If states lose a lot of money on their investments then they might raise taxes. States can not print money and do not lay off many employees. Raising taxes may be the simplest alternative. Is state pension fund money involved? Pension payments and retirement benefits are likely difficult to reduce.
About two years ago, an investigator in the Naked Short stuff I've written about here ad nauseum, a former bond salesman at a major, huge producer, told me, "they 'll be no pensions in this country." I coldn't understand what he was talking about. I fully realized Naked Short selling could easily bring down hundreds of hedgies and some prime brokers, but Pensions??? When this broke, I called him and said, "this is all thru the country, this stuff is toxic, it 's in pensions and govt paper adn,........... " And he said, "yup". Welcome to my world, and it aint' over.
This same thing happened with the tech bubble, state run retirement finds bought into the tech bubble, right? Fast forward just 5 short years and here we are again, amazing simply amazing.
To respond to the above posts since my last one, every one of them is basically correct. Same old story, everyone in the chain makes money - except for the end buyers of this product. The majority of fixed income portfolios (that would be banks, insurance companies, credit unions, pension funds, mutual funds etc) in the US are affected by the subprime debacle in one way or the other. If it isn't in direct lending exposure to bad loans, its by owning ABS CP or Home Equity ABS, Subprime ABS, CMOs...you get the picture. Its legion....and you only hear about each problem as it gets released, one company at a time. One by one, the Street, major banks, and major mortgage companies have come clean about writeoffs and losses, and they are still coming out. You haven't even HEARD about the rest of the people affected. How to play as a trader....VERY hard to tell at this minute with the announcement of the trio rescue for subprime mortgage resets, freezing them etc. ( I am against any and all rescues) But they are determined to do it. I think that will cause a short-term run up across the board, but eventually, they'll realize they can't stop the whole real estate market bubble from deflating, and markets will continue to decline - just my macro viewpoint. And its very late in the cycle to make money shorting anything in particular - most have already been hammered. The last trade was short AMBAC and MBIA.
Lets not forget to thank the greedy people who wanted to buy real estate beyond their means, the mortgage companies and banks who helped them do it, and the Street for laying off all the risk into fixed income securities.... Florida Schools Struggle to Pay Teachers as Investments Frozen By David Evans Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida are scrambling to raise cash after being denied access to their deposits in a $15 billion state-run investment fund. Florida's State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals yesterday at an emergency meeting after $12 billion was pulled out this month from participants. Governments from Orange County, home of Disney World, to Pompano Beach asked for their money back following disclosures that the fund held $1.5 billion of downgraded and defaulted debt. ``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, which kept its entire $2.7 million of cash in the fund. ``What we just experienced here is a classic run-on-the bank meltdown.''
It doesn't surprise me that the state was investing in things that didn't seem very safe. There has been a big investigation into employees that manage money for the Ohio Bureau of Workers Compensation. They invested in a Cayman based hedge fund that lost tens of millions, possibly more. So a lot of taxpayer money is now gone. If individual investors cannot invest in "risky" things like hedge funds, why can states and pension funds lose money on investments they don't seem to understand? http://www.cleveland.com/news/plaindealer/index.ssf?/base/summit/119381984274330.xml&coll=2 "Lay's company lost $216 million of the $250 million in the fund he managed for the BWC. Prosecutors contended that Lay took risks far greater than allowed by his agreement with the BWC and concealed what he was doing from the BWC's investment staff."
Individuals lose plenty of money in investments labeled one thing, and sold as another. The industry is FUBAR. And there are no penalties worth snot. This stuff is pushed from on high, and you've got a NY banker telling you how great this product is, and it's AAA and and and.......then your boss comes in and says "Tennesee is making this, and we're only making that........or it's your ass." I really don't get why you guys dont get how this works and has worked since Jesus lived in Pittsburgh. This time, rather than screwing a couple of farmers in Ohio, they fucked w/the States. This will explode. The problem........ I"m working on a particular problem for an entity that got to a high powered Senator who said, "I'd love to , but the White House will veto it. NO WHITE HOUSE DARES TO GO AGAINST WALL STREET." read that several times. The States dont' have that hangup.
I completely understand the situation, I was just pointing out the obvious, and posting a link to a somewhat similar situation with a state (the one I happen to live in) investing in something that it probably should not have done with taxpayer money.