Thursday, May 21, 2009

Former Head of Pension Benefit Guaranty Corp. Pleads the Fifth (Oh, there's a $33 Billion shortfall too)

There are so many Pulitzer's to be won by journalists smart enough to investigate the corruption of Big Govenment/Big Business that there could be a run on silver*. [see below -ed]
From the Columbia Journalism Review:

Wow. The former head of the Pension Benefit Guaranty Corporation, Charles E.F. Millard, has pleaded the Fifth Amendment to a congressional panel inquiring into his alleged misdoings at the agency.

That, along with news that the fund’s deficit tripled in the last six months, is enough to get The Wall Street Journal to finally cover this big story. Better late than never, guys!

The Journal headlines the shortfall news rather than the scandal news, which I guess is understandable since it’s a $33 billion hole. It puts Millard pleading the Fifth in the second paragraph. The New York Times buries that big news in the sixth paragraph, which is better than the Washington Post, which stuffs it in the ninth. It should have been much higher.

I think The Boston Globe, whose Michael Kranish has been on this story more than anyone, gets it right. It leads with Millard taking the Fifth and puts the deficit news in the second paragraph. It’s close, but it seems to me that’s the way to handle it. Hard to write a double lede without implying that Millard’s shadiness somehow caused the $33 billion shortfall, which doesn’t seem to be the case.

And the Globe is the only paper to report this critical testimony:
The agency’s inspector general, Rebecca Anne Batts, testified at the hearing that Millard had engaged in “serious misconduct” by involving himself in the awarding of contracts to Wall Street firms that would implement the new strategy.
Millard, remember, is the guy who pushed through a shift in strategy at the PBGC—the main government insurer of pensions—to move money out of safe investments like Treasury bonds and into risky investments like stocks and real estate. This was intended to try to up the risk in the portfolio to give it a chance of closing its long-term deficit, which I’ve said was akin to gambling to make the rent...MORE
Our post at the time of the strategy change:

Tuesday, February 19, 2008
Yikes! In Policy Shift, PBGC Turns to Stock Market

Hey, what could possibly go wrong?
Ya know how retail investment types always point to Ibbotson and say something to the effect "There's never been a ten year period...blah, blah blah"? Ask 'em about the Cowles extension and the longest period the index value showed a net decline (I seem to remember 42 years, I'll dig out the book). When they come back at you that you aren't including reinvested dividends, throw a right, left, right combination:

1) What was the average dividend yield in Cowles 1871-1937?
2) What was the payout ratio?
3) What was the equity risk premium?

I usually get the cow eyes.
Even simpler is to ask the question Zvi Bodie did, back in the '90's:
(he seems to have overcome his MIT doctorate)

"If the risk of negative returns decreases over time, why does the cost of long term puts increase?"
(now I know the arguments against Bodie's implication, here's a decent one, here's a counter to the counter, we've got links, baby.)

What I'm wondering is if an entity like the PBGC, with its implicit call on the U.S. Treasury, should be increasing its exposure to equities. Especially when you consider that most busted pensions got that way through a combination of underfunding and lousy investments....
Calculated Risk focused on the deficit:

Pension Benefit Guaranty Corporation Deficit Increases
...Last year the PBGC voted to allow equity investments, but luckily the entire portfolio wasn't moved into equities - and they only lost $3 billion on their $56 billion asset portfolio.

Unfortunately there is much more to come:
The PBGC is closely monitoring companies in the auto manufacturing and auto supply industries. According to PBGC estimates, auto sector pensions are underfunded by about $77 billion, of which $42 billion would be guaranteed in the event of plan termination. The pension insurer also faces increased exposure from weak companies across all sectors of the economy, including retail, financial services and health care....MORE
19. How is "Pulitzer" pronounced?

The correct pronunciation is "PULL it sir."

The Medal


...The medal, about two and three-quarter inches in diameter and a quarter-inch thick, is not solid gold. It is silver with 24-carat gold plate and presented to the winning newspaper in an elegant cherry-wood box with brass hardware.