June 04, 2007

Baby Boomers in Trouble? Pension funds among the bagholders of subprime toxic waste

Got popcorn?

Blown Mortgage and Calculated Risk also did nice commentary on this disaster-in-waiting. Here's the Bloomberg piece on what we've known all along - it's not the homedebtors that are holding the bag - it's the hedge funds, pension funds and foreigners.

And you.

Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund

June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.

At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.

``It has a very high cash yield to it,'' Fleischhacker says at the March convention. ``I think a lot of people are confused about what this product is and how it works.''

Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.

They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.

Fleischhacker, 45, says she doesn't associate toxic waste with the equity tranches she's selling. Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.

Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called ``first loss'' portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody's Investors Service or Standard & Poor's.

The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.

``I have trouble understanding public pension funds' delving into equity tranches, unless they know something the market doesn't know,'' says Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions.

``That's obviously a very risky play,'' he says. ``If there's a meltdown, which I expect, it will hit those tranches first.''

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.''

32 comments:

Mort said...

Public pension fund managers are crooked as a dog's hind leg. They will buy anything, tech stocks, subprime lenders, CDOs, junk bonds. They will pay any amount and they don't care because it isn't their money and the Wall Street crowd buys them free drinks and hookers.

nobigdeal said...

$140 mil from California's Teacher Pension fund is literally a drop in the bucket... the fund is worth multi-billions of dollars.... might represent a 1 or 2 percent play for them. Although the point that someone is going to be left holding the bag is a valid one!

Anonymous said...

The irony is that many homedebtor's have and will continue to pull cash out of their retirement plans to tread water as their toxic mortgage payments skyrockets. So pension plans will ahve less cash to invest, they will need to get more bang for fewer bucks and push the envelope to these risky CDOs yet as more HD/FBs default, the pension funds will loss their shirts and jepardize people's pensions even more. I see a downward spiral dynamic here if financial decisonmakers are not careful, and many economists have noted that risk is not being properly factored into investements due to massive liquidity brought on by low interest rates on a global scale, i.e. they are not being careful!!

Anonymous said...

Sunday afternoon my wife and I went to an open house on the way home from spending a day out on the river canoeing. Home was listed for $389K and on the flyer outside said "Reduced, sellerv very motivated.

So we walk in and are (of course) the only ones there. Two realtors are there staging the open house, one the veteran, one the rookie. The rookie is all Mr. GQ, coiffed hair, suited up, even a tie clip.

Right off the bat the lies start. GQ guy: Hi I'm Joe Smith
Me: I'm Anon, this is my wife Mrs. Aon
GQ: Mrs. Anon That's my sister's name.
Me: Look at my wife and roll my eyes. His sister's name is the same as my wife's name like my name is George W. Bush. Lie 1 told and we're only 30 seconds into the open house.

So we walk around the place and it looks very nice. They had lovely cookies available which was nice seeing how we were both hungry. They both ask me what our situation is, when we're looking to buy etc. I tell him we're renting, we're in a month to month and have all the time in the world to look at as many homes as we need. Of course then comes the "well you know now is the best time to buy and you don't want to wait too long"....I let it go since I didn't feel like getting into a 30 minute debate with these jokers.

The lies continue on now. I ask the rookie, what's the lot size, he says between 1/2 and 3/4 acre. I'm thinking, that doesn't sound right, even 1/2 an acre would surprise me. Sure enough the veteran yells from downstairs it's .45 acres. The rookie is quickly learning I see, speak no truth, see no truth.

The property was not fenced so I metion that to my wife as we have a dog and a fenced yard is a must have for any home. Rookie jumps in and says oh yea but you could easily fence it. I replied, well what about the HOA wouldn't they have to approve a fence and seeing how no other home in the immediate area has a fence, they might have an issue with it. His reply: well yeah I suppose but I'm sure it would be no problem. Yeah I'm sure it would be no problem either asshole, after all I'm sure you've been to many HOA meetings, you've studied up the rules and bylaws and as a real estate professional I'm sure you are not full of shit.

