Illinois

When it comes to corruption, cronyism and general muppetry in Washington D.C., the only real question is 'where does one start?' Yet one has to start somewhere to conclude with a list of the ten most corrupt and despicable marionettes in D.C. Which is precisely what JudicialWatch has done in its annual compilation of the "Top 10 Most Corrupt Politicians in Washington D.C." for 2011. And confirming what everyone knows, that both the left and right are merely irrelevant names for the same general social affliction, or should we call it by its true name - wealth pillage - the split is even between democrats and republicans. In no particular order, the winners of 2011 are...

And so the Illinois pension bomb has been kicked down the street for another few months. The state just priced its delayed $3.7 billion bond courtesy of a plethora of International Wealth Funds. As the WSJ reported earlier "Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said." The use of proceeds, as reported previously, is to fund payments to state employee pension funds. In other words, Illinois pensioners are now on the hook to the periodic generosity of bondholders to make sure there is enough money in the pot to fund their retirement.

No, snow was not blamed in this latest, and certainly not last, broke state snafu. But wait until you read the official excuse...

And so Chicago politics continues in the good old fashion way. From the Illinois Supreme Court: "Given the record before us, it is simply not possible to find clearly erroneous the Board’s determination that the objectors failed to prove that the candidate had abandoned his Chicago residence. We therefore reverse the decision of the appellate court and affirm the decision of the circuit court, which confirmed the Board’s decision. So there will be no mistake, let us be entirely clear. This court’s decision is based on the following and only on the following: (1) what it means to be a resident for election purposes was clearly established long ago, and Illinois law has been consistent on the matter since at least the 19th Century; (2) the novel standard adopted by the appellate court majority is without any foundation in Illinois law; (3) the Board’s factual findings were not against the manifest weight of the evidence; and (4) the Board’s decision was not clearly erroneous."

The SEC is conducting an inquiry into Illinois' projected pension savings and looking into California's as well...

Future mayor Emanuel's first promise once the Illinois Supreme Court elects him? To live in Chicago. Full filing from the Supreme Court of Illinois attached. It is unclear if the invoice for services rendered comes with the filing or later.

We read last night's news that the massively underfunded Illinois pension fund is now the subject of an SEC inquiry with little surprise: "The Securities and Exchange Commission has launched an inquiry into public statements by Illinois officials about the state's underfunded pension fund, the state's governor's office confirmed Monday night. The Illinois inquiry is focused on public statements concerning an overhaul measure passed in 2010 meant to help shore up the retirement system, said the governor's spokeswoman, Kelly Kraft." The issue at hand is nothing short of complete accounting fraud: "An issue being examined is whether Illinois was taking future savings and treating them as current reductions in the cost of the pension fund, said Robert Kurtter, a managing director in the public finance division at Moody's Investors Service, who said his firm spoke with Illinois officials about the inquiry. One of the measures that Illinois took to save costs was to raise the retirement age for newly hired Illinois workers." To be sure if proven, which the porn freaks at the SEC will never be able to do, unless the pension fund has animate midget porn gifs on every excel spreadheet, this only means that absolutely nobody will go to jail for massively misrepresenting the truth. What we are far more interested in is whether the Illinois Teachers Retriement System, which as readers will recall took offense to us saying they are insolvent last summer, will be the next to follow in being charged with gross fiduciary breach and alleged accounting fraud. Now that development would most certainly not surprise us.

As China's president heads over to Barack's home town, we wonder if he is aware that according to the market, Chicago is in a state whose credit risk is about 100 basis points wider compared to a post-revolutionary Tunisia. Despite the country's recent presidential coup, and subsequent downgrade by Moodys to Baa2, the African nation's CDS, which spiked from 120 to 180 bps, is still just 100 basis points inside the CDS of Illinois. And this still assumes 80 cent recovery. We wonder how long before one or more Vallejo precedents reprice the entire CDS muni curve. Should the default recovery be dropped from 80 to, say, 20, it would get very interesting...

While Illinois' desire to finally tackle its unsustainable fiscal situation is admirable, the process is starting to disclose some very stinky rot below the surface. On the heels of the recent hike in the corporate tax rate, today Bloomberg reports that governor Pat Quinn is asking lawmakers to authorize an $8.75 billion bond sale. The use of proceeds? To pay $6 billion in backlogged bills: read invoices that the state has been unable to pay so far due to what technically should be classified as a liquidity crunch, and non-technically as complete lack of cash. Luckily, entities that are owed money by the state at least have a chance to get paid. Earlier, state House of Representatives defeated a borrowing bill that was designed to
eliminate the pile of invoices that is at least five months old. The state's payment delinquency also includes pension funds: local underfunded pensions are owed almost $4 billion in payments by the state. In the meantime, Chicago CDS dropped on the news of the tax hike, declining from 28 bps to 300 yesterday, the lowest since December 9. Whether this means that the state will be able to find sufficiently stupid investors whose capital will go to nothing besides funding overdue invoices, is a totally separate matter however. Perhaps a good indication of the ravenous appetite for muni debt (in addition to the fresh 52 week low in virtually every single muni bond fund), is that the New Jersey agency has shrank the size of a proposed $1.2 billion refinancing offering by roughly 40% and hiked yields on the sale as it struggled to market bonds to investors on Thursday. As the secondary muni market is plunging, the primary market for issuance is on the verge of shutting down completely. Cue in QE3.

New Jersey’s pension fund has gained 8.7 percent so far this fiscal year, but it won't make a dent in its funding status. And Illinois is getting ready to sell more pension obligation bonds...

From Dow Jones

• Illinois House Committee Passes Tax Bill To Cut Deficit
• Illinois Income Tax Would Jump To 5% From 3%
• Illinois Corporate Tax Would Jump To 7% From 4.8%
• Illinois Bill Now Goes To Full House

The TRS offers additional answers to the hard questions posed in the media, but are they good answers? I drill in a little deeper, and hope not to piss anybody off. I'm pretty sure I failed.

Any readers who read the back and forth between Tyler and TRS should ask themselves, "But why didn't the Fund answer these important questions?". Hey, they may not be in a death spiral, but when you make what looks like desperate moves and your returns are spiraling at the same time your liabilities are soaring, all the while your risk is flying through the roof... One should expect a blogger or two to take notice, particularly those bloggers who can count.

A month ago, we discussed the death spiral that the Illinois Teachers Retirement Fund has now entered by openly commencing to sell its securities. We stated: "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." This speculation immediately prompted a response by Dave Urbanek who replied to Leo Kolivakis (we have yet to hear from Mr. Urbanek directly), who said: "Please remove your post of Tyler Durden’s inaccurate analysis of the Illinois Teachers’ Retirement System. It is not excellent. It is wrong. TRS is not in a death spiral. We’ll still be operating and paying pensions for years to come." Yup - about 10 years to be precise, and then it's over. Today, Bloomberg's Jon Erlichman settles the debate, by focusing on the Illinois State Board of Investment in a special video report, where he confirms that absent state funding "the $9.6 billion fund, in less than 10 years, could have no money left. If they get no state funding and they just have to rely on employee contributions, there you go, you could go from $10 billion to zero in less than ten years." There you go indeed. Our condolences to Illinois pensioners - you now have about 10 years of natural asset coverage, absent your pension funds becoming the latest government-sponsored ponzi scheme.

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.