Taibbi - Swing and a huge miss - public pensions

[LegendKiller]

This has to be one of the biggest piles of crap I have seen from this guy. He doesn't even touch on the fact that these public pensions were offering WAY too much. Nor does he even get close to mentioning that many have given out extras to pensioners like Detroit did.

Finally, in his zeal to rip on "Wall Street" he forgets to mention that the only way the pensions can meet their requirements is to seek higher and higher returns. This is because this whole thing is a present value calculation. If you have X dollars and need Y dollars in N years you need Z return. X, Y and N are relatively simple calculations from an actuarial basis. However, Z is key. For a long time pension managers have over-stated their Z while keeping Y the same. This means that X is below what it needs to be.

Of course pensioners won't increase X (their contribution) so the city must increase X by either increasing taxes or going to the debt markets. This has, in turn, degraded credit quality. Further, the only way to make sure that X makes sense is that you need to raise X at a cheaper rate than Z. If you don't you are actually losing money on a present value basis.

Furthermore, rather than decreasing Y, unions require MORE. Thus, the only answer is to increase Z. However, there is only so much Z.

How do you get more? Of course you can either hire the people, like Harvard did, or you can put the money to hedge funds and private equity. Either way you pay a lot of money and get blasted by ignorant tools with agendas, like Taibbi.


http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926

 

[Kwatt]

...For a long time pension managers have over-stated their Z while keeping Y the same...

Who was mis-managing the funds?


.

 

[LegendKiller]

Who was mis-managing the funds?


.

Mismanaged the funds? What didn't you get about above?



Lets say that I have $100 today and promise you $200 tomorrow, I need to have a 100% return in the next 24 hours to meet the obligation. However, I can only deliver $120 tomorrow. What do I do?

If you are a city politician you don't say "hey, wait, I can only deliver $120 tomorrow, you'll have to make do with that". If you are the union you say "Hey, wait, you promised me $200 but instead, I'll accept $400 in 2 days rather than $200 tomorrow and, in turn, I'll vote for you".

If you are the politician it sounds great. You kick the can down the road and you get voted in. The unions are still your friend and you let somebody else worry about the problem.

The taxpayer gets fucked because now he has to rely on a 100% compounded return for 2 straight days.

However, the best he can ever do is 20%, or by the time the 2nd day ends, only $144. Now the politician doesn't want to admit that he overpromised and underdelivered so he says "ok, to cover the $256 shortfall, I will raise taxes by $128 and raised $128 in debt". The taxpayer says "fuck you" and the the union says "no fuck you, we will strike, give us the money or have your house burn down or your drug dealers overrun your streets".

Who mismanaged the funds? There were no mismanagement of funds, there was over-promising of 100% returns when you could only achieve 20%.

Now the politician knows he is screwed. He has to find $256 somewhere, so what does he do? He gets desperate and goes to a hedge fund. Its the only way he can reasonably bridge the gap, or get close.


What he should have done originally is to tell the union to pound sand.

 

[Kwatt]

OK overpromise instead of mismanagement.

Someone needs to talk to the politician. Maybe the tax payers who voted for him and who are now on the hook for the pensions?

If I hire someone to repair my car and he gives me a price and I pay up front. But he doesn't do the repairs. Is that my fault?

Why is the blame on the people who were lied to? And the ones telling the lies gets a pass? When something like this happens and charges are not filed I have a problem understanding.

If he overpromised once in a while that is a mistake. If he overpromises year after year that is at best incompetent and may be criminal.

If we (and I am including me) keep putting these people in office and allowing them to stay and get off scott free. We (and I am including me) are going to keep having this come up.

Union or non-union does not matter the union members, a non-union worker and the politician are all going to make the best deal they can for themselves. The taxpayer should also.

No one I have ever heard of going for a job ask for as little as they can. In order for the customer whether a client, buyer, or purchaser gets the best price.


.

