Public pension funds buy bottom of the barrel debt

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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.