&P Trades*
(before fees and commissions):


1) FT sell @ 2:44pm at 1088.00 = +.75 (1 lot)

2) Algorithm positions (9)

3) “Reading the Tape” positions (3)…combined Secret’s, Algo, & “Reading the Tape” total… -0.75



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