p.s. Do you know what your city or state's pension fund is investing in? For that matter do you know what your staid life insurance company is investing or selling on the side? Cripes. I am sure some "AAA" rated product sold by Goldman, Morgan, Merrill, Lehman (whatever happened to those guys?) or Bear. Just remember, tell your grandkids their money was well spent in "savings the oligarchs... err, economy" and "Main Street = Wall Street". Dogma!
- SPRINGFIELD, Mo Losses at the police and firefighters' pension fund have thrown this Ozark city into its worst budget crisis in decades. The city wants to slash spending on health care, parks and roads. Skunk trapping may have to go, too. One of the pension fund's problems: It's an investor in a $1.1 billion speculative office skyscraper rising in New York's Times Square in the middle of a commercial-property bust. (oops. I recommend buying a commercial REIT stock to make up the problem... they are rocketing up every day as commercial real estate bust is "over" - per the stock market)
- That folks in places like Springfield wound up owning a piece of one of the biggest real-estate gambles in America is indicative of how widely today's commercial-property collapse has spread. Some in the industry believe the damage will be deeper than the previous crash of the early 1990s. (not if you listen to the soothing whispers of the stock market)
- There is some $3.5 trillion in commercial-real-estate debt outstanding -- more than the amount for auto loans, credit cards and student loans combined. And the default rate is rising sharply.
- Over the past decade, Wall Street unleashed a wave of "securitized" commercial-real-estate debt, just as it did in residential mortgages. Some $700 billion worth of commercial-real-estate mortgages were sliced up, packaged into securities and sold to a wide range of investors -- meaning that this time, the pain will be felt by many more players beyond banks and thrifts. (don't forget this "AAA" rated stuff went the world over, small towns in Scandanavia are suffering from this... I know, I know - it's all their fault-- the snake oil salesmen only bring you the junk, no one put a gun to your head to buy it...)
- Some pension plans bought real estate directly. Others invested through funds managed by Wall Street firms and insurance companies such as Prudential Financial Inc. The police and firefighters of Springfield are one of 272 pension funds, foundations and endowments that invested in a pooled real-estate fund managed by Prudential Real Estate Investors, a unit of Prudential.
- Losses for many such funds are now mounting. Some, including more highly leveraged funds run by Goldman Sachs Group Inc. and Morgan Stanley, have written down more than half their equity value.
- "We wanted a small portion of our portfolio in real estate, but we also wanted something that was as safe as possible in terms of the investment risk," says Evelyn Honea, president of the Springfield pension board, explaining its January 2007 decision to invest with Prudential. (err...)
- To sign up new investors, PRISA executives made calls on places such as Springfield, a city of about 150,000. In 2007, at a fire station community room known locally as an affordable venue for birthday parties, the Prudential managers handed out a brochure saying they would aim to put more vacant space on the market, allowing them to "increase income as the economy strengthens and market rents rise."
- Just as the building's sloping facade rose into the Midtown skyline, the market reversed. Reis now predicts that rents in the neighborhood of 11 Times Square will fall to about $64 a square foot by the end of this year, from a high of $76 in early 2008.
- The Springfield fund's board members in attendance -- one policeman, two firemen, one retired fireman, three citizens and two City Hall officials -- were generally impressed, meeting minutes show. Ron Hoffman, the retiree, noted Prudential's decades of experience: "The more history you have, the smarter you are going to be," he said, according to the minutes.
And let me end this by explaining why you might want to ask yourself why pension funds need to take more risks? Well we've delved into that many times - we have promised our public employees far more than we can actually pay them. [May 4, 2009: 4820 CALPERS Retirees Receive Annual Pensions in Excess of $100,000] [May 7, 2008: Vallejo California Votes for Bankruptcy] [May 8, 2008: It Pays to be a Firefighter in Vallejo] So the only way to make it up is to raise taxes (nah!) or increase rates of return. To increase rates of return - you have to take stooopid (sic) risks.... so it's all full circle and comes back to approving promises we can never really pay. An American ethos it appears.
- The long-underfunded pension fund was under pressure to boost returns at the time, Ms. Honea says. To avoid asking taxpayers for a greater contribution, actuaries were telling City Hall it had to boost the annual rate of return on the fund's investments to 7.5% from about 5% to meet future obligations to retirees. Real estate seemed to be an answer.
And what of Springfield's pension fund?
- In Springfield, meanwhile, the pension fund's market value was down to $91 million at the end of March, from $131 million a year before. Nearly 10% of that was tied up with PRISA.
What's that? It's not a problem after all?? Why?
Look! In the sky! It's a bird! It's a plane! No, it's a HELICOPTER! Our solution is here! We'll bail out the nation's pension funds and pay our retirees with money we don't have! How??
Printing Presses!!!!! [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment $1 Trillion Bailout]
Problem Solved. Nothing to see here... move along.
