Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations

Tyler Durden's picture

Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its  $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "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." In other words, TRS was selling substantial amounts of derivatives, which held the fund's other assets as hostage in case the collateral calls started coming in, as should the market broadly decline, the value of the downside derivatives would "increase" and the seller (in this case TRS) would need to pledge ever more collateral against these wrong way bets. Not only that, but the Fund is currently getting annihilated on its curve exposure: "TRS appears to be betting that long-term Treasury yields will greatly increase" we wrote back then. So as a result of i) its massive underfunded fundamentals and ii) a bet that the market would turn bullish, i.e., spreads would drop (they are rising), and treasuries would plunge (we all know where they are today), which was supposed to happen by now but isn't as the economy is now officially double dipping, the fund has basically thrown in the towel and is proceeding with liquidations. The problem there is that due to its derivative exposure, liquidations now become self-reinforcing, as more cash needs to be pledged as collateral in a declining market, and the AIG death spiral we all know and love, follows. The only thing missing is for Goldman to raise its overnight variation margin requirements and it's game over, as we get a brand new AIG on our hands. And since Goldman is among the 60 or so asset managers that actually decide how the fund invests its meager assets, it is fully aware of its precarious position, and it is a sure bet that Goldman is currently deciding when to pull the plug on the TRS life support.

All this is direct consequence of the disclosure in Crain's Chicago earlier that "Illinois Teachers' Retirement System, Springfield, plans to sell $3
billion in investments, or about 10% of its $33.1 billion in assets, in
the current fiscal year to pay pension benefits, according to Dave
Urbanek, public  information officer."

More on the start of the TRS (not to be confused with Total Return Swap, an instrument, ironically, which we are sure the TRS is actively (ab)using to lever up its UST exposure by up to 50:1) toxic spiral:

Illinois State Universities Retirement System, Champaign, expects to sell $1.2 billion in investments from its $12.2 billion defined benefit fund this fiscal year to raise liquidity to pay benefits to participants.

The Illinois State Board of Investment, Chicago, could sell $840 million investments from its $9.9 billion fund to pay benefits of the Illinois State Employees' Retirement System, Illinois Judges' Retirement System and Illinois General Assembly Retirement System. ISBI oversees the investments of the three systems.

The liquidity stress from the investment sales at the five plans could force each of them to restructure their strategic asset allocations, terminate investment managers and search for new managers.

Illinois Teachers sold $290 million in investments so far this month and $200 million last month because of a lack of state contributions.

“Without the monthly state contribution, TRS estimates sales of roughly $3 billion for the entire fiscal year, or approximately $250 million every month,” Mr. Urbanek said in a statement in response to an inquiry.

There is, of course, the obligatory spin:

So far, TRS has accomplished the investment liquidation through “appropriate rebalancing,” Mr. Urbanek said in the statement. “As the year progresses, this approach will no longer be sufficient to cover the total amount of benefit payments and more targeted asset sales will need to be considered.

“TRS staff continues to study the impacts of the current liquidity situation on the total portfolio and recommendations will be made as necessary to adjust targets. These changes could include revisions to the system's target asset allocation and termination of investment manager relationships as 10% or more of the portfolio is liquidated to pay benefits this fiscal year,” he said.

The only question one has is whether as part of this "appropriate rebalancing" the TRS has covered its increasingly out of the money derivatives? And since the answer is most likely "no", as that would be the painful but prudent thing to do, and has likely only sold off instruments which are now losing more and more value with each passing day, each day will merely bring more and more P&L losses to the fund. Which means that as the market continues selling off, the derivatives will require that more assets are sold, which will push the market further lower, which will demand furhter margin calls, and so forth ad Chapter 7.

To be sure, the insolvent state of Illinois has not helped:

Since the start of the fiscal year on July 1 through Aug. 20, the system has received only $90 million in contributions from the state. For the current fiscal year, ending June 30, 2011, the system requested $2.35 billion in contributions from the state, Mr. Urbanek said.

