Pension Funds Broke Because They Sold Credit Default Swaps, Bought Risky Investments → Washingtons Blog
Pension Funds Broke Because They Sold Credit Default Swaps, Bought Risky Investments - Washingtons Blog

Tuesday, March 10, 2009

Pension Funds Broke Because They Sold Credit Default Swaps, Bought Risky Investments

You've probably heard that pension funds are in big trouble. As Bloomberg notes:

With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.

But, there's more to the story than stock market losses.

As the former senior investment analyst for two of the largest public pension funds in Canada points out, the pension funds' trouble largely stems from the fact that they engaged in casino capitalism:

They were contributing to systemic risk by shoveling billions of dollars into commodities, hedge funds, real estate, private equity, CDOs, etc.? What were they possibly thinking selling CDS just like AIG?

States must guarantee public pension fund debts. Therefore, Bloomberg estimates that the government will have to give a trillion dollar bailout to pension funds. Another trillion dollars taxpayers will have to pay for either directly through taxation or inflation.

1 comment:


    Tom Dennen

    Read a great piece the other day, going around the Internet, about Heidi the bar owner who gave all her old drunk customers credit for a year.

    The word spread like wildfire: “Free Booze at Heidi’s!” and all kinds of new drunks came in.

    On paper, her turnover went ballistic what with every old and young and other drunks coming into the scam; the breweries extended her credit, she lowered her prices against volume sales, the banks lent her a shitload of money to expand the building to include a whorehouse and a Wallmart … happy days!

    Until the people that bought her thriving business asked the old drunks to pay their bills at the end of the year and started a credit collapse throughout the little system that shook the walls, I’m telling you!

    That’s pretty much what happened recently, but big time all around the world and only a few old drunks really got anything out of it - a year’s worth of free beer!

    In the current situation, ‘respectable’ banks loaned money to people who they knew could not pay it back, just like the honorable Heidi.

    Now, Henry Ford said that we don’t learn anything from history, so I thought I’d be the first old drunk to have a look and see what I could learn from history, which goes some way back.

    I started with laws and rules, beginning with the Ten Commandments, but they are just totally ignored social rules, and went on to Hammurabi’s Code, which made much more sense, written a little later, about one thousand and seven hundred years before Christ through to Tacitus, who wrote ‘The Annals of Rome’ at about the time of Christ, which gave me some perspective.

    On the one hand, it’s all about food – production, storage, protection, and distribution, all with a force of arms standing by with fierce looks.

    On the other hand, who owns the system that produces, stores, protects, etc., the Daily Bread? The government – in this case, run by Hammurabi.

    Hammurabi’s Code is a simple set of rules that makes any interruption of commerce a crime. And commerce then was run on payment of corn. Interruption of commerce meant interruption of corn on the way to Hammurabi’s own table.


    Tacitus is just as interesting in that he was a very dry, factual and non-partisan commentator on what was happening in Italy two thousand years ago, but he reveals an interesting scenario: dual or parallel economies operating symbiotically but without real awareness of each other – one based on the ‘food chain’ part of the extractable resources including people and materials, the other a ‘fiat’ economy based on credit, meaning debt, implying interest (which Rome capped at 5% and banned usury).

    General ‘Ike’ Eisenhower warned us of the power of the ‘Military Industrial Complex’, which existed in Roman times in much the same way as today – a separate economy from the ‘real’ economy of general commerce and real estate, which operated aside from the then Military Industrial Complex which was and still is resource-based, taking people and material as needed fundamentally to protect the internal food supply of the nation.

    The wealth of all nations depends on many factors, but essentially rests on this parallel economy theory – one resource-based economy taking what it needs from the environment without ‘paying for it’, and another, ‘fiat’ economy dependent on the real resource wealth of the nation in which it resides, protected by the Military Industrial Complex of the time.

    The fiat economy is not resource based at all but quite arbitrary and based on fluctuating and equally arbitrary rules of commerce measured in and by the manipulation and accumulation of currency, which is either printed or minted and is created ‘out of thin air’, traditionally representing a base of gold or other ’real’ hard assets that can be quickly converted to tradable currencies or, as the moneylenders realized thousands of years ago … debt.

    Like the debt created with Heidi’s extended booze credit.

    Hiedi’s ‘credit bubble’ was created out of the thin air of free booze payable a year later (which she certainly knew would not be made, but since she sold the business as soon as she could after creating the bubble, way before the year was up, and left the country, she’s having quite a ball in the Seychelles).

    I’m joining her next week for a conference on how to make some coinage out of the current credit crunch – after all, credit is debt and debt is money from the future we can trade up to and including my new ‘free booze’ package called the Credit Default Swap derivative system of leaning on tomorrow’s childrens piggy bank savings … well, not yet, they have to grow up and get jobs and be mortgaged and all, but you have to look ahead in this world.

    It’s our own fault, because we are still not learning anything from history.

    It does help if you read some of it, though, in case we want to avoid this happening again.

    Also, there is nothing wrong with the study of contemporary history: Last week Zbigniew Brzezinski, former National Security Advisor and early supporter of Barack Obama’s presidential campaign, warned that civil unrest on American soil is a possibility that should not be dismissed.

    Brzezinski explained that “the United States is going to have millions and millions of unemployed, people really facing dire straits. And we’re going to be having that for some period of time before things hopefully improve.

    “And at the same time there is public awareness of this extraordinary wealth that was transferred to a few individuals at levels without historical precedent in America - (The people Heidi sold her business to sold the debt to another bunch who sold it on and then also left the country shortly after she did.)

    (Brzezinski concludes with this noteworthy remark “…hell, there could even be riots”.)


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.