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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downwiththebanks's picture

Don't forget about the necessary triggers for your strange 'freedom':  genocidal land theft and slavery under the guise of a holy crusade abroad.

MichiganMilitiaMan's picture

People/ idiots and others trigger genocidal land theft/slavery under the guise of a holy crusade abroad, not capitalism/communisim/islam/chrisitanity.  Write "capitalism" on a piece of paper and throw it on the floor, it wont' trigger anything. 

Burnbright's picture

So now capitalism is a holy crusade. You are fucking psycho.

downwiththebanks's picture

Capital functions in the world, believe it or not.  The method by which it does so, we call . . . 


(wait for it)



Ripped Chunk's picture

Actually, they really like it when you work hard......for them.

Working against them is the new way of thinking that the masses need to be instructed in.

Al Gorerhythm's picture

I'm dedicating my life to working against them. My solution is to deny them what is rightfully mine. I don't subscribe to their description or formula of what they think is legally theirs.

Strategy:Drop out of their systems and take posession of tangibles, handing them back their paper derivatives.

Outcome: Debt gone! Not easy but doable.

Gold...Bitches's picture

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.

I absolutely agree.  I have come to the opinion that there is no 'fixing' it - its broke.  Beyond repair.  It needs to implode and disappear.  Then there might be a chance to start over with some sanity.  From here on out I do nothing but vote for people (local, state, and federal) that I believe are the worst candidates and the most likely to help implode the system from not knowing how things work.  Or just being batshit crazy in general.  Michelle Bachmann?  Please run for president.  Please.  I will vote for you and your batshit crazy ideas.  Probably help with some money too.  4 years of Bachmann, or a similar type from either side of the aisle, has got to be worth at least 20 or 25 years of average crappy candidates moving us closer to implosion.  Has nothing to do with R or D, they both suck.  As I've said many times before, I hold the view that the R's and D's are analogous to the Genovese and Gambino's.  Take your pick of which 'family' you want to screw you.

island's picture

I agree.  So many Americans are clueless.  Most have no idea about CDSs, leverage, derivatives, Fannie & Freddie's black hole that Timmy is doing his darndest to fill in the wee hours of the night, or the entire corruption of government (i.e. the Kleptocracy) which serves the bankster gang by pillaging the rest of us.  So...let's take things down a few notches and vote in the outrageous and incompetent.  Maybe that'll wake up some people.  Beyond that, I just encourage everyone to do their best to avoid paying taxes of any kind - work as little as possible and consume as little as possible.

DosZap's picture


" So...let's take things down a few notches and vote in the outrageous and incompetent".

Just WTF do you think we have NOW?.Fricken Ali Babba, and his band of 40.

I am of the firm belief, it could not get any worse.............

Bachmann over Obama?.

HELL YES. At least she knows what the Constitution is, was born here, and has no allegiance to the friggin Islamofascists.

kingwallop's picture

Yup Bachmann is demonized because she supports the constitution.

Ripped Chunk's picture

And she really reminds me of my 8th grade social studies teacher.

She knew the constitution pretty good too. Sadly, she went totally mad and had to be taken away.

Bachman is already totally mad and she is in Congress !!!!!!???




Kali's picture

I like this idea of electing bat shit crazies, what cool entertainment.  However, we would need to secure the nukes first.

DosZap's picture


IF you prefer what we HAVE now, to Bachmann,someone like her,then there's no hope for you.

Given the option of the two, I KNOW we would be better off, than we are now.

Total oblivion.................

BumpSkool's picture

Anybody stupid enough to believe that choosing the proper elected official and placing them in office will do a fucking thing has learned nothing from the past three years.

Ripped Chunk's picture

I am really happy to see Bachman has so many supporters on this blog

kingwallop's picture

In your opinion Ripped whats so crazy about her?

Burnbright's picture

She, like Palin, are not careful about the words that come out of their mouth. They can be irrational and reactionary. They don't have patience. That is dangerous.

Ripped Chunk's picture

She shoots off her mouth with whatever her handlers put in front of her. If you really think this stuff is coming into her mind, I have some lots in Detroit I would love to sell you.

Why don't you tell me what her her great qualities are? What is it the separates her from a Craftsman 15/16th box wrench?  She is a tool, specifically a piece of litmus paper just like Palin deployed to test the waters in order to formulate a platform for the fall.

