The Terrible Temptation of Money
Now we hear that the ultimate guarantor of pensions systems went all in at the idiotic peak of the market, leaving behind the conservative bonds it held. I have been arguing for decades now that, for certain funds, security absolutely trumps yield. Apparently the government thought that, too, until Bush appointee Charles Millard helped some friends on Wall Street. Any bets on an insider trading scandal brewing up?
How does one guarantee pensions with the volatile stock market? That is so oxymoronic it needs a new term, like NewFinance. I guess they were hoping to create their own reality. Then again, maybe Millard and friends are simple crooks. And simple crooks are usually stupid. Josh suggests the move was possibly intended to keep the market up. Can this have been legal?
Back to pensions and security. Why does it benefit a fund to have windfall profit at some particular time? Like a gambler, only if one takes the winnings somewhere else is there a long-term success. Otherwise it is a transient condition that does not help the beneficiaries of the fund. They see no extra dividends. Nor do future pensioners see any automatic increase in their expected retirement package; that is usually negotiated independently of the fund's condition, and related to current salary compensation. It is not supposed to benefit fund managers if there is a rise in total valuation. Only the brokers benefit.
But sensible people get sucked into feeling foolish to resist a hot market. They miss the important point, that reliable future performance is the goal, not large fund totals now. At least the government felt that way, until the Bush appointees went loony, stupid, or venal.
This is the greatest problem faced by all societies - how to regulate greed. It is very simple - people cannot and will not respect other peoples' boundaries whether singly or as a group. If greed isn't regulated it will destroy any society in the end.
March 30, 2009 12:58 PM | Reply | Permalink
Yep. I'm guessing that's why Greed made the list of the Seven Deadly Sins.
March 30, 2009 4:26 PM | Reply | Permalink
Has any society actually tried to regulate greed? How would you even go about regulating greed as a society?
March 30, 2009 8:24 PM | Reply | Permalink
We're constantly trying to regulate 'greed' by implementing regulations and oversight of functional operations that restrict or inhibit the 'gaming' of those functional systems and by patching loopholes that inevitably occur. But, no, in the strictest sense, probably no society has tried to regulate greed, perhaps as in the end, a legal system would need to define or quantify greed, a ethically relative term open to interpretation, in legal statute. Something I dare say could not easily be done to the majority's satisfaction, at least in an enduring manner. Such a legal definition would be more suited to a dictatorship than a democracy.
March 30, 2009 9:12 PM | Reply | Permalink
I wish we also regulated stupidity.
March 30, 2009 9:29 PM | Reply | Permalink
Out of curiosity as to what goes on under that stovepipe hat, what would you suggest?
March 31, 2009 12:54 AM | Reply | Permalink
I could be wrong, but I think this is what Lalo means.
March 31, 2009 8:59 AM | Reply | Permalink
:-)
March 31, 2009 1:37 PM | Reply | Permalink
I would say that anti trust laws, banking regulations, labour laws are there to regulate greed.
March 31, 2009 10:35 AM | Reply | Permalink
A fellow like me has to wonder if the socialists were right all those years back.
March 30, 2009 1:06 PM | Reply | Permalink
I don't know if they were right, but I can sure understand the bitterness.
March 30, 2009 1:21 PM | Reply | Permalink
As always, somewhere in the middle (socialism v. laissez-faire) makes the most sense.
March 31, 2009 11:13 AM | Reply | Permalink
It does not benefit the fund. Only the men and women who run the fund. What they do not get by way of bonus at the fund, they get with 'inside' deals they have on the side with the gamblers.
We really do not need new laws, there are enough on the books to put away these blood suckers for life and more.
We need ombudsmen and experts reading the books on a daily basis and quick and fast justice when the 'irregularities' are found.
repubs love to cite the criminals in unions, those that ran the union funds.
If not government run, government supervised and scrutinized at every step in the process.
March 30, 2009 2:10 PM | Reply | Permalink
What I'd like to see is the dates for these trades. And what else was going on? Was someone trying to prop up the stock market on particular days? During a presidential campaign? Were certain companies propped up by big purchases? Until we have more information it's hard to know what was behind the trades. But clearly it represented a way for the fed govt to prop up something for some reason.
What did they do?
When did they do it?
Excellent blog, Tom!