In the last fiscal year, the system sold $1.3 billion in assets to pay pension benefits; it received $170.4 million in employer contributions and $899 million in member contributions, while requesting $2.08 billion in employer contributions alone.

Alas, at this point it is too late: for TRS, and likely for many, many other comparable pension funds, which had hoped that the Fed would by now inflate the economy, and fix their massively incorrect investment exposure, the jig may be up. As liquidations have already commenced, the fund is beyond the point where it can "extend and pretend", and absent the market staging a dramatic rally, government bonds plunging, and risk spreads on CDS collapsing, the fund is likely doomed to a slow at first, then ever faster death. Then one day, Goldman's risk officers will call the TRS back office, and advise them that due to its "suddenly riskier profile" established in no small part courtesy of Goldman's investment allocation advice, the collateral requirements have gone up by 50%. The next step is either Maiden Lane 4... or not. For the sake of the 355,000 full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago, we hope that the TRS has now been inducted into the hall of the Too Big To Fail, as otherwise roughly $34 billion in (underfunded) pensions are about to disappear.

h/t Ed

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MsCreant's picture

It's so exciting when dominoes start falling.

Slash's picture

just what I was thinking! interesting times we live in! *pulls glock closer to me*

Monkey Craig's picture

I think to myself as I'm cleaning the 1911: 'things seem to be getting worse'

DoChenRollingBearing's picture

Funny that.  I think the same when I clean my AK and my Beretta.

Great minds think alike!

Why is it that the only decent weapons are over 50 year old designs (except for the Barrett .50 caliber)?

Attitude_Check's picture

I don't know,  my HK P7M8 is very nice

Mad Max's picture

A design that is nearly 40 years old now...

Who else is from Prussia's picture

My M+P .40 is always clean and ready

Strongbad's picture

Agreed that the best platforms are the older ones for now.  I think there hasn't been much small arms innovation in the last couple decades because there has been no major conventional war and the Cold War ended as well.

RingToneDeaf's picture

Sharks, alligators and snapping turtles have not changed in millions of years.

Why tamper with perfection? Why bother changing the 1911?

Why bother trying to make Chicago honest? We have Al Obama, the Ill messiah, he gonna take away the guns and fix da problem. Yes, and I have a bridge in AZ for sale.

What is a matter with wheel guns, they have been around a long time too? Wyatt Earp didn't do so bad.

It certainly does appear that this will all end badly.

Hungry For Knowledge's picture

My .45 Glock is a "new" design in that it's half-polymer with few moving parts, designed in 1984 I believe.  I love that gun.....especially the feeling of it on my hip as I type.

laughing_swordfish's picture

Ah, How I love Saturdays in the small arms locker and the armory !

My Czech-Made AK is in great shape, wood stock lovingly polished to a fare-thee-well, the M1Garand is ready to go, as is the M-14 (best US postwar long rifle, IMHO), and my prive possession the Remington 870 12 ga magnum pump, with 00 buck close at hand.

As I consider... is full choke or improved cylinder the best setting for "street sweeping" at <10 meters? Such pleasant thoughts.

And then my attention is fixed on my Genuine MG 43 ... best crew-served weapon ever made, with 10,000 rounds of belted 7.62 at the ready.

Would love to acquire a 0.50 cal Stoner Weapons System or Barrett for long-rage point defense, though ..

Gully Foyle's picture


"interesting times we live in!"