 

[IronWing]

So the voters wanted it all. They wanted to attract a quality workforce so they promised a good pension. They didn't want to pay for it as they went because that would have meant higher taxes. So now the check comes due and they don't want to pay for it now. The bottom line is that the workers earned the pension and now the politicians, hired by the voters, are looking for a way to skip out on the check after enjoying the meal. Yes it is an inter-generational screw job with current taxpayers being asked to cover the sins of the past voters but so is a lot of public debt.

 

[Drako]

Taibbi -Swing and a huge miss - situation normal

 

[Svnla]

I read it somewhere that the unfunded liabilities of federal, state, municipal entities are staggering. Somewhere in the TRILLIONS, even more than the US Federal Debt. House of cards indeed.

Edit: WSJ said it was over 80 Trillions in 2012, I am sure it is higher now and climbing.

http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html

 

[stlc8tr]

How do you get more? Of course you can either hire the people, like Harvard did, or you can put the money to hedge funds and private equity. Either way you pay a lot of money and get blasted by ignorant tools with agendas, like Taibbi.


http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926

Do you have any proof or research that shows that the hedge funds being paid millions do better than a plain index fund? Especially after the 2/20 haircut?

 

[MooseNSquirrel]

This has to be one of the biggest piles of crap I have seen from this guy. He doesn't even touch on the fact that these public pensions were offering WAY too much. Nor does he even get close to mentioning that many have given out extras to pensioners like Detroit did.

Finally, in his zeal to rip on "Wall Street" he forgets to mention that the only way the pensions can meet their requirements is to seek higher and higher returns. This is because this whole thing is a present value calculation. If you have X dollars and need Y dollars in N years you need Z return. X, Y and N are relatively simple calculations from an actuarial basis. However, Z is key. For a long time pension managers have over-stated their Z while keeping Y the same. This means that X is below what it needs to be.

Of course pensioners won't increase X (their contribution) so the city must increase X by either increasing taxes or going to the debt markets. This has, in turn, degraded credit quality. Further, the only way to make sure that X makes sense is that you need to raise X at a cheaper rate than Z. If you don't you are actually losing money on a present value basis.

Furthermore, rather than decreasing Y, unions require MORE. Thus, the only answer is to increase Z. However, there is only so much Z.

How do you get more? Of course you can either hire the people, like Harvard did, or you can put the money to hedge funds and private equity. Either way you pay a lot of money and get blasted by ignorant tools with agendas, like Taibbi.


http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926

Interesting article.

None of which you refuted and instead used an ad hominem and tried to argue a point having little to do with the main theme of the article.

Nice job!

 

[cubby1223]

Interesting article.

None of which you refuted and instead used an ad hominem and tried to argue a point having little to do with the main theme of the article.

Nice job!

Actually I found his replies very much on topic against the rantings made in the article.

 

[Zaap]

Edit: WSJ said it was over 80 Trillions in 2012, I am sure it is higher now and climbing.

It is higher, it's at least 90 trillion dollars. It's a subject NO politician will touch, because basically it's effectively more money than the entire world has. Even service on it will eventually rise to swallow up the entire GDP. It exposes the criminal negligence of the federal leviathan. It's the end result of too many stupid people allowing total criminals with ZERO financial sense to write endless I.O.U's on the nation's tab. It's the cans kicked down the road that have now morphed into a 5000 megaton nuclear bomb... and the road will eventually run out.

 

[Double Trouble]

Taibbi isn't the brightest bulb in the bunch, and this article reflects it.

 

[Mursilis]

Mismanaged the funds? What didn't you get about above?



Lets say that I have $100 today and promise you $200 tomorrow, I need to have a 100% return in the next 24 hours to meet the obligation. However, I can only deliver $120 tomorrow. What do I do?

If you are a city politician you don't say "hey, wait, I can only deliver $120 tomorrow, you'll have to make do with that". If you are the union you say "Hey, wait, you promised me $200 but instead, I'll accept $400 in 2 days rather than $200 tomorrow and, in turn, I'll vote for you".

If you are the politician it sounds great. You kick the can down the road and you get voted in. The unions are still your friend and you let somebody else worry about the problem.