What is so crazy about her.  Run on your own thoughts and opinions, not those of your handlers. Being a tool is crazy



economessed's picture

Here's another voice of support for your methods -- I refer to it as "monkey wrenching."

Since the system is going to fail, I want to minimize the time we agonize over preserving the status quo (and the cost too, for that matter).  Help it fail faster is a superior strategy. 

Vote insanity -- support Obamacare, support bailout for states, raise defense spending by 3X, reduce taxes a LOT more, spill oil in the remaining major bodies of water, bailout more private companies that made bad decisions, give everyone a housing and new car subsidy, etc.  Let's all fail faster -- no sense dragging this out for years.

Calculated_Risk's picture

I'm dogpiling the system.

Why do you think I got a govt job. ;)


Hellholeratrace's picture

The bad part is that I don't think we need to even try.  The greedy idiots appear to be doing a damn good job of bringing more and more insanity to the mix.

MayIMommaDogFace2theBananaPatch's picture

So, self-immolation is the obvious conclusion? (if one tends towards over-achievement)

island's picture

I share your thoughts daily - in fact, many times a day.

Let them all fail's picture

The problem with your comments is that what gets "blown to smitherines" is the savings of all these pension dependants.  And while a DB plan is bound to fail in the first place, the people who are getting screwed here are not the ones who deserve it.  The pension dependants should be suing these people over this.  These managers are beyond negligent to hold this type of portfolio as a pension.  This is beyond stupid, it is absolutely ridiculous for them to gamble with the futures of so many people.  Do not be glad that this has blown up, be glad when people stop taking actions which will inevitably destroy the lives of so many people instead.  At this point though, I as well would love to see our system fail simply in order stabilize our country (in the long run, short term pain is necessary), but an individual pension failure is nothing to root about.

ejmoosa's picture

These pension dependents have had plenty of time to get involved. 


I disagree.  They do deserve it. 

There is no part of anyone's life that they should not take the time to figure out what the hell is going on and what could go wrong.

Let them all fail's picture

I agree they should get more involved, but in theory they have a money manager watching their money for them, not taking insane risks like this one was.  There is a difference between losing money from stock market collapses versus derivatives losses and CDS contracts - they have no reason to understand these complex (to the non-finance person) assets and should have no reason to think that their pension in investing in them.  This is a fucking teacher's pension fund, they do not deserve this.  Even if they have ignored their responsiblility of knowing where their money is, it still is not deserved, simply sad and unfortunate.

DosZap's picture


Excuse me, you ever been in a 401k plan, or a Pension Fund?.

If yes, all you got to do is choose where you wanted your VERY limited choices of funds to go.

Since 99% of we the people, are not Board Members of our plans/funds................how do you police the THUGS running it?

How do you know WHERE their investing your money?.

Answer.............you don't.

In my working life, I was a member of three 401k's.......NOT One, gave me an option of commodities, or PM's.

Never...........bottom line, you got the shit you could invest in, chosen for you................

SamThomas's picture

401k plans are self-directed.  Defined-benefit pension plans like this one are not. 

BumpSkool's picture

Anybody whoever willfully chose to be in a Pension Plan is a fool and an idiot. Hey! Give us part of your paycheck and then we match it (Enron anyone) and then we hand it over to some jack-ass trader who churns the living shit out of it for commission and you get a fraction of it back... if at all. Anyone who didn't opt out from day 1 is a sucker looking to be fleeced. It true market parlance - if you didn't opt out - you have no one to blame but yourself. Did you really think these things would pay out??? A fucking 12-year old can see they're Ponzi schemes!

Tangurena's picture

Unlike private pensions, public pensions are not subject to ERISA reporting requirements. 

Unlike private pensions, public pensions don't get public disclosure of the information in them on Form 5500 forms.

Unlike private pensions, public pensions cannot get bailed out by the PBGC.


Even your 401k plan is covered by form 5500 reporting. And if you are able to read yours, you can find out just how much the plan administrators (the folks who hold your money, and are financial companies like Fidelity or Vanguard) are soaking your plan for fees. The plan sponsor is the company/organization that offers the plan to their employees.

