Will your pension take part of the $1 trillion hit from the subprime meltdown?

Posted Nov 29th 2007 8:49PM by Peter Cohan

The Associated Press reports that local Florida governments have been withdrawing assets from its state pension fund at an astonishingly rapid clip. Specifically, in the last two weeks local Florida governments have withdrawn 40% -- or nearly $10 billion -- from the state pension pool. At this rate, the fund would have been 100% depleted by the end of 2007. So The State Board of Administration held an emergency meeting to halt further withdrawals.

If you think about this for a minute, you'll realize that this is pretty much the same thing that happened during the Great Depression when people withdrew their money from banks because they were afraid of losing their savings. In response, the government declared bank holidays. That is, the government told them that they could not get their hands on their money.

What -- you might ask -- is the reason that Florida local governments were so eager to get their hands on that pension money? Florida invested in some mortgage-backed securities (MBSs) -- which were downgraded by credit rating agencies to the point where they were below the standards permitted for a pension fund. Specifically, $700 million in asset-backed commercial paper was downgraded below "purchase credit rating guidelines."

What does this mean to you?

If you have a defined benefit pension plan -- such as the ones for Florida government employees -- there's a good chance that it has invested in similar asset-backed securities. And these pension funds have strict guidelines which prohibit them from holding these securities if ratings are cut to below a certain level.

I think it makes sense to check with your pension fund administrator to find out whether your pension is exposed to these securities and if so, how vulnerable your pension might be to a loss in value of these assets. Florida is certainly not alone -- according to Thomson Financial there are estimates that pension funds will take a $1 trillion hit from the devalued MBSs and Collateralized Debt Obligations (CDOs) because they must sell securities immediately and take a loss when they are downgraded.

It seems that every week, a new wrinkle quietly pops up in the way that our flawed system of issuing mortgages is damaging the financial well being of people around the world. I would be very surprised if Florida's problems were not widespread in states across the country.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

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Reader Comments (Page 1 of 1)

11-30-2007 @ 11:08AM

Kevin Canwell said...

CDOs and SIVs seem to me to be a new fangled Ponzi scheme. Is there any chance that any of the participants in the sub prime mess will do jail time? The whole sub-prime idea smacks so much of fraud on an unsuspecting public that there ought to be some form of justice. My broker has been foretelling this whole fiasco for at least 3.5 years. Why couldn't the 'big guys' see it coming. Or were they fully complicit in the scheme?

12-01-2007 @ 12:38AM

John Doe said...

"Why couldn't the 'big guys' see it coming. Or were they fully complicit in the scheme?"

Oh Wall Street big guys saw it coming. They were fully complicit in the scheme, they created it. They profited from it. They raped their own corporations from it to enrich themselves. They don't care that their own corporations are sinking as a result. It's the old game - take the money and run.

Moody's and the ratings agencies should simply be abolished for the most rampant fraud ever. They played a game of calling subprime shit = money market safe to entice this public money all over the country! The exact opposite of what they are supposed to do. They did this to collect big fees from Wall Street, enrich themselves and are now in the Hamptons, while you and I (taxpayers) are stuck with the clean up bill. The SEC won't do jack shit - they have been paid off to look the other way. Wall Street Mafia at their best.