61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS

Tyler Durden's picture

“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008. Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG." Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S! All it will take is another Flash Crash-like event, or a liquidity crunch, and the 355,000 "full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago" will likely end up with a big, fat donut in their retirement portfolios courtesy of some deranged lunatic, portfolio manager, situated externally at a bank like Goldman Sachs, who in taking a page straight out of Obama's bailout nation, has decided there is no such thing as risk. And to those naive enough to think the TRS is the only such fund which has now gone all-in on "no risk and infinite return", wait until such stories start emerging about every single massively underfunded pension and fully insolvent fund in the US.

From Harris' report:

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.


And as always happens when one collects pennies before a rollercoaster, the spectacular blow up always eventually catches up with you:

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.

Where it gets even scarier, is that TRS may be fraudulently misrepresenting its massively underwater portfolio:

But the Illinois Teachers’ Retirement System said if it unwound the OTC trades held in its pension fund today, the positions would have a market value of $5 million and a notional value of $1.1 billion. Notional value is the total value of a leveraged financial instrument’s assets.

It isn’t clear how TRS is valuing its OTC derivatives and market experts, among them Rosenthal, who estimated a loss of $515 million as of March 31, were skeptical the OTC positions could have been showing a net positive notional value.

TRS projects it will have logged a $158 million gain from its derivatives portfolio by the June 30 end of fiscal 2010— with $5 million derived from its swaptions, CDS and interest rate swaps positions—and just a fraction of its projected $627 million total return.

A significant portion of TRS’s OTC derivatives are linked to interest rate swaps and those are tied to either the London Interbank Offering Rate or Euro Interbank Offering Rate. Interest rate swaps stipulate for every basis point tick upward in the LIBOR or EURIBOR, the fund is forced to pay out an interest rate that is two basis points higher. This is why the notional value of TRS’s U.S. dollar- and international-based interest rate swaps were in the red by $361.4 million at the end of March.

TRS’ portfolio also includes a large number of swaptions—or the right at a future time to enter into a swap position—which showed a loss of $14 million as of March 31. In addition, the fund sold approximately $154 million worth of CDSs guaranteeing the debt of dozens of companies, countries and states, among them American International Group Inc., GMAC, Panama, Mexico and California. (See graphic).

A large part of TRS’s international-based interest rate swaps positions are linked to the Brazilian Interbank Deposit Rate and Euribor in a bet that inflation would stay low in Europe but rise in emerging markets.

Rosenthal, who said TRS appears to be betting that long-term Treasury yields will greatly increase, is incredulous that the fund even has this view. “Their job is not to play the [Treasury] yield curve,” Rosenthal said. “It’s not their job to have that view.”

Swaptions, Euribor exposure, curve trades? What the hell happened to buy and hold. Does TRS really expect to survive this, when there are sharks like Goldman who know every single trade the TRS has on, and one day, sooner rather than later, will destroy it, but not before margin calling it to death in the process.

The logical question of who the hell is supervising this slow motion train crash surprisingly has no answer:

Section 1-109.1. of the Illinois Pension Code states it is the duty of the board of trustees of a retirement system or pension fund to appoint fiduciaries to manage its assets—including the power to acquire and dispose of any assets—as well as assign others as fiduciaries to oversee activities other than asset management.

TRS said it makes day-to-day operational decisions concerning strategic asset allocation, portfolio structure and manager selection, but cedes all of its investment decisions, within TRS parameters, to professional money managers, a list some 60 names long that includes Goldman Sachs Asset Management, JPMorgan Investment Management, Northern Trust Co. and State Street Global Advisors.

When asked which managers were responsible for the pension fund’s derivatives portfolio, Urbanek, the Illinois TRS spokesman, said OTC derivatives positions are scattered across each asset class because they are “complementary positions” within each portfolio.

According to its investment policy, TRS encourages diversification of assets and “prudent” risk taking because these strategies align with its long-term investing goals. “Increasing risk is rewarded with compensating returns over time.”

“They’re not maintaining effective internal controls,” Partnoy said. “Is it prudent risk-taking to write CDSs on Brazil?”

At the end of the day, it appears the fund is doing nothing illegal by essentially offloading front-office duties to Goldman, which of course is happily trading in advance of the fund, to whose books it likely has full exposure, to benefit its own prop trading desk, and reward its own shareholders first and foremost: 63 out of 63 profitable trading days anyone?