March 30, 2009 2:14 PM | Reply | Permalink
This is exactly where my thoughts went also. $64 billion is like a mini-TARP program.
March 30, 2009 2:50 PM | Reply | Permalink
Amen! I hope TPM can look into this. What a huge gamble - it must have been for something!
March 30, 2009 2:56 PM | Reply | Permalink
Before we go all "Wall Street slime ball" on this guy Millard, we probably should take a moment to consider how important this little agency is to the economy -- and not because it insures defined benefit plans.
But because it does and because Congress properly hopes it will never have to pay any money out of the Fund, the PBGC is responsible for setting the "rates" corporations must pay into the Fund. Those rates will vary to reflect how over or underfunded a particular company's plan is.
To the extent the Fund is inadequate it must increase the fees it charges. Increased fees imposed upon insured companies mean less economic activity by those companies and less employment.
Millard's attempt to increase the Fund's return on investment may have had more to do with GWB's "the economy is sound" hopes than rewarding his Wall Street buddies.
March 30, 2009 3:15 PM | Reply | Permalink
But when the imagined benefits of nominally principled policies, i.e. Iraq, are mostly not forthcoming, and the real benefits, i.e. Halliburton profits, are substantial, one suspects a compromised concept. Whether there was some principled intent, similar to those who feel principle supports private-account Social Security, the result is the system crashing because of everyone trying to do something at once.
This is true of many, if not most, conservative policies. They are good as long as only a few follow them. When everyone does it, as in buying an accelerated-depreciation Hummer, the result is failure of the original intent as well as downstream damage. When everyone tried to make a killing in real estate, when everyone tried to make it big on Wall Street, the result was the system collapsing.
Now if everyone tried to chip in a bit of tax money to fund healthy schools, the result would be healthy schools, or at worst an inflated budget. Given the obvious damage caused by constricted budgets I'd take that risk.
And if everyone simply calculated how much, sans interest, was needed to salt away for a pension, and that was part of the cost structure, with all companies playing by those rules, we'd be rather better off, I'd say.
March 30, 2009 4:27 PM | Reply | Permalink
That -- calculating how much -- is the principle problem involved in managing the PBGC -- as it is for ordinary pension fund managers, as well.
Society, the polity, its elected representatives must decide what long-term IRR on pension assets should be assumed. Else, there's no way to determine whether the plan's funding is adequate.
And that's not a simple calculation. In fact it's not a calculation at all; and in the case of the PBGC it's a political decision.
March 30, 2009 10:41 PM | Reply | Permalink
Over the past few decades, we've seen a push by corporate pension sponsors to allow more aggressive investment of pension assets and less conservative estimates of future returns on assets. This, of course, benefits companies by allowing them to reduce their contributions to pension trusts. Of course when the rosy scenario of large stock gains fails to materialize, the pension trusts are left grossly underfunded. This is the case today for many pension plans. And expect to hear a lot more about this funding problem as companies look at their pension funding for 2009. It's a bigger problem than many of us realize.
March 31, 2009 7:47 AM | Reply | Permalink
. . . allowing them to reduce their contributions to pension trusts.
IIRC some corporations have, after an assignation with Ms. Rosie Scenario ("Girl of the Streets") and Wall Street M&A enablers, even pulled money out of their pension funds claiming they were overfunded.
March 31, 2009 10:42 AM | Reply | Permalink
It's rich to me that you can accuse Obama and Geithner of the basest motives when trying to rescue a failing economy, yet are excusing the behavior of pension fund managers here.
These people operate from a presumption that labor is a cost to be minimized by any means necessary. They, also are privy to the best information avaiable on the state of the economy.
These managers were lining their own pockets and intentionally (or were recklessly negligent) sacrificing their employees' retirement to do so.
And, as Josh's point on the main site suggests, the timing on the PBGC move into an all-equity position is suspicious in the extreme. These people are criminals, pure and simple.
March 31, 2009 11:21 AM | Reply | Permalink
Actually, I don't disagree with your surmise -- some but not that much.
I started this subthread because I thought Josh's "point" was unsophisticated and failed to recognize the PBGC's political role. If nothing else my comment got Purple State to join the conversation and flesh out the issues.
March 31, 2009 11:46 AM | Reply | Permalink
It certainly was political to make the move the fund did. Wise is another question.
And yes, there will always be a political component to the decisions all government agencies make.