The taxpayer gets fucked because now he has to rely on a 100% compounded return for 2 straight days.

However, the best he can ever do is 20%, or by the time the 2nd day ends, only $144. Now the politician doesn't want to admit that he overpromised and underdelivered so he says "ok, to cover the $256 shortfall, I will raise taxes by $128 and raised $128 in debt". The taxpayer says "fuck you" and the the union says "no fuck you, we will strike, give us the money or have your house burn down or your drug dealers overrun your streets".

Who mismanaged the funds? There were no mismanagement of funds, there was over-promising of 100% returns when you could only achieve 20%.

Now the politician knows he is screwed. He has to find $256 somewhere, so what does he do? He gets desperate and goes to a hedge fund. Its the only way he can reasonably bridge the gap, or get close.


What he should have done originally is to tell the union to pound sand.

And if the politician had actually done that, the union would've thrown their weight behind his opponent, who was busy telling the lies the public wanted to hear. We the People can't handle the truth.

 

[CPA]

Do you have any proof or research that shows that the hedge funds being paid millions do better than a plain index fund? Especially after the 2/20 haircut?

Why does that matter? Hedge funds didn't force the unions to park their money there. Unions knew the game, but also knew in order to deliver what was promised, they needed high rates of return. What's going to give you the better possibility of that - hedge funds or index funds?

 

[Kwatt]

Why does that matter? Hedge funds didn't force the unions to park their money there. Unions knew the game, but also knew in order to deliver what was promised, they needed high rates of return. What's going to give you the better possibility of that - hedge funds or index funds?

Does the union decide where the money is parked or did the state/municipal gov?

That will make a difference. If the gov. did not "borrow" or knowingly underfund the plan. The members should take the hit if they were in control. If the state was in control. The taxpayer/voter is on the hook.


.

 

[Exterous]

They didn't want to pay for it as they went because that would have meant higher taxes.

This is highly situation dependent. Detroit has attempted to make up for a massively falling population (and there for tax base) with ever increasing tax rates - which help drive people to the suburbs

Why does that matter? Hedge funds didn't force the unions to park their money there. Unions knew the game, but also knew in order to deliver what was promised, they needed high rates of return. What's going to give you the better possibility of that - hedge funds or index funds?

I certainly can't speak for all the public unions but many public pension unions didn't have a choice where to part the money. The politicians chose the pension managers not the unions and these politicians were more than happy to take trips and receive gifts to invest in their schemes while hiding that fact from the unions and lying in their financial releases

http://www.wileyrein.com/publications.cfm?sp=articles&newsletter=8&id=8860

This has to be one of the biggest piles of crap I have seen from this guy. He doesn't even touch on the fact that these public pensions were offering WAY too much. Nor does he even get close to mentioning that many have given out extras to pensioners like Detroit did.

This depends on your position within the city. Many did not pay into social security so their $20k-30k a year pension is all they get

http://money.cnn.com/2013/07/23/retirement/detroit-pensions/index.html

Health care is a big addition but I am not familiar with nor can I find the details on the coverage

All this said - I do not think wall street as a whole is 'looting' the pensions. Sure there are those that prey on them but they need accomplices for that to work. The biggest issue is mis-management, sometimes through ignorance but often through criminal negligence\opportunism. While there are some highly publicized high payout pension systems (LA, NY and Chicago) this is doesn't mean that this is the largest cause of the issue for all public pensions. It absolutely is a part of the problem but we would not be in nearly as bad of shape if more attention was paid to the management and auditing of the pensions.

To that end this article misses the main point by focusing too much on Wall Street

Of course pensioners won't increase X (their contribution) so the city must increase X by either increasing taxes or going to the debt markets.

I can't find any articles on it one way or the other but I was under the impression that the city of Detroit has followed the State of Michigan in upping the requirement contributions for the pensioners. I know Orr wants to go further but I believe the pension contributions did increase

 

[KB]

This is why the 401K was such a good idea and I am glad I have one. The worker is ultimately responsible for where the money in placed. They can do nothing and get the default placement or they can move it into index funds, bond funds, whatever. With a pension, the pension adminstrators/politicians have all the say. They can invest in hotels, real estate or hedge funds or accordig to the article into "coins and "other collectibles" – including Beanie Babies."


