Pensioners Will Feel the Pinch from Illegal Mortgages and Foreclosures

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Editor’s Comment:

There are many people whose opinion produces the resistance of government to rip up the banks that got us into this economic mess. They all say government is too big, that we already have too much regulation and that Obama is the cause of the recession. Their opinions are based largely on the fact that they perceive the borrowers as deadbeats and government assistance as another “handout.” 

But when it comes down to it, it’s easy to make a decision based upn ideology if the consequences are not falling on you. Read any news source and you will see that the pension funds are taking a huge hit as a rsult of illegal bank activities and fraudulent practices leaving the victims and our economy in a lurch.

The article below is about public pensions where the pension funds and the governmental units took a monumental hit when the banks sucked the life out of our economy. TRANSLATION: IF YOU DEPEND UPON PENSION INCOME YOU ARE LIKELY TO FIND OUT YOU ARE SCREWED. And even if you don’t depend upon pension income, you are likely to be taxed for the shortfall that is now sitting in the pockets of Wall Street Bankers.

Think about it. If the Banks were hit hard like they were in Iceland andother places (and where by the way they still exist and make money) then your pension fund would not have the loss that requires either more taxes or less benefits. And going after the banks doesn’t take a dime out of pulic funds which should (but doesn’t) make responsible people advocating austerity measures rejoice. They still say they don’t like the obvious plan of getting restitution from thieves because the theives are paying them and feeding them talking points. And some of us are listening. Are you?

Public Pensions Faulted for Bets on Rosy Returns

By: Mary Williams Walsh and Danny Hakim

Few investors are more bullish these days than public pension funds. While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic. But lowering their investment assumptions, even slightly, means turning for more cash to local taxpayers — who pay part of the cost of public pensions through property and other taxes.

In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

But to many observers, even 7 percent is too high in today’s market conditions.

“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.” Public retirement systems from Alaska to Maine are running into the same dilemma as they struggle to lower their assumed rates of return in light of very low interest rates and unpredictable stock prices.

They are facing opposition from public-sector unions, which fear that increased pension costs to taxpayers will further feed the push to cut retirement benefits for public workers. In New York, the Legislature this year cut pensions for public workers who are hired in the future, and around the country governors and mayors are citing high pension costs as a reason for requiring workers to contribute more, or work longer, to earn retirement benefits.

In addition to lowering the projected rate of return, Mr. North has also recommended that the New York City trustees acknowledge that city workers are living longer and reporting more disabilities — changes that would cost the city an additional $2.8 billion in pension contributions this year. Mr. North has called for the city to soften the blow to the budget by pushing much of the increased pension cost into the future, by spreading the increased liability out over 22 years. Ailing pension systems have been among the factors that have recently driven struggling cities into Chapter 9 bankruptcy. Such bankruptcies are rare, but economists warn that more are likely in the coming years. Faulty assumptions can mask problems, and municipal pension funds are often so big that if they run into a crisis their home cities cannot afford to bail them out. The typical public pension plan assumes its investments will earn average annual returns of 8 percent over the long term, according to the Center for Retirement Research at Boston College. Actual experience since 2000 has been much less, 5.7 percent over the last 10 years, according to the National Association of State Retirement Administrators. (New York State announced last week that it had earned 5.96 percent last year, compared with the 7.5 percent it had projected.)

Worse, many economists say, is that states and cities have special accounting rules that have been criticized for greatly understating pension costs. Governments do not just use their investment assumptions to project future asset growth. They also use them to measure what they will owe retirees in the future in today’s dollars, something companies have not been permitted to do since 1993.

As a result, companies now use an average interest rate of 4.8 percent to calculate their pension costs in today’s dollars, according to Milliman, an actuarial firm.

In New York City, the proposed 7 percent rate faces resistance from union trustees who sit on the funds’ boards. The trustees have the power to make the change; their decision must also be approved by the State Legislature.

“The continued risk here is that even 7 is too high,” said Edmund J. McMahon, a senior fellow at the Empire Center for New York State Policy, a research group for fiscal issues.

And Jeremy Gold, an actuary and economist who has been an outspoken critic of public pension disclosures, said, “If you’re using 7 percent in a 3 percent world, then you’re still continuing to borrow from the pension fund.” The city’s union leaders disagree. Harry Nespoli, the chairman of the Municipal Labor Committee, the umbrella group for the city’s public employee unions, said that lowering the rate to 7 percent was unnecessary.

“They don’t have to turn around and lower it a whole point,” he said.

When asked if his union was more bullish on the markets than the city’s actuary, Mr. Nespoli said, “All we can do is what the actuary is doing. He’s guessing. We’re guessing.”

Vermont has lowered its rate by 2 percentage points, but for only one year. The state recently adopted an unusual new approach calling for a sharp initial reduction in its investment assumptions, followed by gradual yearly increases. Vermont has also required public workers to pay more into the pension system.

Union leaders see hidden agendas behind the rising calls for lower pension assumptions. When Rhode Island’s state treasurer, Gina M. Raimondo, persuaded her state’s pension board to lower its rate to 7.5 percent last year, from 8.25 percent, the president of a firemen’s union accused her of “cooking the books.”

Lowering the rate to 7.5 percent meant Rhode Island’s taxpayers would have to contribute an additional $300 million to the fund in the first year, and more after that. Lawmakers were convinced that the state could not afford that, and instead reduced public pension benefits, including the yearly cost-of-living adjustments that retirees now receive. State officials expect the unions to sue over the benefits cuts.