Kali's picture

Argentina survived it, so can we.  It is gonna happen anyway.  The only money left.  They've already stolen every thing else. I keep prodding two of my friends who have huge pension funds to cash out NOW!  One has 700,000 (!-teacher pension fund), the other twice that (public employee fund), they think Im from outer space when I say they will never collect it.  The teacher only has 3 years till retirement when she turns 50yrs old.  I told her to cash it out and go enjoy life 3yrs ago.  She just avoided layoff around first of this year, still may get laid off before new school year starts.  This woman is teaching kids.  Doh!

Gold...Bitches's picture

The problem with your comments is that what gets "blown to smitherines" is the savings of all these pension dependants.

Do you believe those pensions and savings wont be blown to smithereens on the present course of action that has been, and is being, taken?

The point is that by gutting the system now the rest of their productive years may actually go towards something that has some lasting value.  More paying in and propping up is just more good money after bad.

If you're playing hold em and you got a seven two off suit and you matched a large pre flop bet for some unknown reason, you dont continue to call when the large stack at the table keeps betting into you on the flop and every card thereafter.  You fold.  You get out.  You muck it.

This isnt some teamwork cheerleading thing.  Ignoring the problem or not addressing it doesnt make it go away.  I would point you to the statements coming out of Japan recently regarding their debt, Hungary, Greece, Spain, etc...  If you believe as I do that its going down - its just a matter of time - then prolonging the time before bottom is hit is just wasting time, money, and productive capacity of millions of unemployed people.

Considering some people took umbrage over my use of Bachmann as an example let me even it up with a Kucinich on the other side.  Gambino.  Genovese.

MayIMommaDogFace2theBananaPatch's picture

Care to share your opinion of Congressman Paul?

Geoff-UK's picture

Run your own pension fund (says me).  And be your own central bank (says Marc Faber).


As for bailing out other people...well, that's between you and the I.R.S. on what you're willing to pay.  Think we're all about to see a lot more tax fraud.

New_Meat's picture

@jbc77--OK, theoretically some of us want a different system.  Maybe it happens because of utter collapse.  Maybe it happens b/c of incremental fault.

Worth your time to read Roth's Depression Diary before being so categorical.

You been in combat?  Might condition your views either way.

- Ned

nedwardkelly's picture


If it goes belly up, Government will bail it out. So what the fuck do the people running the show care? I'd gamble like a fucking mad man if every time I got close to going broke someone just gave me a lifeline. Eventually I'd hit the jackpot right?

Think of all the fund managers, advisers, consultants, leeches that are making a KILLING running that fund. I'm sure there's dozens of people making salaries that would dwarf liberias deficit, not giving a rats ass about what happens.

When you earn millions of dollars, you're disconnected from reality. Who cares if there's no job for you if the pension fund blows up? You'll just have to suck it up cruising on your yacht in the caymans. Poor you.

Village Idiot's picture

Unless you are, Mr. Hubrus  M. Mouthpiece, and one of your ex-clients is suing you.  Oh so satisfying...

JLee2027's picture

I don't see Governments bailing out the 100+ trillion in unfunded obligations and what about the 1.2 Quadtrillion in derivatives?  It can't all happen just to save the finances of 20%-30% or so of the population. I say no because hyperinflation for all of us destroys everything anyway.

yes, there will be riots...either way I think.

MayIMommaDogFace2theBananaPatch's picture

Didn't you hear?  Negative interest rates are going to fix everything (whoops, I meant to say 'ignoring the zero boundary').

The real problem is that we didn't think of it before.


BumpSkool's picture

"Seems like ... total destruction the only solution"


-- B. Marley

Anarchist's picture

Chickens come home to roost.  It is almost impossible for any non-Federal pension to meet it's long term future liabilities. Many were underfunded for years or bought risky crap so the fund managers could net bonuses, payoffs or both. None can survive making 1-2% that non-risky investments would yield.

DosZap's picture


WHOSE job was it to oversee these funds, and regulate them?.

The SAME Bstd's now imploding the system..............

Rainman's picture

haha....those federal employee pension coffers are stuffed with IOUs too.

hedgeless_horseman's picture

Are they one of Leo's clients?

jkruffin's picture

They must have been using Goldman or JPM for advice to lose money in 2009.  ROFL


Any bets Goldman packaged them some CDS or crap investment, then shorted it to plummet the TRS fund.  I would bet my entire life savings something rotten is underneath the rug.