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As a way to say thanks to all of those hard working fire fighters, policemen, teachers and other public servants; organizations such as CalPERS, Texas Teacher’s Fund and the Missouri State Employee’s Retirement System bought millions and millions of dollars worth of collalteralized debt obligations (CDOs) made up of the worst of the worst mortgage debt. No better way to say thanks for your service than putting your retirement dollars in the "first loss" position of the worst in subprime mortgage debt.
A Bloomberg exclusive story highlights the investment of $140 million by CalPERS pension managers in to these CDOs which are tranches (sections of debt that have been divided out of mortgage backed securitizations) of bigger pools of mortgage backed securitizations. There is also an very clear explanation from John Mauldin’s excellent article (who we featured on an earlier post):
From Tanta’s article on Calculated Risk via Pershing Capital Management (commentary in red courtesy of Tanta).
Tanta at Calculated Risk does a great job of sounding the alarm here. If you are a public employee who is counting on the growth of your pension or retirement fund you need to contact your fund manager immediately and make sure you let them know how unhappy you are to know that your retirement dollars are invested in essentially junk (or better, toxic waste).
Your pension fund managers are buying "high yield" bonds that put you in first loss position on a bunch of junk bonds, and they are doing so on the risk-management "advice" of the people who are making a commission from selling those bonds.
Then you take the lowest possible tranche of the CDO–the "equity" portion or the very first part to take any losses, which is so high-risk it is referred to as "toxic waste," the stuff that is unrated by the rating agencies because it has no "credit support" whatsoever–and you put it in a pension plan managed by some goofball who thinks that it must be a good deal because a party who owns some of the higher rated tranches–the
ones you "support" with your equity piece–tells you that if the
planets align and the Messiah returns and everybody rolls a lucky
seven, you’ll make 20%!Teachers, firefighters, and police officers: you are not just the
sucker at the table here. You are the sucker at the table of the
suckers in the big casino of suckers. Your "managers" of your pension
money just took the "opportunity" to assume the risk that Wall Street does not want to keep because it doesn’t think a "20% return" is worth it.
I hope the media does not let this go. There are millions of dollars at stake that were spent on the most risky types of investments by managers that were dealing with public pension money.
Chriss Street, treasurer of Orange County, California, the
fifth-most-populous county in the U.S., says no public fund should
invest in equity tranches. He says fund managers are ignoring their
fiduciary responsibilities by placing even 1 percent of pension assets
into the riskiest portion of a CDO.“It’s grossly inappropriate
to take this level of risk,” he says. “Fund managers wanted the high
yield, so Wall Street sold it to them. The beauty of Wall Street is
they put lipstick on a pig.” . . .
When we say we are in the early stages of this mess, we are truly in the early stages. I imagine there will be hearings, class-action lawsuits, union involvement, you name it. If I was a fire fighter I’d be pissed.
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“No comment” from all the pension fund managers. Wonder why….
OTOH, Doesn’t CALPERS have tens of billions of dollars under investment, so that this is just a small slice? Even if they lose it all, it won’t really matter? But I think CALPERS has a hand in a lot of land holdings too, and that is where they bigger losses could come. They got too heavily into real estate.
Why would these pension funds buy products on the advice of a commissioned MBS salesman?
I hope the CalPERS manager at least got kickbacks/bribes to buy that crap. Maybe with a Lewinsky or two thrown in.
Selling this crap is wall street’s way of washing their hands of it and sticking it with the working class[retired even] ,by spreading it out through all these pension funds.These fund managers should be put in jail … if wall steet dont want 20% returns somthing has to be very wrong with them.
Great site. The wizards of Wall St. Made billion dollar bonuses creating this AAA junk that is now toxic waste. This stuff represents their billion dollar bonus pool for 2007. When I worked in the investment world, we called these guys “Bond Daddies” The sale goes like this:
BD: I have a great new CDO issue for you.
Pension Fund Guy(PFG): Really?
BD: “It’s a good one. How much you need?”
PFG: “I don’t know, you know my son is graduating from high school and I really wanted to get him a Rolex, he is such a good boy.”
BD: “Gold President? $50 million?”
PFG: “Sounds good.”
BD: “OK! I’ll send it to your house. My best to your boy!”(hanging up phone, dials trading desk shouting to assistant, “Get a Gold President over to PFG today!” Places $50 Million order with bond desk.
In my day, it was CMO’s and SLG’s Savings and Loan Guys.
CDO’s: Mr Tiffany: “Rolexes all around!”
Why would you be pissed if you were a firefighter? They get the same amount regardless.
You should be pissed if you’re a taxpayer!
Not only are you paying for excessively generous pensions promised by politicians 20 years ago to buy votes from public employee unions, you’re also paying to make up for the loss these funds will take in their “high yield” crapbonds.
And if the politicians have their way, you very well may be paying the moron who took out the loan that created the crap in the first place.
sam - that is a great point. As a tax payer I hate the thought that people’s irresponsibility is going to be financed out of my wallet. This is across the board, from borrower’s who used their homes as ATMs to fund managers who took the advice of salesmen to add to their portfolio with zero support equity tranche purchases of CDOs.
Some people come on here (mostly industry people) and say “the borrower’s have to take responsibility - stop saying it’s everyone’s fault except there’s” and I hope that I am clear that there is blame-a-plenty up and down this chain.
Thanks for reminding me why I should be upset across the board.
Tom - That is great. I can see that happening in all too many instances. I also love how fund managers take portfolio advice from the people selling the stuff. That is like you listening to me as a mortgage broker say “yeah - go ahead and buy 4 homes; we’ll just state your income to this - mark them all owner occupied, etc.” it happens; but it shouldn’t.
Thanks for sharing.
irate - great point. If Wall Street is turning down 20% you know there is something wrong with it. I don’t know a single Wall Street person who would turn their nose up at 20% unless it really stunk.
I don’t think those tranches have a shot in hell at 20% now.
WC - I think Tom’s comment above just showed us what those kickbacks look like
Hi Schahrzad - Yes they have billions under advisement but if they are buying on the advice of the salesmen how confident do you feel about the rest of that portfolio?