What perfect timing.

ken-

they're assuming non-correlation on 15% exposure to an asset class with little to no disclosure and I might add was proven wrong in August where non-correlated assets became correlated due to the across the board liquidation that occurred.

they also need to manage a liability stream with exposure to additonal illiquidity, additional equity exposure which could potentially pose problems in a declining market, and an underfunded status that could magnify the future funding concerns.

this is a cluster@#$%^ waiting to happen by any measure.

Is this some sort of deliberate attempt to pump the market? The whole plowing Social Security $ into equities thing didn't work, so this is the best we could do?

Yeah, what r-c- said.

I am going to feel guilty -- kind of like watered-down Holocaust survivor guilt -- when financial armageddon hits and my family and I ride things out safely via gold stored in Switzerland.

But, with dummies like the PBGC -- and CalPERS having done something similar recently -- clearly, economic Darwinism must run its course and rid the gene pool of obvious financial idiots.

Many oblivious, trusting innocents are going to be hurt, unfortunately. But, maybe those are two traits we have to weed out/breed out, too.

Let me amend my last comment to "over virtually all given 20-year periods."

Plus, since they get premiums every year, they will benefit from being able to buy more shares during a bear market, aka dollar cost averaging.

CR-

"Seems like a strange day for this announcement ..."

This is far more than strange!

Most reputable firms have increased their default projections for 2008 and 2009, the potential for increased claims on the PBGC has no doubt risen for at least the next 24-36 months, I say this due to the amount of HY debt maturing in 8,9,10,11, & 12. The ability to roll this debt and also for firms to access the capital markets is compromised and should this cycle prove to be longer than what most currently forcast which could prove quite devestating to a plan which is currently underfunded & arguably is taking on more risk, not less. With corporate defaults projected to rise to approximately 5% (I am still taking the extreme over on this one), the stress on the PBGC only has one way to move and it ain't down.

The irony is that many "progressive" (but conservative) pension fund analysts are coming around to the POV that the only way to run a pension fund is to match long term liabilities with long term bonds. And to bring down their estimated rate of return on investments a lot. Otherwise - it's all a crapshoot. The return on the SP500 has basically been zilch for 7 years now. It has a lot of work to do just to get even with the return on CDs. This is about as stupid as what New Jersey did with its pension plan a while back.

A few comments about earlier threads. I don't think you can compare Georgia with Florida. Both states are too large - too diverse. It would be more to the point to compare something like the close-in Atlanta metro area and the close-in Miami metro area. I think both of those areas have a lot in common. Extremely large populations of poor people. A substantial LGBT community. Some young trendaholics. What they don't have for the most part is what we would usually think of as "normal middle class families."

FWIW - think Florida has some things going for it (like a state tax system which encourages people with money to establish residence here). Georgia has some things going for it too (salaries in metro Atlanta are probably higher than those found in most - if not all - metro areas in Florida). There are more better paying jobs too. Note that many parts of both states have huge water problems. Huge traffic problems too. I think there are a lot of people in both states who think a breather in terms of the torrid pace of building is a welcome development.

As for splitting the monolines - unless you're prepared to spend the next couple of months reading thousands of pages of documents (assuming you could even get your hands on them) - and thousands of pages of legal things (like statutes - case law - and regulations) - it's impossible to know who's on first - and who's on second (or even who might be on first or second). I have owned bonds in companies that split up - like ITT - and it was basically TS for the bond holders when you read the fine print. But that was the fine print in that case. The fine print in other cases may vary a lot.

Has anyone here ever read a contract between an insured and a monoline (about the best I have is the fine print in the prospectuses I've received from some muni bond issuers - but that is not the actual contract between the insured and the issuer). Which I'm sure is longer than a page or two. Roby

rich-

explain to me how the 15% exposure to alternatives falls under the rule of "do no freakin harm".

strike that, I forgot, it's for diversification purposes and the non-correlated nature of the holdings.

and btw, late last year gm's plan increased its fixed exposure and decreased its equity exposure, so you can remove them from your general rule of db allocations.

Sebastian bought NEW shares during their pre Going-out-of-business sale.

What are all those older "folks"(hehe) going to do when their paper wealth vanishes and they can't even get a job at walmart because there are 100 applicants for every position? The 100 applicants for every position thing is already happening, just wait until walmart starts laying off greeters to cut costs.

What is REALLY going to happen? Any ideas?

This isn't the 1930's when you extended families would move back to the farm and live through the tough times with hard work and a slim diet.

Many food banks are already shutting down because of lack of donations.

I have a bad feeling the government "help" won't be as helpful this time around.

