Juggling Dynamite

Chris Whalen, senior managing director at Tangent Capital Partners, and Bill Rochelle from Bloomberg News talk with Bloomberg Law’s Lee Pacchia about how the so-called in pari delicto defense stops trustees from suing for fraud in cases such as MF Global and Bernie Madoff. Whalen argues that appointing equity receivers, a popular remedy 100 years ago, in these cases would allow court appointees to pursue third parties on behalf of victims for fraud. The question is whether Congress is willing and able to change the law.

Here is a direct link.

Arnab Das, managing director at Roubini Global Economics, told CNBC, “A disorderly ‘Grexit’ could accelerate the process in Spain but even if we don’t have something untoward in Greece I think part of the problem is that people are starting to get to grip with the fact that there is too much debt in Spain, it is not yet in the sovereign but that’s where it’s headed.”

Here is the direct link.

For more than a decade pension plans have been using unreasonable investment return assumptions in their funding plans. Since no one wants to admit this or face the increased contributions needed to catch up to capital requirements, the hole just keeps getting bigger. This article offers a good update:

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.”

Eventually we all have to face the math, meaning cuts to benefits, and increased contributions–in pensions and elsewhere.  Having wealth stored for future needs requires forgoing present consumption and profits in order to save more for later– that is just the way it works.   See: Public pensions faulted for bets on rosy returns