Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds. See Banks Sell Toxic Waste:
“Worldwide sales of CDOs — which are packages of securities backed by bonds, mortgages and other loans — have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches. They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.”
“It's grossly inappropriate to take this level of risk. Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig. . . . Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans. They (Wall Street) spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses.”
And all at a time when some 82% of public pension funds are already sporting staggering funding deficits due to the losses they sustained reaching for risk returns in the last stock bubble. All at a time, when individuals are living longer, and saving less and desperately in need of some guaranteed retirement income.
When our fiduciaries are swindled, the whole system breaks down. Pension trustees must be held accountable. They have a legal and moral duty to act as shark repellent protecting the capital in their care. They must counsel corporations and governments that the key to sustainable pension funds is through increased contributions not increased risk.