Taibbi's article isn't completely off. The hedge funds make big promises on what they can deliver, but then charge large fees and barely if at all beat the stock market. They often invest in very risky assets that don't always pay off. They do share some of the blame. As Taibbi put it, the "supposedly massive gap could all be chalked up to the financial crisis, which, of course, had been caused almost entirely by the greed and wide-scale fraud of the financial-services industry – particularly with regard to state pension funds."


Taibbi places blame on others besides wall street. "Politicians quickly learned to take liberties. One common tactic involved illegally borrowing cash from public retirement funds to finance other budget needs. .... Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff. It's the governmental equivalent of stealing from your kids' college fund to buy lap dances."


But blame needs to be shared further. Even though pensioners have gotten the worst of this and done very little to cause it, they still must share in a small part of the blame for believing such large promises from politicians.

 

[networkman]

Maybe a little over-simplified, but that's the best damn description of the issue I've ever read! +1!

Mismanaged the funds? What didn't you get about above?

Lets say that I have $100 today and promise you $200 tomorrow, I need to have a 100% return in the next 24 hours to meet the obligation. However, I can only deliver $120 tomorrow. What do I do?

If you are a city politician you don't say "hey, wait, I can only deliver $120 tomorrow, you'll have to make do with that". If you are the union you say "Hey, wait, you promised me $200 but instead, I'll accept $400 in 2 days rather than $200 tomorrow and, in turn, I'll vote for you".

If you are the politician it sounds great. You kick the can down the road and you get voted in. The unions are still your friend and you let somebody else worry about the problem.

The taxpayer gets fucked because now he has to rely on a 100% compounded return for 2 straight days.

However, the best he can ever do is 20%, or by the time the 2nd day ends, only $144. Now the politician doesn't want to admit that he overpromised and underdelivered so he says "ok, to cover the $256 shortfall, I will raise taxes by $128 and raised $128 in debt". The taxpayer says "fuck you" and the the union says "no fuck you, we will strike, give us the money or have your house burn down or your drug dealers overrun your streets".

Who mismanaged the funds? There were no mismanagement of funds, there was over-promising of 100% returns when you could only achieve 20%.

Now the politician knows he is screwed. He has to find $256 somewhere, so what does he do? He gets desperate and goes to a hedge fund. Its the only way he can reasonably bridge the gap, or get close.


What he should have done originally is to tell the union to pound sand.

 

[halik]

Unlike Maxine Waters, I don't get my economic perspectives from the Rolling Stone.

 

[MooseNSquirrel]

Actually I found his replies very much on topic against the rantings made in the article.

Sure, if you think the feeding schedule of cows is somehow related to what type of condiments you should put on a hamburger.

 

[First]

Taibbi has never had any credibility. This guy is best known for once calling Goldman Sachs a vampire squid. This is his entire claim to fame. Funny to think about it, but not much more than that.

 

[Doppel]

I am sure LK's notion about over promising is correct. Is that view not sacrosanct when discussing pensions? My father has a guy who makes a shit ton (pun intended--wait for it) cleaning out septic tanks. Guy retired at 49 years old with a pension paying a nice chunk and now has his own business. Double-dipping is rampant across the land. A co-worker's ~60 year old wife is about to retire with a pension nearly equivalent to full pay. She worked for ~35ish years and now could get another 25 at nearly full pay.

I have no pension. Most people don't, especially the younger generations. I suppose at the end of the day I have just very little sympathy for baby boomers who clearly grabbed as much as they fucking could out of the pie, putting it on my back. My generation didn't sign up for this shit, neither did our kids. But you expect our taxes to pay for something we can't afford for ourselves? Not a single tear.

It was fun while it lasted, but then reality caught up and said oh yeah those pensions we promised, they were kind of um fucking insane and sorry we just don't have the money for it, never really did, never will.