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. 

And here we see where the next layer of catastrophic systemic collapse will come from: the multi-trillion pension system, which is now invested in the riskiest imaginable products, and whose existence is contingent on a market and economy, both priced to perfection. The Fed is surely aware of this, and will do everything in its power to prevent a catastrophic collapse. Yet the Fed always loses the battle at the end of the day. And if Americans were angry the last time they had to bail out bankers, just wait until it becomes obvious that these very banks blew up the pensions of tens of millions of Americans only so that the very same banks could enjoy at least one more year of record bonuses. It is not obvious where the next crash will happen. And it is certain that nothing will be done, as facing the problem would mean recognizing the massive losses already facing the pension system. And that would be the dominoes that forces yet another round of inevitable mark-to-market, and bank implosions. The timebomb is now ticking and there are merely seconds left before it goes off. We have been warned, and will do nothing to stop it.

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MayIMommaDogFace2theBananaPatch's picture

...and by raising this flag I hereby declare all of these lands to belong to her majesty The Queen...


You can't just come in here and claim this land for your own, this is our land, we were here first!


Oh really?  Do you have a flag?

Insert witty title's picture

I'm about to add teh 20th junk to send this muppet to oblivion, here is what he wrote so the thread makes sense

by downwiththebanks
on Mon, 06/14/2010 - 21:31


'It was always capitalism, even when running on slave labor.

Even though the whole game is built on stolen land.

The whole affair has been about money-making, start to finish.  And that's capitalism.'


BlackBeard's picture

and now...time for a Johnny Cash song!

boooyaaaah's picture

What would have happened to the sub prime morgage industry if Goldman and Michael Burry did not short it

Would it still be cranking out worthless mortgages?

Then GS & Burry did us all a favor

And now for the next Act -- Shorting the State Teacher funds

The truth may be painful but bring er on


Howard_Beale's picture

What would have happened to the sub prime morgage industry if Goldman and Michael Burry did not short it?

The people would have defaulted because it was a bubble and prices would have fallen due to bullshit no down, HELOCs as seconds at origination,  no doc, no income, interest only and their negative amortization, option arm, and other spontaneously combustable products being originated.

GS and Michael Burry? That is the shortest list (and by far not even close to the largest money makers) who saw it coming. Hell, I sold at the top in Arizona. I saw it coming. No rocket science involved.

The Merchant of Venice's picture

You offer the closest bid without going over.  Come on down and collect your prize.

The big shorts are the result of an American voting populace that buried its head's in the sands.  Rather than rise up and throw out their elected officials they continued to support them.  In fact, even in spite of near criminal behavior they still supported them.  See, their congressman was a devout christian, an open gay man, a strong black woman.  Their elected official was everything they wanted in representation, as an image.

GS is making voters pay for apathy.  They will not cease in punishing capital markets.  Why would they?  Tomorrow is another day for yet another profitable trading day.

TRS is in bad shape, but TRS nothing compared to the trouble from CALSTERS and CALPERS.  Those two are knee deep in capital investment in the worst performing states in the union.  They own land, property, debt, and corrupt politicians in Illinois.

Howard_Beale's picture

I guess Morgan Stanley is just going to have to pay up for a few Goldies since they weren't PERFECT in April....Bwahahahahahaha.

papaswamp's picture

The govt is going to have to do a little reach around action before they bang me with this bailout...I'm tired of this all going one way.

DosZap's picture


Yep, how much longer do they think the American people are going to put up with this shit, without bloodshed is beyond me.

We're not talking a 5-10% loss of benefits, we're talking ALL.

Like I stated in prior blogs, Americans are a very sedate, and non violent group as a whole.....but, they will soon come a time, when nothing will stop the tsunami.

355,000 folks on top of the millions already pissed off, is gonna send this bitch over a cliff............

Some folks best have their Passports, and private jets ready to hit it.

papaswamp's picture

I think the majority of the sheeple will sit on the couch until the cable goes out..only then will they realize the house of cards came down.

Strider52's picture

Papa, you hit the nail on the head. As long as people can go home, have a cold beer, sit on the couch and watch their favorite programs while eating whatever Mama got out of the freezer, sheeple are reasonably happy. Sure, many of us know that the entire planet is in major crisis mode, but, who cares? Let them QE to infinity. "It's their job, not mine. And what could I, Joe Sixpack do about it anyway?"

