Risks Rising at the PBGC?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Kim Dixon and John Crawley of Reuters report that weak companies are raising the risk for U.S. pension agency:

Weakness
in the auto and airline industries, as well as retail and service
sectors, has more than tripled the potential risk to the U.S. pension
insurance system.

The
Pension Benefit Guaranty Corporation (PBGC) on Friday said its
potential exposure to future pension losses from financially weak
companies had increased to about $168 billion in fiscal 2009 from $47 billion a year earlier.

It
also reported a doubling of its deficit in the year that ended
September 30, and said future shortfalls from retirement account
defaults could be worse than forecast.

"Exposure
to possible future terminations means that we could face much higher
deficits in the future," Vincent Snowbarger, the agency's acting
director, said in a statement.

The
agency, which insures pensions covering 44 million workers and
retirees, said its annual deficit grew from $11.2 billion in fiscal
2008 to $22 billion in fiscal 2009.

The
deficit figure was an improvement over mid-year projections as the
agency's balance sheet benefited from an improved economy and
rebounding investments.

In addition, the government arranged for General Motors and Chrysler to maintain their major pension plans in bankruptcy.

The
agency's deficit is the difference between assets under its control and
payout obligations. PBGC assets reflect the value of terminated plans.

"We
won't fail to meet our obligations to retirees, but ultimately we will
need a long-term solution to stabilize the pension insurance program,"
Snowbarger said.

Companies with junk credit ratings are put on watch for pension plan troubles.

Automakers
and their parts suppliers as well as airlines account for most of the
risk. Service sector and retail companies are also a concern.

The PBGC this year has assumed responsibility for pension plans at auto parts supplier Delphi Corp, retailer Circuit City Stores, IndyMac Bank, Lehman Brothers Holdings Inc and textile maker Dan River Inc, among others.

The
financial health of the company-funded agency has been a hot button
topic in recent years as faltering companies, particularly airlines,
shed pension obligations in bankruptcy.

The
PBGC and pension experts say the agency has plenty of cash to make
payments for the next decade or more. Assumption of fully funded plans
will not increase the PBGC deficit. But the recent trend has been for
bankrupt companies to turn over underfunded accounts.

"These
are all companies who do represent some serious risk, and historically
those who do go under get significantly worse deficits before they
actually go," said Douglas Elliott, a former investment banker and an
expert on financial institutions and the economy at the Brookings
Institution.

The PBGC is
reviewing the investment strategy for its assets, having put aside a
proposal to become more heavily exposed to equities. The agency has
been directed by the Obama administration to "prudently rebalance" its
portfolio.

"We will announce any new investment policy when it is adopted by the board," PBGC spokesman Jeffrey Speicher said.

The job of "prudently rebalancing the portfolio" now falls under PBGC's new director, Joshua Gotbaum, a private equity executive:

Mr.
Gotbaum is currently an operating partner at Blue Wolf Capital
Management L.L.C., a New York-based private equity firm. During the
Clinton administration, Mr. Gotbaum held a variety of positions,
including executive associate director and controller in the Office of
Management and Budget, as well as assistant secretary for economic
policy at the Treasury Department and assistant secretary at the
Department of Defense.

During the Carter administration, Mr. Gotbaum served on the White House staff and at the Department of Energy.

He also was an investment banker at Lazard Freres in New York for more than a decade.

Senate confirmation is required. The position has been vacant since January.

Are
you wondering what I am wondering? Why would a private equity partner
want to become the director of the PBGC? Want to take a stab on where
they're going to rebalance their portfolio? I can already see PE funds
lining up to fill out the requests for proposals.

Another thing I can tell you is that the PBGC's ongoing deficits will require a massive bailout down the road. That's why Uncle Ben will let this bubble blow for as long as he possibly can.

Comments

[torabora]

If someone will bail you out from risk taking then why not take risks?

This was bound for failure the day it was launched. The only surprise is why it took so long.

[Anonymous]

If you're a retiree, your pension WILL be cut. Soon. Save your money. You'll need it.

[exportbank]

There's more money in fleecing pension funds than in dope - so where will the smart crook be. There are already two classes of pensioners - the public sector pension 100% guaranteed by taxpayer's and the private sector pensioner (the taxpayer) who will, with his meager pension, have to subsidize the public sector. You can see the future - in Canada, the obvious example is Ontario, a 25 billion dollar deficit yet not one public sector lay-off or wage reduction. Individuals will be forced to bring their spending in line with income but governments are simply impervious because they are only capable of increasing spending they seem unable to lower it (never). If the public sector employee has his pension guaranteed then it's no sillier to do the same for the private sector. Just turn on one more printing press - it's only money - it's not like it has real underlying value (no I'm not a gold bug). Money is just faith in the system and people - we're losing that faith and trust at a rapid rate. 

[anynonmous]

Of interest based upon 13F's for example CalPERS as of  Jan 1, 2000 had a value of $66.5B and as of this past June its value was $24.1B . This this article seems to corroborate the above numbers.

To his credit Leo has been one of only a few voices in the wilderness sounding the pension alarm, for the PE folks they are ripe for the picking; a great opportuity to foist hollowed out 'assets' on to the taxpayer.

[bugs_]

Guarantees gone wild!  You won't like this video!

[mgarrett84]

 We will continue to inflate, because we cant afford not to.  Rising tide lifts all ships.   

[mrhonkytonk1948]

Perfect storm brewing, eh?

[mrhonkytonk1948]

Perfect storm brewing, eh?