Frank: Do you mind my asking: you're writing a book, yet you don't believe any of the prophecies?
Jose: At the start of the nineties, they predicted major breakthroughs for the neurosciences: the 'Decade of the  Brain'. Instead, it was the decade of ... body-piercing. Now why should the millennium predictions be more accurate?"
Frank: "The religious component. Do you not believe in God either?
Jose: Oh, there are times when I've been a devout believer. And there are some times I have been a staunch atheist, and there've been times when I've been both ... during the same course of the same sexual act.
Frank: Don't be dark. Personally, I think this is a very significant time in mankind's history.
Jose: But that's what every man throughout history has said about his time. [

Burnbright's picture

Frank: Don't be dark. Personally, I think this is a very significant time in mankind's history.
Jose: But that's what every man throughout history has said about his time. [

If a man doesn't see his time on this earth as being significant then how could he possibly see his own life as being such? Certainly we tend to view ourselves as the center of all existence, but that is only because we are the centers to our own perceptions. And anyone who does not understand that point of view will never understand the value to his own place in the world.'s picture

your a blowie,   me thinks†

Uncle Remus's picture

oh oh oh - like that scene in "V for Vendetta"? So who picks up the last domino?



Chinese gangs?

[eyes 12-gauge in corner]

Eternal Student's picture

Personally, I think it's sad. Very, very sad. For all of the hard working people this is going to hurt.

Spalding_Smailes's picture

Don't be sad, Obama will bail us out & saddle your kids with the debt.

ebworthen's picture

Exactly.  I wouldn't doubt the pension plan along with GS arranging failure and TBTF status intentionally; more gravy that way for those at the top now AND when the bailout money rolls in.

dark pools of soros's picture

exactly!   nothing can go bankrupt except the future!!!  and that never comes!!  keep kicking the can forever!!

Eternal Student's picture

Of course that will be tried. I've stated similar things for the various States in the past. If you think this is going to be successful, IMO you're mistaken. The most that might happen is to kick the can down the road a little, which is a familiar pattern.

The end of the road is clearly in sight. And it's not pleasant.

rocker's picture

Oh Please, so politcal. Bush bailed out GS, AIG, JPM, MS, LM, C, (the Muslim Saudis, who he kissed), because he was

saving us from a Greater than the Great Depression. To the tune of 23.7 Trillion Dollars, and you were probably worried about Health Care Reform too. Godman Shafts would be so proud. Mission Accomplished.

And just in case you might think otherwise, Obama SUCKS too. It's just about who SUCKS more. The GS squid did a

great job fooling most of the Sheepies, with a little help from the disinformation machine. The Media.  

brushfire's picture

I share your sentiment, but the political theatre is going to be epic. Obama either tries for another bailout against an increasingly bailout weary congress and populace, or he stiffs his home state's teachers after driving the gravy train straight through lower manhattan. Fireworks bitches.

BrosMacManus's picture

No worries, no need to go to the public trough for approval, TRS will just go to the PBGC (who cares if it's not eligible), funded by...ultimately....the public trough.   

TRS in this thugocracy is TBT effin F. Wait for Calpers to implode.


Crook County's picture

I agree, Eternal.  It's easy to troll these posts and make wisecracks about how hopeless this situation is, but when you actually know people who are part of this system, it is heartbreaking to wonder where they go from here.

TwoShortPlanks's picture


In some sick way, while witnessing these events unravel, I often feel an eager anticipation of the coming events, and satisfaction as and when they arrive. I think this quote describes it well.

Alfred Pennyworth:"Because he thought it was good sport. Because some men aren't looking for anything logical, like money. They can't be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn."

On the other hand, how do you fully bring to justice, or punish, or re-level the playing field, against those who have brought us to this situation?!

Bruce Wayne:"The Bandit, in the forest in Burma, did you catch him."

Alfred Pennyworth:"Yes."

Bruce Wayne:"How?"

Alfred Pennyworth:"We burned the forest down."'s picture

First Woman: Burma!

Second Woman: Why did you say Burma?

First Woman: I panicked.

A Proud Canadian's picture

A very obscure Monty Python reference!  

What's that penguin doing on the tele?

Two Face's picture

I loved that scene almost as much as the one where the Joker burns his "half" of the Mob's money.  :-)

I also start to get giddy w/ excitement as I watch the events of Project Mayhem unfold.  The director does need to do some serious editing of "our" flick though because the film's length is running WAY too long to keep the audience entertained.

