A look into the ZeroHedge vs. Illinois Teacher's Retirement Fund Spat, We still have some unanswered questions..

Reggie Middleton's picture

Zero Hedge posted an interesting response from the Illinois Teacher’s
Retirement System that basically stated their dislike for Tyler
Durden’s characterization of a “death spiral” in relation to their need
to sell off assets (see Illinois
Teachers’ Retirement System Enters The Death Spiral: AIG Wannabe’s
Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations
The response had a very cogent and common sense reason for the asset
sales, even thought they occurred at a very inopportune time. See TRS Responds to “Death Spiral” Comments.

We at the BoomBustBlog commented on the Illinois TRS on August 23rd: Is Illinois Worse Off Than Greece

In reviewing both our comments and the responses from TRS, it begs
the question as to why TRS officials failed to address some of the more
salient points in our missive. To wit, let’s excerpt a portion from our
note, linked above:

Illinois Budget Crisis Draining State Services: Bloomberg

  • State retirement liabilities are near $130 billion, Illinois holds the country’s largest pension and health care funding gaps
  • Pension debt is $90 billion, and programs are unfunded to the tune of $54 billion
  • The state’s unpaid bills have risen by $1 billion in the past year

Chicago Downgrade Raises Borrowing Costs Amid $164 Million Sale: Bloomberg

  • Chicago is planning a multibillion dollar education capital plan, which it will debt finance
  • Chicago has continued to thin out its cash reserves, and when
    faced with firing 1,200 public school employees, it instead chose to
    let the good times roll (party like its 2005)
  • Recent credit ratings downgrades may have raised the debt financing cost by 40%

Illinois Pension Continues to Borrow From Future: Sun Times

  • In January of this year, Illinois raised $3.5 billion in five
    year pension obligation notes at a tax free rate of 3.84%, most of the
    funds going to the Teachers Retirement System (TRS)
  • The pension fund usually reinvests some of the proceeds
    from the bond sale into financial markets to try and beat the 3.84%
    interest rate, however, in 2009, the TRS fund lost 22%, even as the
    S&P 500 strengthened by 26%
  • The pension system has reached an endpoint where simply cutting
    future benefits will not be enough to get out of a fatal debt spiral

Perhaps the only thing more frightening than the TRS asset shortfall is the TRS asset holdings
Illinois has exposed itself to material credit risk and CRE exposure
through their CMBS holdings. I assume an astute sales team sold this to
the pension fund. For more on the profitability (for the banks) on
selling CRE products to institutions, see When It Comes to Wall Street Real Estate Funds, the House Always Wins – Even When Investors Get Slaughtered
(it’s long, but it drives the point home). TRS has also assumed (and
probably generated) material global credit risk in the OTC credit
derivatives market by underwriting sovereign CDS on government bonds.  An audit of fund holdings indicates that these positions have lost $515 million,
with the audit occurring at the end of March 2010, so it is ok to
assume that these positions have become even worse as spreads have blown
out in Europe.  For those who are not aware of my stance on credit
risk as well as the financial and economic contagion hotbed boiling in
Europe amid the rampant mis(and dis)information , see my series on the Pan-European Sovereign Debt Crisis.

Hey, Mr. and Mrs. Illinois Teacher, Reggie Middleton thinks your pension fund is picking up pennies in front of a freight train!

So, we have teacher’s pensions writing insurance on the biggest
European debacle of this century. We have same said pension buying the
debt of assets, 40% of which are probably underwater.
What was not mentioned thus far is that this very same pension has
more than 80% of its holdings considered “risky” according to a study
by “Pensions and Investments”, and industry rag – and that was in 2008,
without the benefit pending defaults in Europe and the ever higher
climb of LTVs in CRE.

Then there’s the fact that TRS is also:

  • selling swaptions,
  • shorting international interest rate swaps
  • knee deep in GNMA, FNMA instruments,,,,

and this is just from a cursory view of their holdings. They paid
over $160 million in management fees, and if I had to take a guess,
they are reaching for yield and quick returns over the prudence of
looking to preserve capital which in my opinion should be the mantra of
a pension fund shepherding the retirement funds of real people. Then
again, there I go being old fashioned again.

In addition to the market performance of the actual positions
themselves, one must ponder… If a credit event is triggered, does the
Illinois TRS have the liquid capital to make good on its CDS
obligations? When BoomBustBlog created the Sovereign Contagion Model,
who knew it left out Illinois.  If the TRS is unable to make good on
its CDS positions in the event of a tail event, it is definitely not
unfathomable that Illinois could be the domino that falls into the blow
up the CDS market.