[Anonymous]

I'm amused that you even bothered to put a question mark on that header, Leo. Of course risks are rising, of course. Folks who read ZH sometimes make the mistake of compartmentalizing the various FUBARS, when they should be viewed in totality as the forest (fire) they are. All paper will burn, Exter's pyramid will implode.

[Anonymous]

yes the fund is doomed. i think this is another clear sign that this secular bear market has a long way to go. The degree of corruption/fraud out there is definitely a grand super cycle type event and needs to be corrected before this bear is over.

[Cistercian]

 Being technical about the risks to the fund is a waste of time.Given current levels of lawlessness, simply ask a question:Do the corporations want to pay out retirement benefits or would the executives at said corporations rather have a huge bonus and pay nothing to the ex-workers.

 The answer is obvious....the fund is doomed.

[Anonymous]

the question is who will be the ones to go out with black ink when the bubble bursts

obviously, GS will be the first one out the door since they are always perfectly hedged against every possible scenario.

the last ones out will be the mutual funds, with red ink all over every quarterly 401k statement.

can the pension funds cash out somewhere in between and early enough when the bubble bursts? i think not. simply because they need to make up for so much money that they will keep riding the bubble and never take profits in a timely manner. i see a bailout in order.

[anynonmous]

what a small world we all live in 

 WSJ APRIL 22, 2009

Quadrangle Questioned on Pension Disclosure

The former firm of Obama adviser Steven Rattner is under scrutiny. (I wonder for what?)

The New York City comptroller said Tuesday it is conducting an internal investigation into whether private-equity firm Quadrangle Group "intentionally misled or deceived" the city pension funds by failing to disclose paying finder fees to the firm...

http://online.wsj.com/article/SB124034121817339991.html

It seems some blogs have been on to the Blue Wolf / Pension triangle (or should I call that quadrangle)

The Wolf at the Door of Thompson

Attorney General Andrew Cuomo has expanded his investigation of the pension fund scandal ... Blumenthal and Wolf-Powers’ Blue Wolf Capital Management, like Hank Morris’ firm Searle, specializes in drumming up pension fund business for private investors. Under a section entitled “Government in the Value Chain”, Blue Wolf’s company website states, “Many middle-market private equity firms shy away from companies for which the federal government, federal agencies, or state or local governments or government entities, are major factors in the value chain. Government contractors and companies in industries driven by government procurement, policies or subsidies have a set of common issues which we specialize in addressing.” According to its website Blue Wolf is particularly well-suited for government procurement work, because “each member of our investment committee has served as a public official.”

Among Blue Wolf’s other top players are its operating partner Joshua Gotbaum, whose mother New York City Public Advocate Betsy Gotbaum is a trustee of New York City’s Pension Funds, and Mike Musaraca, who before joining Blue Wolf as its managing director, was previously assistant director of the Department of Research and Negotiations with District Council 37 of the American Federation of State, County and Municipal Employees (AFSCME).

http://yourfreepress.blogspot.com/2009_04_01_archive.html

and it also seems the NY Times has mentioned Gotbaum, Blue Wolf, Rattner and Cuomo in the same short article

http://dealbook.blogs.nytimes.com/2009/11/10/blue-wolf-executive-to-head...

[anynonmous]

and then there is this (not that Josh Gotbaum has anything to do with Blue Wolf Capital errr uhhh well there is certainly no evidence linking him to Pension Gate):

'KICKBACK' FIRM $CORED BIG NYC PENSION BIZ April 25, 2009

Thompson, who oversees the city's five pension funds, also received $1,000 from a Wetherly director two years ago.

The presumed mayoral candidate released the list at the request of The Post.

Morris, a longtime political consultant for disgraced former state comptroller Alan Hevesi, allegedly took kickbacks on deals with the state pension fund.

The list also shows that a former director under Thompson, Josh Wolf-Powers, secured $70 million in investments for his private equity company Blue Wolf Capital after he left the Comptroller's Office. Wolf-Powers did not use a placement agent.

http://www.nypost.com/p/news/regional/kickback_firm_cored_big_nyc_pensio...

[anynonmous]

another Lazard alumnus I wonder if he and Ratner ever crossed paths - (due to Marla's requirements for decorum I will not comment further, but will share this excerpt from the May 1986 issue of the Washington Monthly)

Rattner was one of the Times's ablest writers. His rise in the organization had been rapid: at 22, clerk to James Reston, at 23, covering energy, one of the most important stories in the country, at 24, a full member of the Washington bureau, at 29, a foreign correspondent in a prestige bureau. But by the summer of 1982, Rattner felt he needed a change. Coming home on vacation, he had considered several options. He'd stopped in on G. William Miller, the former secretary of the treasury, whom Rattner had covered two years before. Miller now ran a merchant banking firm in Washington. He thought Rattner was a "brilliant guy' and was eager to take him on. There were other ideas: venture capital, for example, and management consulting, though Rattner worried that consulting was like being a business reporter for the Times "without 950,000 daily readers.'

Most attractive was investment banking. The field had lured a stream of former Carter officials: Altman and Peter Solomon from Treasury, Josh Gotbaum and Ralph L. Schlosstein from Stuart Eizenstat's domestic policy office, David Aaron from the National Security Council. Most of them were at Lehman Brothers, which, in contrast to the more hidebound, blue-blooded banks, frequently hired people on the basis of experience (and connections) in government. Peter G. Peterson, the man at the top, had been Richard Nixon's commerce secretary.