It’s About the CDOs

Pension plan management is traditionally a very dull job.  A huge group of people in a big corporation or a union contribute a chunk of their* monthly paychecks into the collected pension fund where a normally 3rd party company manages the contributes and tries to make them grow more than the rate of current inflation to ensure a fund is viable for future retirees. Traditionally, the managing companies put this money into blue chip funds and treasury bills. It was not an exciting job but there are many Big Pools of Money.

But in the 2002, 2003 time frame, this changed. Surely by now you have all gone and listened to the Planet Money archives, you have listened to the Giant Pool of Money show from This American Life and you even read Michael Lewis’s the Big Short. Money manager for pension funds received bonuses for growing pension plans over the rate of inflation and Wall Street had brand, swanky new cannot-fail products to sell for big fees. First they sold mortgage backed securities and when all the mortgages there were disappeared the junk left behind was sliced and diced into Collateralized Debt Obligations (CDOs). Who bought all this crap? State pension fund managers. Obviously someone bought all this garbage — otherwise no one was making any money off sales.

In 2007, the market crashed and the pension fund managers were left with huge amounts of the pension plans being zeroed out. The states were contractually obligated to be on the hook to cover the pension funds mismanaged by their third party fund managers. The Obama Administration swooped in, passed a stimulus, and gave giant block grants to the states to help them meet their obligations. This bought the states a couple of years.

It’s pretty straight forward. State unions entrusted the management of their pension plans to the state to manage. The state outsourced it to a company that bought the Wall Street line of fast, easy money. The market crashed. The money taken from the State unions went *poof*. Now the states have, instead of firing the money managers and pressing the Federal Government to force regulations to protect their future obligations, decided to Union-bust. Which is ridiculous policy.

What galls me most about what is going on in Wisconsin are the lies. The argument is essentially this:

“We have a multi-decade agreement in place with our workers to assist in their retirement that they pay into. We lost it all gambling. But we love gambling on exotic bond instruments we don’t understand so very much we have decided gamble more and fire them all! Aren’t we great civil servants?”

Why not tell people the truth? The state lost the money on a shell game. The money managers were trying to make big bonuses and lost the whole fund investing in crappy developments in Florida. The state has contractual obligations and has to make up the shortfall because that’s how legally these things work. So that means either the unions have to take some kind of cut until the pension plan is repaid in full or the revenue will have to be raised. The holes were somewhat covered by the stimulus but with the Republicans in charge and no second round of stimulus, there’s going to be a change and it will have to come in the form of a raise in gas tax/sin tax/etc. Oh, also, we have new money managers. It’s their fault, they need to own up, and come up with a solution.

But no. “UNIONS ARE EVIL ALL MUST DIE DIE DIE.” In this day in age, our politicians don’t have the balls to tell the simple truth. Instead they grandstand. I would pay good money for a single politician who could be bothered to read a damn newspaper or understand the problem.

It might have helped if the Obama Administration could explain anything they do to people but that is, as they say, another story.


* Yes, theirs.

  • http://Errantgame.blogspot.com Greg Christopher

    Epic post. Very well written. Our media has definitely proven itself incapable of doing it’s job.

    • http://www.djinky.com zenith

      I’m a little disturbed that the media is doing a better job covering the uprisings in the Middle East then the labor uprisings right here. I’m also very bothered that no one is explaining why there are budget shortfalls. The reality is that the states played a casino game with the pensions of public school teachers and lost. Now they have a budget shortfall and the new game is to use the budget shortfall for political gain instead of pressing for regulation and oversight. Yes, the shortfall has to be made up because the state has to pay its obligations. I do not believe the answer is to take away all collective bargaining.

      I’m also not saying all unions are good. The California prison guard union is an example of a union that needs to die in fire. But I also believe that states have to deal with this fairly.

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