When the mayor of San Jose, Calif., Chuck Reed, warned that the city’s reliance on 7.5 percent returns was too risky, three public employees’ unions filed a complaint against him and the city with the Securities and Exchange Commission. They told the regulators that San Jose had not included such warnings in its bond prospectus, and asked the regulators to look into whether the omission amounted to securities fraud. A spokesman for the mayor said the complaint was without merit. In Sacramento this year, Alan Milligan, the actuary for the California Public Employees’ Retirement System, or Calpers, recommended that the trustees lower their assumption to 7.25 percent from 7.75 percent. Last year, the trustees rejected Mr. Milligan’s previous proposal, to lower the rate to 7.5 percent.

This time, one trustee, Dan Dunmoyer, asked the actuary if he had calculated the probability that the pension fund could even hit those targets.

Yes, Mr. Milligan said: There was a 50-50 chance of getting 7.5 percent returns, on average, over the next two decades. The odds of hitting a 7.25 percent target were a little better, he added, 54 to 46.

Mr. Dunmoyer, who represents the insurance industry on the board, sounded shocked. “To me, as a fiduciary, you want to have more than a 50 percent chance of success.”

If Calpers kept setting high targets and missing them, “the impact on the counties won’t be bigger numbers,” he said. “It will be bankruptcy.”

In the end, a majority decided it was worth the risk, and voted against Mr. Dunmoyer, lowering the rate to 7.5 percent.


A.I.G. to Pay $725 Million in Ohio Case

July 16, 2010

A.I.G. to Pay $725 Million in Ohio Case

By MICHAEL POWELL and MARY WILLIAMS WALSH

The American International Group, once the nation’s largest insurance group before it nearly collapsed in 2008, has agreed to pay $725 million to three Ohio pension funds to settle six-year-old claims of accounting fraud, stock manipulation and bid-rigging.

Taken together with earlier settlements, A.I.G. will ladle out more than $1 billion to Ohio investors, money that will go to firefighters, teachers, librarians and other pensioners. The state’s attorney general, Richard Cordray, said Friday, that it was the 10th largest securities class-action settlement in United States history.

“No privileged few are entitled to play by different rules than the rest of us,” Mr. Cordray said during a news conference. “Ohio is determined to send a strong message to the marketplace that companies who don’t play by the rules will pay a steep price.”

A.I.G. disclosed the terms of the settlement in a filing with the Securities and Exchange Commission.

How A.I.G. will pay for this settlement is an open question. It has agreed to a two-step payment, in no small part to give it time to figure out how to raise the money.

Executives are well aware that taxpayers and legislators would cry foul if it paid the lawsuit with any portion of the $22 billion in federal rescue money still available from the United States Treasury.

Instead, the company intends to pay $175 million within 10 days of court approval of its settlement. It plans to raise $550 million through a stock offering in the spring of 2011. That prospect struck some market analysts as a long shot.

“There’s still a lot of question marks hanging over A.I.G.,” said Chris Whalen, a co-founder of Institutional Risk Analytics, a research firm. “How would you write a prospectus for it?

“The document,” he said, “would be quite appalling when it described the risks.”

A.I.G.’s former chief executive, Maurice R. Greenberg, and other executives agreed to pay $115 million in an earlier settlement with Ohio, which filed its lawsuit in 2004.

State attorneys general often have proved more aggressive than federal regulators in going after financial houses in the wake of the 2008 crisis. And A.I.G. could face new legal headaches. For instance New York’s attorney general, Andrew M. Cuomo, has stepped up his investigation of the company in the last few weeks, according to a person with direct knowledge of the case.

The Ohio settlement allows “A.I.G. to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise,” Mark Herr, a company spokesman, said in a news release.

The Ohio case was filed on behalf of pension funds in the state that had suffered significant losses in their holdings of A.I.G. when its share price plummeted after it restated results for years before 2004. Those restatements followed an investigation by Eliot L. Spitzer, Mr. Cuomo’s predecessor, into accounting irregularities at the company and the subsequent resignation of Mr. Greenberg.

But the company faces a long and uncertain road, say Wall Street analysts.

Its stock, after adjusting for a reverse split, once traded at $1,446.80 a share; it stands now at $35.64.

A.I.G. has become the definition of turmoil. Its chairman resigned this week after a fierce feud with the chief executive, who has referred dismissively to “all those crazies down in Washington.”

Those crazies presumably include the federal government, which over the last two years gave A.I.G. the largest bailout in United States history, making $182 billion available to the company.

And the company’s proposed stock offering next year is rife with uncertainties. Such an offering would by definition dilute the value of the government’s holdings.

A.I.G. has struggled of late to sell off subsidiaries to repay the Federal Reserve Bank of New York. This year the company failed in its attempts to turn its Asian life insurance subsidiary over to Prudential of Britain. This week the company’s directors voted to proceed with an initial public offering of the same subsidiary, with the proceeds intended for the Federal Reserve.

Should the company fail to raise the $550 million, Ohio has the right to resume its litigation.

The fall of the world’s largest insurance company began in the autumn of 2008, when a sudden downgrade in its credit worthiness set off something like a bank run. It turned out that the company had sold questionable derivatives that were used to prop up the portfolios of other financial institutions.

Federal officials moved quickly to bail out the company, fearing that if A.I.G. toppled, dozens of financial institutions would quickly fall as well. Havoc seemed in the offing.

Federal investigators have since examined many aspects of the company’s behavior, even convening a grand jury in New York. But they have never brought charges against the company or its top officials.

“The states are too often the only ones to watch out for this misconduct,” Mr. Cordray said Friday. “For years, people have been asleep at the switch.”

Louise Story contributed reporting.

This article has been revised to reflect the following correction:

Correction: July 17, 2010

An earlier version of this article misidentified the New York attorney general who began the investigation into A.I.G.’s accounting irregularities. It was Eliot L. Spitzer, not Andrew M. Cuomo.

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