Illinois is facing what Hayman Capital Advisors manager Kyle Bass
referred to as “The Keynesian Endpoint”.  To paraphrase, when debt
service exceeds revenue, deficit spending becomes permanent and
structural until default inevitably occurs.  Since the bursting of the
housing and credit consumption bubble back in 2008, tax revenues have
fallen, and pension liabilities continue to receive funding through debt
markets.  Using basic accounting, the gimmicks used to placate state
employees are about to come to an end.

There are more charts and graphs that generate even more questions from inquiring minds in the original BoomBustBlog post, Is Illinois Worse Off Than Greece…, but I think what I have excerpted here should serve to stoke the inquisitive mindset.

If TRS wishes to dispel notions of its insolvency, addressing the issues listed above would be a very, very good start!.

It appears as if ZeroHedge may have the last laugh, at least
according to this Bloomberg TV interview they posted today. The interviewee also brushes
up against the CRE issue, although ever so briefly.

Illinois’ $10 Billion Pension Time Bomb

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Buck Johnson's picture

They aren't the only states and counties that are in trouble, some have entirely stopped paying pensions to their retires.


Do you know what will take down this system, it will be the states imploding and having the inability to sell their debt both locally and statewide.  For one, it's a ponzi scheme based on rosie forcasts that weren't real (like 10% growth every year for 30 years).  This was done in order to borrow the money from the financing of the pensions and say "well we'll pay it back and/or the forcast will make up for any loss".  Two as one person put it not just California but other states are betting on a bailout, and that won't come.  Because if they do it to one state the other states will demand a bailout to and it will be in the Trillions.  The state senators and congress people will hold it up unless they help their state, and in the process those states will be wanting to be bailed out for debt that they can't afford to pay back or rollover on the open market.  How can the Fed even consider bailing out the states without printing up more money and causing exponential inflation.  And on top of that destroying the dollar.

This is the hidden problem that is growing, and eventually when pensioners get reduced pensions and/or no pensions as my one example they don't spend. 

StychoKiller's picture

Imagine all the Senators from Montana, North and South Dakota, trying to figure out how to explain selling out their states for the mismanagers in CA, FL, IL and NY?  Ain't gonna happen!

Magua's picture

There was a time when I was pissed that all I had was an IRA and not a pension. Now, in my IRA, I can hedge the irresponsibilities of the big boys, the HFT traders, and our government stewards because unlike them, I am a disbeliever.

I am a huge believer in reducing the footprint (not carbon) to starve the beast. To make up for busted pensions, they will tax you to death. Sell your real estate and rent, or move to a non-income tax state like mine, Tejas. Buy used rather than new, barter, and pay in cash.

Kill the beast

hooligan2009's picture

wow! you were bad in last of the mohicans and you still weild a mean machete! heh. James Fennimore Cooper would be pleased.

I agree with you. Taxation by Government is a privelege bestowed on people we trust, not a right taken by those we know are fuck ups (oops, pardonnez moi).

I am looking up Tejas now, but I am white! Will I be tolerated! :)

StychoKiller's picture

Get a belt with a big buckle, learn how to say 'y'all' and 'fixin' correctly, you just might fit int! :D

hooligan2009's picture

cool beans reggie and tyler.. keep it coming..cant beat the truth..oh wait..yes you can, you use politics, economics and failing that, religion!

Spare a thought for the hedge fund "deer in headlights". They still offer some insight. Check this out for Obama dodging a perfectly good relevant question from a hedge fund manager he used to go to school with. Forget the fact that it is a hedge fund manager, who is making 100 times more than Obama, focus on the bit where the hedge fund manager says "if I hire someone for 50k, other costs (employment and health) add 40k for a total cost of 90k an 80% increase in employment costs.

Note these are not described as taxes. But these are what they are; a tax on employment.

So what we have here is employment costs that the employee could be getting and spending on what suits the employee. Private health and employment insurance costs at 40k a year? I say, no way! This is a form of corruption.

Here is the link, hope it works, its on "think progress" (should be "think regress" I think!:


Johnny Dangereaux's picture

Home-schooling supply business anyone?

doomandbloom's picture

Reggie and ZH..good tag team....hope to see more such collaborations..

BDF_NYC's picture

The government always denies everything.  The only time the Illinois Pensioners will find out the truth is when their checks don't show up.  I have the feeling that this is how Social Security will end, suddenly, and without notice.