March 31, 2009 12:10 PM | Reply | Permalink
Your view of what constitutes a 'conservative' policy is a little simplistic. Liberals and conservatives both like to make money, many of the wall st. big shots are in fact democrats. The markets are not crashing because everyone invested in the market, they are crashing because everyone is un-investing in the market (pulling out their money) to cover losses from real estate speculation. Too many people with bad credit were given loans they couldn't or didn't want to repay. Loans banks were pressured to make by stupid gov't policy. As far as everyone 'chipping in' to help the schools, I pay a lot in property tax to support a school system that I get no use from. I also pay a lot in state and federal taxes to support those schools, half the state's budget is for education, something like 18000 per kid. Inflated? You bet.
March 30, 2009 6:19 PM | Reply | Permalink
Move elsewhere.
Also, thanks for explaining what few have succeeded in clarifying. If only we had continued to redline bad districts. Dang. Have you told Mr. Geithner?
That is of course possibly a small contribution, but absent the hugely multiplied and leveraged debt structures of CDOs and swaps, those losses would have remained exactly in their neighborhoods. But we have overcapacity in multiple sectors, poorly run businesses like GM (it's not the health care that made for such crappy designs in the 70s that many have not bought American since then), and top-heavy finance dominance. It is not healthy that that sector came to over-shadow actual production, or even observable services.
You will likely complain that you work, too, deciding in what to invest. I'll stipulate that, and accept that you should only have to pay the same tax rate I do, if you earn the same.
Foolish, though, to claim you do not benefit from living in an area with good schools. And if they are bad, get on the board and chip in, or move elsewhere.
March 30, 2009 7:08 PM | Reply | Permalink
And what of the publicly funded schools you attended as a child, (or did you attend private school from K-12)? Do you not feel some obligation to those who come behind you to offer them as much of an educational advantage as you yourself enjoyed? Your selfishness and self centeredness is magnificent in its' ugliness.
March 30, 2009 7:32 PM | Reply | Permalink
Uncleverbulldog, you write a lot of things that I disagree with, and mostly I just try to ignore them. But this is one of the most ignorant comments you have ever made. Not only does it show that you don't come even close to understanding what has happened in the financial markets, but it unmasks your selfishness, as well. How do you live with yourself?
March 30, 2009 7:46 PM | Reply | Permalink
And what exactly is wrong with how he described what happened in the financial markets? Apart from the unkind word he used to describe government policy?
March 30, 2009 8:36 PM | Reply | Permalink
What is wrong is that mortgages issued pursuant to the particular legislation he mentions are a very small component, and should have remained a local problem. That would have been both sound financial policy to limit risk, and would have exposed the practice as unsound. The crisis is not because of that, it is because of the overbuilt complexity of derivative instruments.
Now if by "stupid government policy" pressuring banks he means the invitation to participate in unregulated risk-taking, by eliminating the separation between investment and commercial banking, I'll agree. That took place entirely under Bush, even if it was instigated in the lame-duck days of Clinton's damaged tenure.
March 30, 2009 8:52 PM | Reply | Permalink
I don't know what you planet you were on when everybody was talking about explosion of consumer defaults on mortgage payments - for months. Or what you were reading when Obama created an entire financial plan to help troubled homeowners.
The "overbuilt complexity of derivative instruments", I'm assuming, is aimed at the CDS, which of course is a derivative valued based on credit risk.
Either you just confirmed what he was saying or you have no idea of what you're talking about.
Sorry.
March 30, 2009 9:06 PM | Reply | Permalink
The dog was talking about the issued loans, not Obama's plan to forestall foreclosures. If you only mention that to emphasize the foreclosure problem, why is that not also a result of the declining values combined with lost employment?
Sorry. You're changing the subject, and ignoring that bad mortgages have always happened, and used to only bring down a Savings and Loan here or there.
Welcome to Earth, where poorly understood risk has consequences. The explosion of real estate in the 2000s invited other abuses, like developers here in Chicago overwhelming the permit process, and the city getting sucked because of the expected new revenues. The result is multiple cases of condo rehabs that died a-bornin', abandoning their mortgages and leaving the few condo owners holding the bag for the absconded developer.
