Naked Capitalism through Guest Posts by Leo Kolivakis, publisher of Pension Pulse, has done an excellent job of chronicling the problems with pension funds. I certainly encourage people to read his posts.
The headline is from a Bloomberg "exclusive" story. This is the lead in paragraph:
U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.
There is some talk in the article from private equity and pension industry people that these are long-term investments and have patience and it will come back. Yada. Yada. But here is the problem: When will these investments "come back"? In a few years we start feeling the brunt of the "baby boomers" retiring.
Did pension funds underestimate the risk of their investments in private equity?
According to Professor Stephen Kaplan they did:
“With private equity, you’re taking on a liquidity risk, which people did miscalculate,”
This Bloomberg story stood out this morning because another pension fund/private equity fund story hit in the Financial Times: Pension Funds Back Buy-out Fight Over Bank Deals. A coalition of the largest US state pension funds, probably the same ones that have lost 59% of their cash in private-equity, wrote a letter to FDIC backing the private-equity industry's opposition to FDIC's proposed rules regarding purchase of insolvent bank assets. FDIC proposed rules attempt to safeguard taxpayers from the riskiness of private equity investments.
But obviously the pension fund industry doesn't care and they are siding with private equity firms. Could it be that pension funds are at a point with their private equity investments where they have no choice but to "ride this investment out" regardless to where it leads? If so, how did it come to this? Oh, but there is more.
Desperation often leads investors to assume even more risks in the interest of making up losses. Pension funds are taking huge hits not only from their private equity investments but also from their commercial real estate investments. But that hasn't stopped some pension funds from investing more in commercial real estate. A highly risky investment right now.
Are pension funds so desperate to make up losses on their investment portfolios that they are willing to take on more risks?
How did we get to this point - millions of people are counting on their pension funds to be there when the retire in a few years? But will the money be there?
If so, like everything else about this financial crisis it will be middle-class families that will bear the brunt of it!
WE ARE SO SCREWED!