CALPERS now having trouble.......

Discussion in 'Economics' started by wilburbear, Oct 22, 2008.

  1. I don't buy most of the other criticisms of hedge funds, but they were supposed to have uncorrelated returns. CALPER's hedge funds are like all the rest - they were mostly long to keep up with the returns of their peers.
  2. Pension Benefit Guaranty Corp. lost $3.1 billion in stock investments in the 11 months through August.

    This I did not know. They invest in the market? I wonder if they short stocks of companies of whose liabilities they might one day assume. That strategy might come in handy.

    The pension plans of five key companies in the ongoing mortgage crisis are underfunded by $400 million, a situation that could put pressure on the bottom line of the already cash-strapped Pension Benefit Guaranty Corp. should it have to intervene in the underfunded plans.

    PBGC Director Charles E.F. Millard said it is too soon to say whether it might have to get involved with any of the pension plans. But Millard told lawmakers at a congressional hearing that the plans of Lehman Brothers Holdings Inc. (LEHMQ), Fannie Mae (FNM), Freddie Mac (FRE), Indymac Bancorp Inc. (IDMC) and American International Group Inc. (AIG) are underfunded by $400 million.

    If all five of those companies were to terminate their plans, the PBGC would have to pay out about $100 million in pension benefits, Millard added.

    "It is not all clear what will actually happen, but that is the magnitude of things," Millard said, although he noted that a takeover of all five plans may not be likely since AIG, Fannie Mae and Freddie Mac haven't declared bankruptcy.

    Millard said the agency would be able to pay the amount needed without a problem if it had to, but the long-term financial health of the PBGC is already in jeopardy.

    It currently faces a $14 billion deficit. To help bolster its budget, the PBGC implemented a new investment policy in February that, once fully implemented, will allow the PBGC to put up to 45% of its investments in equities. The new strategy was enacted to avoid a government bailout.

    In a recent report, however, the Government Accountability Office criticized the PBGC, saying the investment policy carried more risk than it acknowledged.

    And now, with the stock market in disarray, lawmakers are more concerned than ever about the financial stability of the PBGC and how such a strategy could affect the financial health of the corporation.

    "The recent trauma on Wall Street only makes it more important we examine the financial condition of the corporation," said Rep. Jim Ramstad, a Republican from Minnesota, who is the ranking minority member of the oversight subcommittee at the House Ways and Means Committee.

    Millard defended the investment strategy Wednesday, saying it is a long-term plan to help the corporation get out of its deficit.

    "My number-one concern is people want to change that investment policy," he said.

    The agency is slowly transitioning into the new policy, and 70% of its investments are currently still in fixed income. But even before the decision to change the policy occurred, the portfolio had some exposure to more risky investments.

    It has a net notional value of $2.8 billion in exposure to credit default swaps, a type of insurance meant to protect lenders against borrowers who don't pay. Those are the derivatives that have gotten companies such as AIG into trouble. If all of the positions the agency is swapping against were wiped out, the PBGC would face a net loss of $70 million.

    In addition, 6% of the agency's portfolio is tied to mortgage-backed securities, although Millard assured lawmakers that most of those investments have strong bond ratings.

    The PBGC's budget is funded by insurance premiums paid by plan sponsors, assets received from terminated plans and from its own investment income.

    As more companies freeze pension plans and offer 401K plans to new employees, however, that source of income continues to dry up, said Barbara D. Bovbjerg, director of education, workforce, and income security at the GAO.

    Lawmakers criticized the agency Wednesday for failing to include them in the decision-making process to change the investment policy, saying the PBGC barred congressional aides from even sitting in on meetings.

    They also lamented that the agency doesn't have access to more up-to-date information on underfunded pensions. Because of the way federal reporting requirements are timed, there is a lag in the data. The $400 million in underfunded pensions at troubled firms tied to the mortgage crisis, therefore, is based on data submitted at the end of 2007.

    -By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;

    (END) Dow Jones Newswires

    September 24, 2008 16:03 ET (20:03 GMT)
  3. Nanook


    Yeah, and I'm a little worried since Alaska's PFD decided to increase their hedge fund exposure recently:
  4. California has "become" Argentina. :cool:
  5. :D :D :D