Finally after 5 minutes or so I get back to the veteran and say "so I see the price has been reduced, what was it originally?". $419,000. Hmmm OK so a reduction of 6%, that's a good start. I ask "so how motivated are they"? Rookie: very motivated. I say motivated enough to sell for $300K?

The rookie was about to open his yap, but the veteran stepped in with "oh come on, now, this house is already priced well below market". I reply "well then why isn't it selling and obviously the sellers aren't really that motivated". They both went on about how great the neighborhood is (it is very nice but not nicer than 40 other neighborhoods in town), how great the schools are (so-so actually with a rapidly growing Hispanic population), blah blah.

We got out, drove a little further and counted 4 other for sale signs on the street.

This is indeed going to be fun watching.

Anonymous said...

dow setting records every day

s&p setting records every day

yet 401k money is in trouble.

when you wingnuts get back to earth, say hello

SPECTRE of Deflation said...

To say that this liquidity/debt bubble will end badly is the understatement of the year and more likely the decade. The madness of the crowd in full display.

Liquidity used to mean cash or damn near it's equivalent such as stocks which are highly liguid though not cash. Now liquidity means debt folks. I'm afraid people are about to learn a terrible lesson in semantics.

SPECTRE of Deflation said...

From Market Ticker:

The coming wave of foreclosures

There was a ton of mortgage-related news in the last week, with the most interesting being a note about the risk of foreclosure for ARMs - one in three if you have an ARM from 2004 to 2006 with a teaser rate of less than 4%! That's a little ditty that was widely ignored....

Got popcorn?

Anonymous said...

Keith & All,

http://tinyurl.com/2u9xg9

I don't live there, so on the one hand I don't care, and on the other hand, I'm currently renting, yet I will buy a home again in the future, so I *do* care. Sons-a-bitches: home value goes down but taxes remain the same (or go higher). How come it's always the little guy - Joe Sixpack - who has to make do with less, but not government (local in this case)?

As has been said a number of time on this blog: property taxes = no true ownership.

Anonymous said...

People spending a majority of their income on housing payments will send the rest of the economy into recession, thereby pulling housing into recession. Either way, it's impossible for housing prices to keep rising faster than wages/salaries.

Anonymous said...

with as much money in play as some of these pension funds have, one would have to ask, if there is any crooked activity going on with that money? i mean afterall, we all have seen what has happened with the teamster's union pension funds....

the trouble is on these cdo's , the rating agencies give them a clean bill of health, then they pension funds buy them without knowing exactly what is in them. i think there are going to be serious repercussions from this very soon..

i think most of the pension funds are going to disappear as the sheep get fleeced.........

hindsight said...

My father in law is still taking money out on his Northern San Deigo house. 2 helocs and now a construction loan on a POS 2 room shack. Who would loan money to him? He's soooo over his head that he owes way more then that property could ever sell for. "They" are going to keep this real estate monster alive, by still giving loans that they will Never get their money back. Whats the story?

batman said...

OK, the best part about this article is the name Fleischhacker. Man that is a badass name. He should get a job as a loanshark or a repo man.

Anonymous said...

"...tells fund managers they can get a 20 percent annual return from the bottom level of a CDO."

It's such a great investment, we're trying to sell all of it!!

Anonymous said...

The "equity" tranches will probably go to zero. They'll pay 20%...for a little while, then you lose everything.

What will be interesting is if the other "riskless" tranches (because the equity is supposed to absorb the risk) start getting blown out too.

That would really gum up the works.

buyerwillepb said...

Risk? What risk?

If the County/State funds lose money on Wall Street, then they just raise taxes to cover the shortfall.

Always full benefits with Zero risk for governments.

Full benefits for govt = full benefists right up the rear for the taxpayers.

rala2 said...

Would you buy toxic CDOs from someone named Fleischhacker? HmmHm - thought not.

westwest888 said...

"CalPERS is the nation’s. largest public pension. fund, with more than. $207 billion in assets."

This play is like giving a penny of your change from buying lunch to the tip bucket.

Mark in San Diego said...

