Yesterday, The Boston Globe unloosed a superb piece of accountability reporting, writing that the Bush administration decided to move* the assets of the Pension Benefit Guaranty Corporation heavily into stocks last year in what can be only described as boneheaded at best.
The Globe‘s Michael Kranish reports that the pension-insurance fund has lost 6.5 percent of its value—and that’s of the last accounting, at the end of September! Back then, the Dow Jones Industrial Average traded at a lofty 10,851. It was at 7,524 this morning—a 31 percent drop.
I can’t tell from the piece when exactly the shift into stocks began or how much was already in stocks (this PBGC release says 28 percent).
Who’s the Bushie responsible for this disaster? Charles E.F. Millard, who came from Wall Street, of course, and who effectively doubled the pension-insurance fund’s exposure to stocks in the midst of one of the great crashes of all time. You may now scorn him, especially because he’s either in denial or won’t admit his catastrophic mistake:
Millard, a former managing director of Lehman Brothers, said flatly that “the new investment policy is not riskier than the old one.”
He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency’s deficit. “The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress,” Millard said.
Folks, this is equivalent to me saying I almost certainly won’t make rent this month, so I’m going to go to Atlantic City and put half my paycheck on the roulette wheel. Seriously, this is genius-level stuff.
Seriously, if you’re going to insure something, you want to be as conservative as possible and not make the same bets those you’re insuring do. You don’t want to correlate your investments, right? The Globe has a great analogy on this from a professor who strenuously advised the PBGC not to invest in stocks:
Bodie once likened the agency’s strategy to a company that insures against hurricane damage and then invests the premiums in beachfront property.
Since he issued that warning, he said, the agency has gone even more aggressively into stocks, which he called “totally crazy.”
And he didn’t just get into blue-chip American stocks:
Under Millard’s strategy, the pension agency was directed to invest 55 percent of its funds in stocks and real estate. That included 20 percent in US stocks, 19 percent in foreign stocks, 6 percent in what the agency’s records term “emerging market” stocks, 5 percent in private real estate and 5 percent in private equity firms.
So Millard put at least 20 percent more into foreign stocks than he did U.S. stocks.
Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, “Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it.”
Of course, we’ve learned that stocks don’t necessarily do so well over the long term.
If you’re not sure why this matters so much, the Globe gives some background:
The Pension Benefit Guaranty Corporation may be little-known to most Americans, but it serves as a lifeline for the 1.3 million people who receive retirement checks from it, and the 44 million others whose plans are backed by the agency.
The agency was set up in 1974 out of concern that workers who had pensions at financially troubled or bankrupt companies would lose their retirement funds. The agency operates by assessing premiums on the private pension plans that they insure. It insures up to $54,000 annually for individuals who retire at 65.
As others have written, pension shortfalls are a timebomb:
Most of the nation’s private pension plans suffered major losses in 2008 and, all together, are underfunded by as much as $500 billion, according to Bodie and other analysts.
Guess what? The PBGC is underfunded, too, to the tune of $11 billion. And that was even before the latest leg down in the stock market and before it inevitably takes on huge new liabilities from companies that go under in the recession.
So what’s the second (okay, third)-day story? Millard didn’t sit there picking and choosing stocks himself, so we need to know who he gave the money to. Which money managers got it? How much did his chums at Lehman Brothers get? Surely this is gettable information via the Freedom of Information Act.
Keep your eye on this one. Great job by the Globe. This is what newspapers are for.
*I originally mischaracterized what the Globe reported, saying the PBGC had moved the assets already. The extent of how much it had been carried out is not yet known (see my comment below).
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.