DosZap's picture


Yes,UNLESS those are your Domino's.

Not so exciting huh?.

TwoShortPlanks's picture

I couldn't care less about my money, my house, my material objects. What matters most is what the world will look like during our kids generation.

"The Dominos" are merely creases in the Origami paper; what creature will be left after the last crease and fold is what matters...a Black Swan, or a White Crane?

I spent 11 years looking through the sights of a rifle scope; I'm going to make sure my kids don't.

Ragnarok's picture

All I want is justice.... delivered cold and unforgiving by the natural order.

JLee2027's picture

And I want to live long enough to see it. It will be a good lesson for my children to learn as well.

MsCreant's picture

All our dominoes. I am sick of the lying, sick of the illness living in the center of all of us, existing this way. Cut it out, cauterize it, turn that rock over, shine the light on it, leave it out in the sun to bake and bleach and wither away. Purification. Streamlined simplification. Elegance.

Not 2000 page bills signed by senators who never read them.

Not complex unresolvable politics that make people rich by killing others.

Not fragile centralized distribution systems that kill us all if any one part fails.

Not Mc Food, Mc Mansion, Mc Jobs, Mc TV, Mc Medicine, and Mc Life.

I am willing to have a shorter lifespan if that means having a meaningful life that I invented, not a prefabricated template life that was built for me so that others could pacify me and control me for the sake of making a profit off me.

I strongly suspect I will never see any retirement money that has been taken from me. I understand now I abdicated a lot of my own responsibility for my future because I conformed to the prefabricated lifeshape that was cut for me. Will the dominoes falling hurt me and those I love? Yes.

I had severe 3rd degree burns on my leg and foot as a teen. It was not healing well, they were telling me the foot may have to go. The nurses hated cleaning my leg and foot twice every day, some even cried with me when I cried out. Got a tough gay male nurse one day. He was fem and mean, a real damn battle ax. He scrubbed that wound hard and would not hold back. I cried so loudly, thought he was so insensitive, cussed at him. Then he dressed the wound his way (so air could get to it, but it was protected). The next day a new nurse undid the dressing for the cleaning. I had new skin started where there was pus an goo before. I asked for my male nurse back. We became friends. He taught me a huge lesson. Sometimes pain is good and necessary and the only way to it, is through it. 

This economy is a festering wound. I hope when I feel it burn, I will remember that it has to hurt in order to heal. There is no getting around it.

Bring it. 

FASB 666's picture

Thanks for sharing, only thing I can think of is "trial by fire".  Reconnecting with our true selves will actually be a glorious event.

Gully Foyle's picture


"He taught me a huge lesson. Sometimes pain is good and necessary and the only way to it, is through it."

We forget we only learn from failure.

Only the mediocre are always at their best.
Jean Giraudoux

trav7777's picture

Screw that.  don't be a masochist.

This situation here is like GS and the elites are the nurse AND the person who lit you afire.

If pain comes of its own accord, then fine.  But we've had our assholes ripped open by these rapists and now they want to dump a full container of Morton's onto it.

Let THEM suffer.

We have too many "austerians" who nothing more than misanthropes.  NONE of this is necessary.  Sure, we need to adjust, but we do not need to have a trial by fire.

MsCreant's picture


You know this is bigger than GS (who I love to hate) or Demofats or Repulsicans, etc. The system was always going to do this. I have read you and cheered you on preaching about how interest takes from the money pie/supply and unless we grow it to produce the interest and still preserve the principle (endless growth, not sustainable), it will have to contract. That isn't any of these people, that is the system we live in that we, as a collective, don't understand and repeat over and over. 

There are rules, and no one will enforce them, that is just true. 

They know it will blow up and they are using the fear to profit from the blow up (steal from us), also just true. 

