Inspired by a Boston Globe story and aroused by the indignant yet underinformed Josh Marshall, lefties are aghast that the Pension Benefit Guaranty Corporation switched "much of" (per the Globe) or "most" (per the unflappable Josh Marshall) of its portfolio from safe bonds to risky stocks last February, prior to the stock market wipe-out (see "FEEL THE RAGE", below). However, our friends on the left are so intent on bashing Bush and his appointees that they have overlooked some good news, which I will bury for a while. In fact, assistant treasury secretary nominee Alan Krueger will make an appearance on my side of the debate. But if you can't bear the suspense - yes, the left has gone fact-free on this.
Here is the Globe:
Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.
The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.
Careful readers will note that the Globe makes a distinction between "decision" and "action". Then there is Dr. M:
The more I look at these investment decisions of Pension Benefit Guaranty Corporation and former Lehman exec Charles Millard the more my suspicion grows that some very bad happened here. There's no question that something happened very bad for the pensioners who were relying on this fund. But is there any conceivable good reason why you'd take most (the quote from the Boston Globe is "much" of the funds) of the assets of the fund designed to insure pension benefits out of safe investments like bonds and put them into highly speculative investments -- hedge fund, equities, etc. -- just before the stock market collapsed.
Incompetence doesn't cut it as an explanation.
So many questions, so many answers. First, anyone with the patience to make it to the end of the original Boston Globe article will learn that "much of" and "most" are actually targets of roughly 45% stocks and 10% real estate and esoteric stuff. That is up from a current target of 15-25% equities. Or one can find coverage of the announcement last year and get the same answer. The Globe:
As to why some fool would do this, well, I'll agree that there is a huge covariance problem since the PBGC's equity portfolio will be tend to be down during times of economic weakness when distressed firms are more likely to fail and drop their pension plan into PBGC's lap. However, the evident intention was to spare Congress some embarrassment:
[Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20] said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said.
He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed.
Well - heads the government wins, tails they are already losing so what is a few billion more among Congressman?
But I promised some good news! With a burst of creativity and insight I actually went to the PBGC website and checked their most recent annual report, for their fiscal year ending Sept 30. The gist? Talk is cheap and the expensive actions have not been taken - all the PBGC seems to have done so far is to lay the groundwork for the investment shift; as of Sept 30, 2008 their actual allocation had not changed notably. Here we go, in their discussion of the new investment strategy (p. 17 of 88):
In FY 2008, PBGC continued to hold a large portion of its investments in long duration fixed income securities, while working to transition the assets into the new target allocations. PBGC will continue to take a prudent and careful approach to the phased implementation of this long-term policy in FY 2009 and beyond.
Wow, it's almost as if they are taking their time. And they are:
the end of FY 2008.
Now, by the time this report was prepared in November the PBGC knew that soft-pedaling its switch to equities was prudent. However, the advertised switch had not taken place as of Sept 30 - alternative investments was stuck at 2% and equities were down from 32% to 27% of the portfolio (partly due to market declines, no doubt).
This report is as of Sept 30, 2008, which follows the Lehman/AIG debacle but precedes the full October meltdown. As of Sept 30 the S&P 500 was at 1164, compared to its current level of about 800 and an Oct 31 2008 level of 968.
The PBGC director testified to Congress on Oct 24, 2008 and said this about the new investment plan:
PBGC has developed a plan for gradual implementation of the new policy to prevent any disruptions in financial markets. The Board Representatives have been deeply involved in crafting the new investment policy and will continue to oversee its implementation.
Well, if they hadn't made any notable moves as of Sept 30 and expected future moves to be "gradual", maybe the current panic among the punditocracy is premature.
Now, it is possible that the newly-hired money managers ignored that "gradual" admonition and chose early October as the time to plunge with both feet into the most turbulent market in recent history of this millennium, thereby dropping a bundle. Or maybe they were lucky enough to buy the lows - the October low was 850 on the S&P, and the November low was 750. Or maybe they are watching and hoping, like the rest of us.
Speaking only for myself, I intend to refrain from tearing out what is left of my hair over this miserable misallocation of assets until I see a few more facts, starting with determining whether the PGBC has actually implemented this dubious strategy. Of course, folks who are desperate for a Bush-bash will want to take a different course.
FEEL THE RAGE: Let's hear from some aghast lefties:
dday at the Washington Monthly and Hullabaloo does not think that Team Obama will stick with the strategy because "there's probably almost no money left in that portfolio". Oh, he (she?) will be so happy if /when this post catches his eye.
Dave Johnson of Seeing The Forest has yet to see the annual report but is preparing indictments:
Was it Bush and not Cheney?
Somebody at Wonkette:
If the stabbing has begun, I volunteer my eyes, just so I won't have to read on.
Here is the emptywheel:
Third, the market was already beginning to tank when they made this decision. And Karl Rove knows you don't win elections if the economy isn't "strong."
Call me crazy. But it sure looks like some Bush flunkie put the potential retirement of a bunch of Americans up in smoke so a guy who married a $100 million sugar momma would have a shot at being President.
Call you crazy? How about "lazy", as in too lazy to do a lick of research before joining the chorus.
The Anonymous Liberal (my emphasis):
As the Boston Globe reports this morning in an important story, this past year--at the height of the bubble market--the Bush administration implemented a "new diversified investment policy" at the Pension Benefit Guarantee Corporation, the entity established by Congress to guarantee pension payments to workers when their companies go bankrupt.
"Implemented"? At the height of the bubble? Well, they implemented it without actually shifting assets, then.
Mary of The Left Coaster calls this "A Case of Outright Theft":
The financial detectives need to look at what tranches Mr. Charles E.F. Millard bought for the PBGC. Because this looks like he and Mr. Bush's Cabinet Secretaries can be charged with fiduciary liability.
Birds on a wire.
The decision to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier but possibly higher-paying assets like stocks has been controversial.
I re-endorse Prof. Krueger's concerns about the revised strategy:
MORE REASSURANCE: From the WaPo last October:
[Rep. George Miller (D-Calif.)] blamed the $3.1 billion loss on the agency's investment in mortgage-backed securities. Speicher confirmed that 6 percent of the agency's portfolio is in mortgage-backed securities. But he said they were fixed-income products and, therefore, not the cause of the drop.
Miller also questioned the agency's decision in February to adopt a new policy that would allow it to invest 45 percent of its portfolio in equities, 45 percent in fixed-income and 10 percent in alternative investments. Previously, it could invest only 15 to 25 percent in equities and 75 to 85 percent in fixed-income.
"The people served by the PBGC have already lost their original pensions. . . . I don't think we should be investing in high-risk instruments when this is the last chance for people to hold on to what little retirement benefits they have left," Miller said.
The shift has not yet happened, however, with 70 percent of the portfolio still in fixed-income. The new asset allocation, agency officials said, would produce a more diversified portfolio and work better for long-term investing.
If the Nutroots want to make themselves useful, I assume our Congressfolks can get unaudited results for Dec 31 2008 and maybe even a five-month result through February 2009. Then we might have actual facts to deal with.