I read an article the other day that retirement age is now creeping up again, after droping for nearly 70 years. . .baby boomers are finding they can't retire because they either don't have pensions any longer, or they didn't save enough - now with the "housing bonanza" gone, looks like we will see lots of 70 year old co-workers. The good news was that older workers will pay into Social Security longer, and take out for fewer years.

My landlords are "poster boys/girls" for the housing/retirement "bonanza." They bought two condos in 2004 with the idea of holding for 5 years, doubling their money, and then selling for a million in profit to fund their retirement. . .hmmmm. . .didn't quite work out.

Stuck in So Pa said...

Here in PA, there is no requirement that says that the state pension plan has to show a profit. The current company(s) assigned to manage it are simply the best friends/political contributors of the current elected powers that be. Any decrease in money for those sooooo deserved pension increases and cradle-to-grave benefit packages (teacher’s union, state worker’s union, elected parasites who get in for at least two years, etc.) is simply offset by requiring , by law, all taxing agencies to raise property taxes (this coming directly from a school board member.) It isn't that pension fund managers are necessarily crooked; here in PA they don't have to give a DAMN!

Anonymous said...

Don't be so giddy about 70 year old-coworkers. Today's 35 year old , ie me, will be stuck in middle management until today's 55 year olds retire and make room for me at the top. If they retire at 70 instead of 60, I get hurt as much as them.

Anonymous said...

as a guy that pays in to a pension and REALLY hopes I get one back, 20 yrs from now, I have to wonder if they aren't runing this into the ground on purpose...

Anonymous said...

All taxpayers will have to take the bullet through their pension and 401k funds. The government has probably ordered all fund managers to drink a little bit of the CDO kool-aid so that we all get sick and vomit, but nobody will die.

vegas crash watcher said...

Public school teachers, police and politicians are rotten to their core. I resent every penny they make, and hope the housing bust leaves them destitute.

Anonymous said...

as a guy that pays in to a pension and REALLY hopes I get one back, 20 yrs from now, I have to wonder if they aren't runing this into the ground on purpose...

----------------------------------
i see the new tin foil hate is working well

Anonymous said...

hey someone's been posting under my name

Anonymous said...

"...looks like we will see lots of 70 year old co-workers. The good news was that older workers will pay into Social Security longer, and take out for fewer years."

Hmm, almost seems calculated.

Anonymous said...

>>>Mark in San Diego said...

I read an article the other day that retirement age is now creeping up again, after droping for nearly 70 years. . .baby boomers are finding they can't retire because they either don't have pensions any longer, or they didn't save enough - now with the "housing bonanza" gone, looks like we will see lots of 70 year old co-workers. The good news was that older workers will pay into Social Security longer, and take out for fewer years.
>>>>>

I believe this is the government's ultimate plan, call it a conspiracy if you want--it solves the SS deficit problem.

flip that turdbox said...

What is a tin foil hate you fliptard?

on the fence about MBS long term said...

Ive had some retirement money tied with an old job. Supposively a low risk investment that has a pension of 10-12K for life attached to it if I leave it vested with them.

Started looking into it a bit and it has 40% of the fund tied to MBS paper.

Not so sure its that 'low risk' anymore. Ive got about 20-25 years to retirement considerations but it does concern me.

leave 30-35K in for 20 + years for a 10-12K pension for life or roll it over to something not tied to MBS paper and hope the returns appreciate enough to make up the difference.

difinitely a long term play but ya got to consider all the options.

Anonymous said...

I believe this is the government's ultimate plan, call it a conspiracy if you want--it solves the SS deficit problem.
------------------------------------

All they need to do is cut back on medicare, that will reduce the social security load.

Anonymous said...

Just my 2 cents:
http://tinyurl.com/2rsou9

Hayley said...

I think the semi-retirement scenario is a given for people born post 1955. There's simply no other way to imagine people funding their retirement.

Trust me, once corporate America figures out that they can get nearly the same amount of work from a semi-retired employee at half pay (with the gov't picking up the rest of the living wage/health care tab) it'll be an easy paradigm shift.