There was plenty of eyes-open fraud, but it is neither the sole, or even significant fault of the relaxed mortgage rules. It was much more the result of Phil Gramm's efforts to open up the finance biz to all sectors. Add further downgrading of regulation at SEC, add the general worship of financial money play.
March 30, 2009 9:19 PM | Reply | Permalink
In other words - there is a mysterious invisible threshold after which CDSs become toxic, and that had nothing to do with the housing bubble (which was an isolated problem)....
Tom... really?
March 30, 2009 9:25 PM | Reply | Permalink
The thread is mainly about inappropriate risk-taking by pension funds.
You're being intentionally obtuse. CDOs and CDSs were toxic because the issuers had no idea of the risk being represented. Of course it had lots to do with the bubble. But who is responsible for the runaway damage caused by the multiplication of the bubble into a new Universe of imagined wealth and fanciful security? It's kind of silly to say some ill-advised idiots bought houses they shouldn't have, and that brought down the whole system. So much for brains at the top, if they're that gullible. They should never have the power to invent that kind of unsound debt-based wealth.
Remembering regulating greed? It's called rules and standards, laws and sanctions. Another name for it is government.
March 30, 2009 9:48 PM | Reply | Permalink
"Of course it had lots to do with the bubble."
Thank you.
Since I was commenting on stillidealistic's objection to how dog described the issue, I'm fine with your admission he has a point.
March 30, 2009 10:11 PM | Reply | Permalink
Lalo, what has happened in the financial markets is very complicated. Here is a VERY good set of short videos that explain in pretty easy to understand terms what happened:
http://tpmcafe.talkingpointsmemo.com/talk/blogs/stillidealistic/2009/02/credit-crisis-for-dummies.php
Obviously, the collapse of housing prices has contributed, but that is far from the entire problem.
The major problem was that so many people were making so much money from the invented financial instruments, that they found ways to issue more and more questionable mortgages, so they would have more of the instruments to sell. Those people were aided and abetted by government officials from both parties (as you mentioned.) The terrible situation was made worse by the credit default swaps, which purported to provide insurance for bad mortgages, but with no money with which to pay the claims, once the foreclosures started the whole system began to collapse.
But then you may already know all this.
March 30, 2009 10:44 PM | Reply | Permalink
1. Relaxed lending standards (both fraud and CRA)
2. Low interest rates
When you can get a cheap and easy mortage, you go for the American Dream. That includes homeowners and real estate speculators. Without these conditions, house prices wouldn't have gone into stratosphere. You can't not admit that they did. Millions of people also refinanced because of house prices, essentially digging themselves into a hole.
So when the bubble burst, you had bad assets, reduction of consumer spending and over-reaction in lending, leading straight into the credit crisis. It was a chain reaction.
Credit default swaps ARE "the instruments" - swaps- , yet you seem to be blaming them twice.
What I'm arguing to you and Tom is very simple.
CDS by DEFINITION become a problem because of defaults. Risk of default is their reason for being and the meltdown is the product of the chain reaction from the two conditions above.
You and Tom are confusing the cause with the consequence.
March 31, 2009 8:09 AM | Reply | Permalink
I don't know that we are going to be able to come to an agreement on this. If I am understanding you correctly, you (and the dog)are saying that the blame for this mess lies at the feet of people who took out mortgages they never should have taken out.
I am merely contending that had the CDS(s) not been invented, the bad mortgages that were issued would not have been able to fly, because they would not have been disguised as AAA rated investments, and sold to the world. They would have been seen as the risky investments that they were, and not nearly as many entities would have purchased them. There would not have been the overheating of the housing market that occurred.
So I still contend that the original mortgages were not the problem. The problem was the repackaging, making risky mortgages appear to be safe. Had they been transparently risky, I do not believe we would be where we are today.
March 31, 2009 12:42 PM | Reply | Permalink
I agree with you in everything except for the key point - without a market that's hungry for them, the derivatives wouldn't become as big as they did. You wouldn't have been able to re-package and sell them if you didn't have the housing bubble - there wouldn't be the same amount of demand for them.
Put another way - I think the derivates simply plugged the whole in the circle that started from the bubble - and then the circle was complete.
March 31, 2009 1:29 PM | Reply | Permalink
We're probably closer to agreeing than was initially clear. Bottom line? Greedy people did stuff that screwed over the rest of us...
March 31, 2009 6:09 PM | Reply | Permalink