Sweet, This is Gov't help. GS and the other "insiders" need someone to sell their equities to before the "big one". We (the taxpayers) are buying so the big boys can get out. FG

"But in practice you have to deal with harsh realities like the DOW being flat in real terms from 1925 to 1982."

I don't follow your figures.
http://www.analyzeindices.com/dowhistory/djia-100.txt

Dow was approx 150 in 1925 and around 900 in 1982, a 600 % increase. And that doesn't include dividends, which would easily add 5 %/year. Now that doesn't make the returns flat, even accounting for inflation. And they are certainly better than bonds (or RE).

I don't think PBGC should be 100% in equities, but what's wrong with 45%? It's diversification, which is perfectly reasonable. I would hope they won't dive in all at once, but will gradually shift their investments over several years, as any prudent investor would do.

Now the fact that they are underfunded is a valid, but separate issue.

By the way tj, almost anything seems to be capable of getting you to say "wow", even month-old news. I envy your ability to be surprised.

Bob: I actually do have a defined-benefit plan from a former employer, a large pharma company. They send me an update every year; the plan seems very well funded and the company is doing well, so I'm not too worried. And my wife's a teacher, so she has one as well.

Aheadofthecurve-

If stocks and bonds can generally rise and provide returns for a century, who's to say they can't generally do the opposite for a similar period of time?

I think a lot of people who think they are very well of are just going to "get by", while those who are optimistically thinking they can "get by", are totally screwed.

My parents have most of their money in paid off rental properties. I think they will probably get by, but their actual returns will be much less than what they had originally planned for.

A lot of people that I know who are nearing retirement have a lot of their wealth tied up in "assets"(houses and property) that are going to be increasingly difficult to sell in the future. These aren't real estate speculators, these are people who have been paying these properties off for 20-30 years, but as growth evaporates they are in for a hard lesson.

Sweet, Was making an offhand remark at how the government always seems to help the rich (who buy them through "donations") and never seems to care about the truly "needy". They will only help if it buys them votes to stay in power. Politics is about power, not "the people". I agree with you that what is to come is not likely to be what most people are expecting. FG

"Schultz still sees an apocalypse
Commentary: 'Pretend an emergency is coming, because it may be'"

"Among his more colorful recommendations: "Buy a few local non-rare gold coins of whatever country you are in for emergency/barter use, smallest denominations ... Keep 6-12 months cash at home/ office/ lawyer-doctor office. Pretend an emergency is coming, because it may be."
Schultz has also begun recommending the traditional inflation hedges familiar from the 1970s: "Art, commercial property that yields certain income, farm land." "

wow.

Harry Schultz is running for the hills Peter Brimelow - MarketWatch

PBGC has political constraints that preclude them going heavily overweight in anything. That's the reality. So diversification is really their only option.

Individual investors can go overweight and can beat the averages for a time. Though the longer the time frame, the less likely anyone is to beat the averages.

The US government already has way more guns than it needs, thank you very much.

P.S. Over very long periods (think decades) - the historical return on broad equity indices is pretty much the growth in earnings plus dividends. Roby

Any idea why the futures are up? Do they like the idea of the monolines splitting up? Or perhaps it's just time to buy....cause the Fed's gonna cut rates. Hooray!

pbgc employee-

"To the person who mentioned GM, the reason why GM reduced its equity allocation was because the plans were projected to be fully funded plans. By raising the bond allocation, GM is trying to do a better job of immunizing their portfolio and reducing the volatility of the plans' funded status."

First off, you need to do more research, gm is "funded" according to pension accounting, we don't need to really go here, now do we?

There are currently various "ongoing" investigations into their pension accounting. But, you knew that, seeing that the PBGC has been monitoring the situation, right??

The PBGC is admittedly 14B underfunded, you wish to take on more risk and gamble with the future of your participants, arguably going into a more volatile period on many fronts, one which will likely include increased claims on the PBGC.

My questions; who is the advisor to your plan fiduciaries? Are they independent? And lastly, who specifically, by name, makes up the committee that made the plan changes?

All Fall Down- I heard they would be able to prop up housing until 09 as well.

"Global liability2 data for the P11

In 2007 global pension liabilities grew a little faster than pension assets, reversing some of the gains of the years from 2003 to 2006 and leaving some defined benefit funds in weaker solvency positions

Roger Urwin said, “2007 was a year of two distinct halves. In the first half pension fund balance sheets continued to strengthen, but faltering markets in the latter half largely undid these gains. Severe market events this year suggest that balance sheets will remain under pressure.”
Watson Wyatt - News | Press Releases

"Any split could imperil billions of dollars in play by banks, hedge funds and other debt investors who have been betting on the demise of the bond insurers. At issue are credit default swaps that act as a form of protection against a default by Ambac on its obligations or on debt it issued to fund its business.