  Yep, wait until "American Idol" goes off the air, along with all cable TV. Then you will see Joe and Jane Sixpack out in the streets throwing rocks at the banks.

ebworthen's picture


I'm willing to bet the pension fund managers are waging a war with capitalism by gambling it all; kind of like betting with your Ex's alimony.

Or, the people in charge of the pension fund are getting paid big money on the side to to buy crap with the pension money, kind of like Paulson working at the FED.

Howard_Beale's picture

The article states they are selling crap. Selling insurance in the form of CDS's like AIG. Paulson was the Treasury Secretary. He did not work "at the Fed".

MayIMommaDogFace2theBananaPatch's picture

He did not work "at the Fed".

He worked at Goldman -- what the hell is the difference at this point?

Village Idiot's picture

"I think the majority of the sheeple will sit on the couch until the cable goes out..only then will they realize the house of cards came down."


How about calling that moment of realization, "the big panic."  I plagiarized.

ejmoosa's picture

"Some folks best have their Passports, and private jets ready to hit it."


Possibly true.  The question is what place is in better shape and able to handle the influx of 1 million or more Americans?

Hellholeratrace's picture

Yeah, good thing we Americans are so *loved* around the world.

DosZap's picture


I was refering to the Politicians, and Wall Street group..........their ass is on the block.

DosZap's picture

dupe, damn slow servers.

I need more asshats's picture

It's not the ZH servers it's all of their embedded bullshit to track their readers.

Nielsen/NetRatings SiteCensus
var pageTracker = _gat._getTracker("UA-11091066-1");(too lazy to look at the js file for this one)

Whatever happened to HeyWouldJaBlowMe?

Hephasteus's picture

That's what all websites have or something similar and they aren't done THROUGH the servers. It's all done through ianna multicast.

Village Idiot's picture

"Some folks best have their Passports, and private jets ready to hit it."


"Possibly true.  The question is what place is in better shape and able to handle the influx of 1 million or more Americans?"



Fantasy Island. "Da plane. Da plane."

Tangurena's picture

Well, I have a TWIC and merchant marine credential along with my passport. Since I don't think there will be enough room on planes to escape the doom and collapse (or erupting supervolcanos), I at least have the paperwork to work my way across the oceans. After all, someone has to shovel coal into the boilers while y'all play shuffleboard on deck.


The question is what place is in better shape and able to handle the influx of 1 million or more Americans?

Probably Australia. They're currently hurting for water, are quite anti-gun, but at least they speak something resembling English.  

anarkst's picture

"Like I stated in prior blogs, Americans are a very sedate, and non violent group as a whole..."

Are you referring to the Americans that live in the United States? If you'll recall from your history, Americans are anything but non-violent.  We have terrorized nearly everybody for nearly three centuries now.

DosZap's picture


How so?.............yes,of course the US.

Up until the last 35yrs, we have terrorized no one, and saved you from speaking German.Or, Japanese..............if at all.

anarkst's picture

You don't get to be an empire without  raping and pillaging everybody else.  It's a global version of, "King of the Hill."  And it's just the way that organised humans do things.  All empires have had similar behaviors.

Renfield's picture

I wouldn't call the US an 'empire'.

Maybe it's the tail end of the British empire...I could see an argument to be made that way. Not on its own, though.

Burnbright's picture

I think you are confusing government with citizens. The government is made up of a very small body of individuals.

jeff montanye's picture

i like "the last 35yrs".  1975 was the turning point.  not slavery, not the trail of tears, not the mexican war, not the philippines, not central america, not vietnam/cambodia/laos. 

The Merchant of Venice's picture

Your blaming the US for the failures of Spain and France?


RichardENixon's picture

Yea, I'm sure Canadians would have felt much more secure with China, Russia, Germany or Japan on their southern border all these years.

anarkst's picture

For all practical purposes, Canadians are essentially Americans.

Remember, in case our economic terrorism fails to attain its goals, we have 5000 nuclear weapons pointed EVERYWHERE.  The U.S. (and the interests' it represents) will destroy you one way or another.  People in other countries understand this reality.

Ragnar D's picture

Your America-last-ism is nauseating.