Should there be some old fashioned justice to leave a bloody mark in the history books for the future? OH YES there should be. But the contraction was always going to happen. If this is the system we use, then you know damn well IT HAD TO BE THIS WAY. They know it and they are using us. We are so fucking slow.

I want justice too, but putting off the hurt that has to happen to let this unwind makes it worse later. I know you know this. 

Even soldiers fighting a "just" war get hurt in training and hurt on the battle field.

They should not be allowed to do what they are doing. But the system was going to contract with or without them screwing us. The contraction brings pain. The elites are pumping it for all it is worth.

Mad Max's picture

Short reading list:

"Survival+" by Charles Hugh Smith

"Starve the Monkeys" by Tom Baugh

"Atlas Shrugged"

Those will tell you where we are and basically how we got here.  Toss in "The Creature from Jekyll Island" if you like.

Once you're good and focused (and depressed) by those, I would suggest adding for good measure "The Long Descent" by John Michael Greer, or for those with a shorter attention span, "The Long Emergency" by James Kunstler.

If you want to be utterly despondent and don't have a closed mind, I would further add "Storms of My Grandchildren" by James Hansen.

nedwardkelly's picture

Long emergency is a good, if a little sensational (guys gotta sell books), read.

I look at oil and oil based products so differently after reading that. It's incredible how completely underpriced oil actually is and how people are generally just totally oblivious.

wake the roach's picture



Wow, I'm really impressed MsCreant...

Yes. Everything must be this way. It is the hardest truth one must come to accept. Thousands of years of greed, religious division, empire building, wealth accumulation, globalization etc. Has shaped the world into what it is today and spawned our greatest achievments in scientific knowledge, technology and the arts but this time things really are different.

For the first and only time, mankind will have a small window of opportunity in which we will decide our collective fate. The monetary systems that provided wealth through ever increasing consumption of finite resources (waste) have nothing left to offer 7 billion people. Capitalism was never the final road to equality and wealth for all, it was simply the last monetary profit system and final road towards a global energy credit system (and once we have global energy abundance, no credit system at all). Will we choose a future of global peace, equality, resource abundance and unlimited human potential? Maybe the outcome of the NY mosque "debate" will be a great leading indicator of what is to come? Who knows, but whatever choice we make, it is certainly an amazing time to be alive ;-)



nmewn's picture

Hugs & kisses Ms.

Pain tells one they are still alive. Being alive, you will always have a chance to win and you can never really lose until you quit trying as there is no clock on this, it's generational.

Never quit baby!

trav7777's picture

I agree...this monetary system needs to go.

But we do not have to suffer 3rd degree burns or the apocalypse as a result.

USians could cut our oil consumption in half and still live very well.  There are many of us here who were alive in the 70s and don't recall grinding poverty or austerity.

The problem is that consumption per capita of energy is pretty much the arbiter of wealth for a society.  And ours has gone UP, way up.

AccreditedEYE's picture

Awesome lesson. Agree 100%.

Monetary Lapse of Reason's picture

Thought provoking and well written MC...   

"I understand now I abdicated a lot of my own responsibility for my future because I conformed to the prefabricated lifeshape that was cut for me. Will the dominoes falling hurt me and those I love? Yes."

Taking personal responsibility is the major first step we all must take, to the degree that we have lived for years as Sheeple before awakening.  For instance, I have 90% of my savings in a 401K, with limited investment options.. and I can't free that money unless I QUIT MY JOB... which is not a good move right now.. so... I borrow against it and buy Gold and Silver.. do the best I can do.  Downsize, payoff debt, get sustainable, teach my kids that which I never learned about our monetary system until I was in my 40's...  and warn others what is coming.     

Dirtt's picture

Bring it.  Bless you Patriot.

VeloSpade's picture

Yeah, I'm sure that faggot nurse knows all about pain from taking it up the ass.  Great

Careless Whisper's picture

oh don't try and pretend that you've never done it. puhleeze, i can spot a closet queen a mile away.