Thursday, November 9, 2017

The Mother of All US Pension Bailouts?

Zero Hedge posted a comment yesterday, It Begins: Pension Bailout Bill To Be Introduced This Week:
Over the past year we have provided extensive coverage of what will likely be the biggest, most politically charged, and most significant financial crisis facing the aging U.S. population: a multi-trillion pension storm, which was recently dubbed "one of the most heated battles of a lifetime" by John Mauldin. The reason, in a nutshell, why the US public pension problem has stumped so many professionals is simple: for lack of a better word, it is an unsustainable Ponzi scheme, in which satisfying accrued pension and retirement obligations requires not only a constant inflow of new money, but also fixed income returns, typically in the 6%+ range, which are virtually unfeasible in a world where global debt/GDP is in the 300%+ range.  Which is why we, and many others, have long speculated that it is only a matter of time before the matter receives political attention, and ultimately, a taxpayer bailout.

That moment may be imminent. According to Pensions and Investments magazine, Democratic Senator Sherrod Brown from Ohio plans to introduce legislation that would allow struggling multiemployer pension funds to borrow from the U.S. Treasury to remain solvent.

The bill, which is co-sponsored by another Democrat, Rep. Tim Ryan, also of Ohio, could be introduced as soon as this week or shortly after. It would create a new office within the Treasury Department called the Pension Rehabilitation Administration. The funds would come from the sale of Treasury-issued bonds to financial institutions. The pension funds could borrow for 30 years at low interest rates. The one, and painfully amusing, restriction for borrowers is "they could not make risky investments", which of course will be promptly circumvented in hopes of generating outsized returns and repaying the Treasury's "bailout" loan, ultimately leading to massive losses on what is effectively a taxpayer-funded pension bailout.
The bill would also fund a program at the Pension Benefit Guaranty Corp. to finance any remaining needs of pension plans borrowing from the new program.

"Any money needed for the PBGC would be a tiny fraction of what it would otherwise be on the hook for if Congress fails to act," said an analysis by Mr. Brown's office.
Sen. Brown's angle was naturally populist, and aimed squarely at those whose pensions are likely to recoup pennies on the dollar under the current investing climate: union workers. Brown told a group of retired Teamsters in Ohio on Monday that the bill will be out shortly.

"It's bad enough that Wall Street squandered workers' money — and it's worse than the government that's supposed to look out for these folks is trying to break the promise made to these workers. Not on our watch. We won't allow that to happen," he said.

No, instead what will happen "under his watch" is that funds collected from taxpaying Americans will be spent to satisfy the ridiculous retirement promises and obligations made over the past few decades, and while the immediate recipients of the funds, i.e. those looking at near-term retirement will be made whole, everyone else, i.e., taxpayers will lose.

And now that the machinery for pension bailouts is finally in motion, we look forward to the next, and possibly final, tear in the American social fabric, that between workers who can't wait to retire to the generous pension promises (see "Why Illinois Is In Trouble - 63,000 Public Employees With $100,000+ Salaries Cost Taxpayers $10 Billion" and "Mapping The $100,000+ California Public Employee Pensions At CalPERS Costing Taxpayers $3.0B"), and all those other unluckly taxpayers, who will have to fund these promises.
Zero Hedge being Zero Hedge has to put its own right-wing spin on things but I must admit, when I saw this, I almost fell off my chair.

Instead of moving toward the Canadian model of pension governance, this bill will ensure more mediocrity as there will be no incentive whatsoever to change what is fundamentally plaguing large US pensions.

Your discount rate is too high? No problem, keep it. Your plan is chronically underfunded? No problem, just borrow from the US Treasury in perpetuity. You have no risk-sharing in your plan? Who cares, Uncle Sam will backstop it all so you don't need risk-sharing or better governance.

Just keep doing what you're doing, namely, getting squeezed on fees by big hedge funds and private equity funds as your plans sink deeper into deficits, and the US Treasury will gladly backstop this long-standing charade.

No wonder some think fully-funded US public pensions aren't worth it. Of course not, when they run into trouble, they can just borrow money in perpetuity from the US Treasury, ignoring the real issues which have ensured a huge pension mess.

In essence, this is a backhanded way of inflating their way out of a massive public pension crisis. As long as rates stay ultra-low -- and there is no reason for me to think otherwise -- US public pensions can keep borrowing to make their pension payments and fund big hedge funds and private equity shops.

As far as the PBGC, it's woefully underfunded and headed for major trouble as private pensions keep crumbling, so it only made sense to add it on to this crazy bill.

The genius of this move is simple. No need to raise income taxes or property taxes, just let chronically underfunded public and private pensions "borrow" money from the US Treasury when things get sticky.

Of course, this will work until US creditors get fed up and start questioning the full faith and credit of the US government, but we're far from that point.

Below, former Greek Finance Minister Yanis Varoufakis, author of The Global Minotaur (his best book and the only one I highly recommend), explains why 'America doesn't have a debt problem'.

He's right, America doesn't have a debt problem but if it continues passing insane bailouts like this, it's only a matter of time before the chickens come home to roost and US pensions end up suffering the same fate as Greek pensions (Varoufakis being a master of half-truths won't admit to his huge blunders which led to even bigger pension haircuts than what Greek pensioners should have ended up with).

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