The rest of the world isn't filled with enlightened citizens of the world, half of it is a shithole of hardline, oppressive socialist dictatorships, and the rest is stagnant dependent softline socialism.


We've got plenty of problems here, but pretending things are better (or even not as bad) in Venezuela or Egypt or Britain is a joke.

The people there don't understand any "reality" other than the Entitlement garbage they've been fed:  their politicians have told them they're owed everyone else's paycheck, America has never embraced that abyss as fully, therefore America is greedy and terrible and we hate them until they surrender the last of their individual rights and become wards of the Nanny State.

Howard_Beale's picture

Wow, let's generalize our perception of the rest of the world that pays the real price for petrol, VAT's that hit you 15 cents on the dollar, and very high income taxes to boot. Yeah, what a bunch of ignorant entitled fools. We are all in the same boat now and try not to speak for the rest of the world with Nanny State nonsense. It is what it is everywhere now. We are no different with stimulus, 2 year U/E benefits, state health care systems that are bankrupting them, and the banks raping municipalities and state governments with clever financial "short-term" fixes that are criminal at the very least. 

Yeah, we're way ahead of Europe. NOT. 

Ragnar D's picture

The "real" price of gas consists of a 300% tax instead of a 30% tax?

I think we're arguing the same thing here.  Anarkst was holding the rest of the world up as some superior alternative.


Over here, those of us who work for a living lose nearly half our earnings, and it still isn't nearly enough to pay for all the pyramid Entitlement schemes.  Fedzilla is intruding into more of our lives than ever, and we have massive bloated government unions feeding at the trough.

What's the European counter?  Losing more than half their earnings, to fall short of paying for even more bankrupt Entitlement programs.  Governments even more Omnipotent, individual rights even fewer, economies even stagnant-er, and an even larger portion of the population riding the government-union gravy train.

I never said we were way ahead of Europe...we're following in their footsteps (but we're bigger).  Calling out the US on its problems while holding up the rest of the world as a solution is like calling Barry's Chicago-meets-DC "change".  It's even more of the same.

Howard_Beale's picture

I guess i have spent too much time in Canada and England that I had my head turned around like Linda Blair in the Exorcist on that blunder on gas subsidation. Thanks for correcting me. But got milk? 3 liters in Canada? $6. Can't drive with it but sure tastes better on cereal and in coffee.

Might I add that we're all kinda phucked here. There's this systemic debt cancer going around, appears to be viral. Definitely pandemic. The 2010-2012 plague. I'll call the CDC and they can request funds to get right on it...only the innoculation will cost billions.

MayIMommaDogFace2theBananaPatch's picture

...only the innoculation will cost billions.

Oh, we can do BILLIONS, thousands of billions, in fact.  Do you really think it will work Doc?

BumpSkool's picture

That may be true Tricky ... but how secure do you feel with GS, JPM and Morgan Stanley up your ass all these years .... and  private Federal Reserve above your head???

QQQBall's picture

If 2008-2009 didn't do the trick...

aerojet's picture

Bah, don't tease my cock like that!

jbc77's picture

My God, reading stuff like this just makes me sick. To think I'll have to pay for some retard's pension fund gambling. This is why I cheer when the system cracks. I scream out with joy at the first sign of a flash crash...This is why I root for an all out rout of the financial system. Because sick bastartds like this deserve to be blown to smitherines.

George the baby crusher's picture

You have a point there my good man/woman.

downwiththebanks's picture

Most people are brainwashed, 24:7, to think the system works for you if you work hard.

Capitalism justifies it's existence in many, many ways.

MichiganMilitiaMan's picture

What do you mean "capitalism justifies it's existence?"  Capitalism is an idea, it can't justify anything. Corrupt idiots do the justifying/lieing and spinning. I suppose you believe that communism/socialism/progressivism doesn't justify it's exsistence.

DosZap's picture


?...Capitalism is an idea?.

I don't think it is, I think it's the best system of how economies work best, and provided the incentives that built America into the greatest nation on the planet ever to exist.

It equaled FREEDOM.

Capitalism, goes back to the founding of civilization............

All other forms of governance are illicit.

WaterWings's picture

Agreed. A framework that protects individual effort and punishes those that would corrupt it. Unfortunately the corruptors have taken over. Restore the rule of law and peace will reign.