The cost of such credit protection rose sharply over the last few months as the bond insurers' problems mounted. Friday, protection on Ambac's bond-insurance unit cost $468,000 annually, from $358,000 three months ago, according to data from Markit Group. The increases mean that hedge funds and other investors that bought these swaps to bet on a deterioration in Ambac's financial health have profited as fears over the bond insurers' solvency have grown.

Some of those profits could increase -- or evaporate -- if the bond insurers separate their municipal-bond guaranty business from their mortgage-related guaranty business, say credit analysts. They say it isn't clear if the credit default swaps tied to a bond insurer would be tied to both businesses if the company is broken up, or to only the municipal business. It also isn't known how much in swaps have been written on Ambac and FGIC themselves, though some traders say Ambac's swaps have been actively traded in recent weeks and months.

"A lot of investors put on hedges or speculative bets that the bond insurers wouldn't be credit-worthy, and there's a possibility some of those bets could become worthless" if the swaps end up referencing the stronger municipal-bond guaranty business, says Brian Yelvington, an analyst with debt-research firm CreditSights Inc.

If more than 75% of the bond insurer's obligations is tied to municipal bonds, industry guidelines suggest the swaps will "succeed" to that stronger business, note analysts. That outcome would cause the cost of credit protection to plunge, hurting the values of the swaps held by hedge funds betting against the insurers.

However, if the municipal business is deemed to comprise between 25% and 75% of the bond insurers' existing obligations, the credit default swaps are likely to be split into two halves that are each tied to one business. In that scenario, the cost of credit protection for the municipal business would still plunge, while the cost of credit protection for structured finance business would surge, says Tim Backshall, chief derivatives strategist at Credit Derivatives Research LLC."

OK.....why doesn't Ambac simply sell credit derivatives against its own debt. After selling derivatives with nominal values of 10's of times the cost of its debt, Ambac could simply use the premiums to retire the debt.

Obviously I am not serious about this, but the idea of the notional amount of swaps equal to huge multiples of the underlying issues gives people perverse incentives to see companies fail.

risk capital writes:
First off, you need to do more research, gm is "funded" according to pension accounting, we don't need to really go here, now do we?

Well, maybe. If GM was fiddling with their actuarial assumptions, then they could be fully funded under one set of assumptions and several billion dollars in the hole under other sets of assumptions [1]. Any of which are acceptable when preparing one's 5500 filings. As a retired salaried GM employe [2], I'm somewhat worried about my piddly little pension [3]. So I watch the 5500 filings at Free Employee Benefits Data - FreeERISA [4]. Odd how GM files a year late, isn't it?

If one looks at the Schedule Bs for the salaried vs hourly DB plans, you'll see some very odd numbers. I don't have a good understanding of it, as I'm not an accountant, but it sure looks to me like there are some odd and very different assumptions of the DB pension plans. And to make those analyses even more difficult, the Schedule B goes away this year.

Elvis writes:
It is ironic that the AFL-CIO is complaining about pay...

I used to work in Kokomo, IN. At one time there was a Bethlehem steel plant there. The mismanagement bent their union over a barrel and said "if you don't take 50% pay cuts, we'll close the plant." So the union buckled and ate the pay cuts. One year later, the mismanagers closed the plant anyway and awarded themselves millions of dollars in bonuses. 2500 men out of work so that some fat cats can buy a bigger yacht.

Notes:
1 - United Airlines did exactly this for years: using a whacky set of assumptions that they then reversed when they wanted to ditch the plan and dump it onto PBGC.
2 - GM makes/made everyone use a single e at the end of employe because they calculated that single change would save tens of thousands of dollars in ink per year.
3 - Based on years served, it is under $150/month and perhaps with inflation, it might buy a happy meal per month in 15 years.
4 - I also check into my current employer's 401k plan (all my previous 401ks have been rolled over into my IRA) because the 5500 filings are about the only way that you can accurately figure out the loads on your plan. If the plan sponsor soaks you for an extra .5%, that can mean tens of thousands of dollars sucked out of your retirement over your working career. And based on the supplied prospecti and other documentation, there is no possible way to determine what the load is without having the skill to read that 5500.

AOTC,

BTW, the details are surprising.

It didn't take a genius to know the housing bubble would burst, that the credit bubble would follow, etc. But, like any good but predictable movie, it's not the destination but the journey.

Peter, GM doesn't file their 5500's later than anybody else.