Start preparing now, the checks are going to go away, or they will be paid in devalued dollars that won't buy you anything.

michigan independant's picture

At least in Michigan we know we are professionally fucked.


Michigan has a total state debt of $69,418,882,370 when calculated by adding the total of outstanding debt, pension and OPEB UAAL’s, unemployment trust funds and the 2010 budget gap as of July 2010.


Hundreds of Jobs still being moved over seas.  


onlooker's picture

"" ultimately, Tyler cannot win. They don't just put lipstick on a pig. They will be the put the fucker in a cocktail dress, give it a boob job, and tell you it's the best piece of ass they ever had. That Tyler, my boy, is what you are up against. Good luck.""

----He done did dude.--- a TKO that will become a KO for these poor people. If they read this they might have a chance to save a part of the fund. Thats kinda the idea.

Something Wicked This Way Comes's picture

Their defense is only logical. This is the same mentality that a condemned man brings when he faces the gallows. Maybe I can convince someone that I am really not the killer and spare myself.

The Illinois pension fund is about 52% funded. Any significant market leg down will bring them to their knees. Insolvency.

What Tyler fails to recognize is that the FED and these crony capitalist politicians are willing to go to any lengths to keep that from becoming true. And ultimately, Tyler cannot win. They don't just put lipstick on a pig. They will be the put the fucker in a cocktail dress, give it a boob job, and tell you it's the best piece of ass they ever had. That Tyler, my boy, is what you are up against. Good luck.


metastar's picture

Better instruct the teacher bitchez to count.

MayIMommaDogFace2theBananaPatch's picture

It's the "Knew" [sic] Math...

MarketTruth's picture

Illinois Teacher’s Retirement System... dislike.. characterization of a "death spiral" in relation to their need to sell off assets.


Tyler, perhaps next time just say "They are totally f--ked!" Perhaps that will be more to their liking? Well, at least it is honest.

Almost Solvent's picture

"In order to help spur the further development of green shoots, particularly here in Illinois, we are liquidating assets."


Nothing to see here, move along..... 

hungrydweller's picture

C'mon, Reg - this is easy.  Almost all of their current income is from selling crap that is going to blow up later.  They are counting on a major bailout from the US Gubmint.  It is the only explanation for taking that level of current risk in order to generate a small amount of current income.

Ancona's picture

Illinois and California are going to blow up, it's not a matter of "if", but one of "when".

There are a number of other states in the same hole, that continue to negotiate with the unions over pension contributions, health care etc. This is not ever going to get better, and the sooner they realize it the better it will be for them.

To privatize everything is the way to go here, but that simply can't happen in a union stronghold such as Illinois. No, they will strike, demand higher wages and higher taxes to pay for it. When the system blows up, they will demand the Federal Government step in and guarantee their fat benefits for life, foisting the obligation on the American Taxpayer.

The unions will never learn. In good times, by all means go after more and better if you choose to, but in bad times, something has to give, and unfortunately for them, greed will kill the unions this time around. Joe Six-Pack, who has to save for retirement because he doesn't get an automatic lifetime pension when he retires, is going to say no to higher taxes for support of pension programs that have been mis-managed. They have already paid for it once, and shouldn't have to pay for it again..

jmc8888's picture

What? Privitization got us here.

Privitization SPEEDS the process up.

PRIVITIZATION adds to the destruction.

The privitize everything people are as dumb as Ben fucking Bernanke to still not see this.


Only the banksters will say otherwise.  (or those confused souls who do their bidding without knowing it) a.ka. idiots.

....and it ain't got nothing to do with Unions.  Get off the union kick.   Another reason we're fucked is because we have NONE.  7 percent compared to 30+ percent, yet NOW is where you hear how unions run everything? Oh really.  THey didn't back then, when they were 4-5x (or more) bigger.  Get real.

Another person with their head so far up, they're on a quest for diamonds, not realizing they're poking around their own dumb ass.

tony bonn's picture

the end point of a debauched currency via zirp is "investors" chasing fantasy returns...

mr urbanek retains his fool rating

bugs_'s picture

This isn't Spat Club.

StychoKiller's picture

It's NOT a "death spiral", it's a living-impaired oscillation!

Sheesh, for a bunch of teachers, they sure seem pig-ignorant about finances.  If they really knew/understood just what the State of Illinois is doing, Springfield would be a burnt-out cinder by now!