So your pension is paying less. Plenty of people don't have one and never did. And so you complain it was part of your compensation. Well, go back to whomever promised you that (hint: it wasn't me) and get that money out of them.

 

[Exterous]

There were no mismanagement of funds

:hmm: Seriously? This isn't even all of it:

pension fund trustees loaned more than $200 million to businessmen accused of paying bribes and kickbacks between January 2006 and April 2009, according to federal prosecutors. The businessmen included a Georgia man charged with embezzling more than $3 million with the help of a former Detroit Lions wide receiver and spending some of the cash on an $8.5 million mansion in Atlanta.

To secure the investment, prosecutors allege Dixon paid bribes and kickbacks to Kilpatrick, Beasley, three other pension trustees and others. Dixon and an unnamed business partner also allegedly contributed $45,000 to Kilpatrick’s nonprofit, the Kilpatrick Civic Fund.

the pension funds lost at least $84.18 million on investments tied to the alleged fraud scheme involving Beasley and other pension officials

Among them was a former trustee who — the government says — accepted perks galore from businessmen seeking favors, including a $5,000 casino chip, a Christmas basket stuffed with cash and trips for him and his mistress.

Zajac organized the party and solicited and collected the cash from people having business before the boards of the pension funds

Next came Chauncey Mayfield, a former investment adviser to the two City of Detroit pension funds who pleaded guilty last month to conspiring with Beasley to pay him bribes in exchange for new business from the funds. The bribes came in the forms of trips and private jet flights to Las Vegas, Florida and Bermuda.

Earlier this month, Detroit-based investment adviser Chauncey Mayfield agreed to give back $3.1 million that U.S. regulators allege he stole from a pension fund for the city's police and firefighters.

Federal prosecutors allege city pension officials started approving a series of shady transactions with businessmen

The audit concluded that the funds lost more than $125 million on real-estate deals. (snip)
Both pension funds invested more money than the 10 percent limit allowed by state law(snip)
The investigation, the audit says, “uncovered several inconsistencies” in the General Retirement System, such as questionable interest rates applied to annuities, the probability of bonuses being including in annuity account holders’ balances and overtime pay included in their average final compensation calculation.

An executive overseeing $200 million in real estate investments pleaded guilty earlier this year to conspiring to bribe a city treasurer to get business.

The spending cheated Detroit retirees out of more than $84 million, led to criminal charges against six people

(3 were fund managers)

http://www.reuters.com/article/2013/06/20/us-usa-detroit-pensions-idUSBRE95J11820130620

http://www.deadlinedetroit.com/articles/6588/how_kwame_kilpatrick_s_wall_street_deal_helped_bankrupt_detroit_and_fuel_corruption#.UksHxYbkvSg
http://www.detroitnews.com/article/20130930/METRO01/309300024
http://www.detroitnews.com/article/20130926/METRO01/309260130
http://www.huffingtonpost.com/2013/06/20/detroit-pension-fund-investigation-kevyn-orr_n_3474087.html

 

[stlc8tr]

Why does that matter? Hedge funds didn't force the unions to park their money there. Unions knew the game, but also knew in order to deliver what was promised, they needed high rates of return. What's going to give you the better possibility of that - hedge funds or index funds?

What are you talking about? The article is criticizing public officials like Raimondo for moving funds to hedge funds and other alternative investments on the false premise that hedge funds will outperform, costing the pension billions in unnecessary fees.

"In public finance, hedge funds will sometimes give slight discounts, but the numbers are still enormous. In Rhode Island, over the course of 20 years, Siedle projects that the state will pay $2.1 billion in fees to hedge funds, private-equity funds and venture-capital funds. Why is that number interesting? Because it very nearly matches the savings the state will be taking from workers by freezing their Cost of Living Adjustments – $2.3 billion over 20 years."

 

[Don Vito Corleone]

I pretty much always find Matt Taibbi unreadable. He is a reasonably bright guy but he's so in love with himself that his "style" invariably gets in the way of his content.