I blogged earlier today about the intriguing shift in this pension guaranty agency's investments into real estate and private equity under a director, Charles E.F. Millard, who had previously drummed up business for a real estate investment group, Broadway Partners.

I wondered aloud what real estate investments might currently be in PBGC's portfolio.  While the details will have to wait - PGBC hasn't been forthcoming - I did pick up this interesting tidbit on the changes Mr. Millard brought to the agency:

The PBGC also entered into strategic partnerships with three leading financial service firms, Blackrock, Goldman Sachs and J.P. Morgan, who will manage very signficant real estate and private equity allocations...

How significant?  $2.5 billion in significance - $900 million each to Blackrock and J.P. Morgan, $700 million to Goldman.  It's little wonder that Gary D. Cohn, President and Co-Chief Operating Officer, The Goldman Sachs Group, Inc. raved about the arrangement:.  "(w)e are delighted with this significant commitment to our alternative investment strategies."

Did Goldman and friends in turn channel some of those funds to Broadway Partners?  We'll have to wait to find out.

In the meantime, we might be wondering what the real deficit of this agency is.  Mr. Millard has pointed to steady deficit reduction as one signal accomplishment of his agency under Bush.  The reported deficit shrank to $11.2 billion in fiscal 2008, down from $14.1 billion in 2007 and a whopping $23 billion in 2005.

Most of this reduction, however, owes nothing to Millard or to his predecessor's fiscal prowess.  In fact, here's what Millard had to say in a candid interview about the deficit reduction:

Millard: It's very important to understand there are two principal factors as to why our liabilities are going down.  No. 1, as interest rates rise, the valuations of those liabilities go down. (my emphasis) No. 2, the Pension Protection Act changed the math.  They basically said we're going to count the liabilities of [airlines] Delta and Northwest differently from the way we're going to count everybody else's liabilities. If you count them differently, you take them out of your deficit.  It doesn't mean that the threat is no longer posed to us in the long term. (my emphasis) 

So in truth, one reason for the decline in the reserve deficit no longer applies - with interest rates still falling, not rising, liability valuations are increasing - and the second is basically voodoo economics courtesy of sweetheart legislation.

In fairness to Mr. Millard, the deficit was reduced by $3 billion in fiscal 2008 because 13 auto parts suppliers reorganized and didn't leave PBGS holding the bag.

But with tricky math to obscure the real extent of the deficit, shrinking interest rates adding to liability valuations, companies choosing to underfund their pension plans in a period when more of them are likely to go into bankruptcy, and Goldman Sachs and friends poised to "manage" the pension backstop into new and riskier ventures on which they directly profit, I wouldn't count on a lot of good news in the next set of figures.

Apparently under the Bush Administration,  upper echelon Wall Streeters had another venue besides the Treasury Department to call their own: the federal agency that backstops billions in pension payments for companies at risk for bankruptcy.

The Boston Globe, Josh and Zachary Roth today highlight yet another tale of fiduciary negligence and the woeful mismanagement of public funds - the reallocation of the reserves of the Public Benefit Guaranty Corporation(PBGC) into high-risk investments last year from bonds, a strategy a former advisor likened to a company that insures hurricane damage investing its premiums in beachfront property.

Charles E.F. Millard, formerly of Lehman Brothers, took over as director of PBGC in 2007, and quickly switched the agency's mix of investments to 55 percent of stocks and real estate from 15 to 25 percent just as markets went into a drastic freefall.  Interestingly, of this new allocation 5 percent could now be invested in private real estate and 5 percent in private equity firms.

What's so interesting about this particular shift?  Some quick sleuthing reveals that in 2004, after leaving Lehman, Mr. Millard went to work for a company called Broadway Real Estate Partners.  His new job?  According to the company's press release:

Mr. Millard will be responsible for the creation and direction of BP Securities, a brokerdealer which will syndicate both equity and debt in Broadway Partners real estate investments to private individuals, families and institutions.

Scott Lawlor, CEO of Broadway Partners, was quite pleased with Mr. Millard's hiring:

[Mr. Millard] is ideally suited to expand Broadway's ability to  offer real estate investment opportunities to our investors and to help us expand our investor base.

And Mr. Millard was equally enthusiastic about the arrangment, saying :

 "I hope to expand our pool of investors as Broadway increases its investments."

Is it just my overworked cynicism, or does it seem exceedingly convenient and self-serving for the Wall Street-beloved Bush adminstration to put a fox -  sorry, a Wall Street executive whose prior responsibility has been to expand the opportunities for real estate investment - in a henhouse - sorry, a federal agency managing the pension fund risks of shaky companies, and for that executive to immediately allocate a greater proportion of the agency's funds into real estate despite expert advice to the contrary?

Has PBGC actually purchased any "real estate investment opportunities" offered by Broadway Partners?  The agency hasn't revealed any details of its post-September 2008 trading, so we can't be sure.

Given Mr. Millard's prior enthusiasm for expanding Broadway's "pool of investors", however, it wouldn't be shocking.

And it's hard to know how else to explain undertaking such a risky move at a time when the agency was appearing increasingly likely to be on the hook for billions of dollars.

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