In the wake of the recent unprecedented and highly questionable demise of Bear Stearns, I had the opportunity to speak with Catherine Austin Fitts regarding some of the fuzzier elements surrounding Bear’s demise.
Issues discussed included claims by options expert, John Olagues, outlining how massive buying of ‘puts’ and shorting stock led to the demise of Bear Stearns in an article titled, Bear Stearns Buy-Out... 100% Fraud:
“This article is about how Bear Stearns stock was artificially collapsed so that illegal insider traders would make billions and J.P. Morgan would be paid $55 billion of US tax payer money to shore up themselves and buy Bear Stearns at bankruptcy prices.”
By the way, the article referenced above is really great stuff – discussing details as to what happened and the timelines involved - which everyone should take the time to read. One particular issue surrounding the Bear Stearns event we discussed, which I feel must have been related more so due to “timing” than anything else, was the revelation of impropriety and the lightening quick removal from office of New York State Governor, Eliot Spitzer [announced resignation March 12, 2008]. Bear Stearns collapsed the very next weekend.
Tip Toeing Through the Tulips
Folks would do well to remember this op-ed piece Spitzer penned for the Washington Post:
Predatory Lenders' Partner in Crime
How the Bush Administration Stopped the States From Stepping In to Help Consumers
By Eliot Spitzer
Thursday, February 14, 2008; Page A25
Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers….
Ms. Fitts explained to me the following:
“The Governor of NY is responsible for three state pension funds one of the largest pension fund pools in the country. The Governor does not have direct control. The NY State Comptroller has the direct governance responsibilities. However, if there is serious fraud, it is the Governor's political responsibility to ensure that the retirement savings of State government workers are protected and the Comptroller and the boards have the resources and support they need to protect such savings. As fund performance impacts the amounts that the state and governmental budgets must fund annually, significant losses in the pension funds can impact government budgets not only in Albany but throughout New York. That is very much the Governor's business.”
Running the Gauntlet
And who would argue, regardless of any personal indiscretion, that Mr. Spitzer had a penchant for prosecuting cases of blatant fraud? How do you think Spitzer might have reacted under these circumstances had he remained governor?
But what I really learned from the dissertation above was this:
“The Governor of NY is responsible for three state pension funds one of the largest pension fund pools in the country.”
This talk of pension funds got me thinking – and researching:
“There are more than 100 public retirement systems in the U.S. managing a combined $2.3 trillion. The amount is $380 billion short of the funds needed to pay pensions over the next 30 years, according to the National Association of State Retirement Administrators in Baton Rouge, Louisiana.”
And then this comment by Fitts got me thinking a little bit more:
“I suspect that one of the reasons for the Bear Stearns deal, related market manipulations combined with the Paulson Plan was the fear of what was due out in March from the pension funds about their losses on mortgage and structured finance paper as well as financial stocks. Remember, UBS, Merrill, Citigroup...these firms package mortgage securities and sell them to investors, with a significant amounts going to pension funds and insurance companies. They traditionally do not hold large amounts of inventory. My guess is their write downs include derivatives and other types of assets. The really big write downs should hit the pension funds. Yet the silence coming from the pension funds since March has been deathly -- just as deathly as the suppression of the gold and silver price.
Spitzer could have proved -- and would have had a moral obligation to prove -- that the federal government's insistence on stopping enforcement in 2005 (see his editorial in the Washington Post -- linked on my blog -- in one of several Spitzer posts). Presumably this means that some of the financial liability for losses could have been shifted to feds or banks or both.
Over the past few months, who hasn’t read or watched articles or interviews streaming from the mainstream financial press about banks caught up in ‘sub-prime’ or derivatives issues – writing off seemingly endless amounts of toxic, un-saleable securitized mortgage derivatives?
But so far, as Fitts said, the silence coming from pension funds HAS BEEN DEAFENING!
Walk On the Wild Side
I decided to take a look at the largest pension pool in the U.S. – the 240 billion Calpers [California Public Employees Pension Fund] - we can see the breakout of their Fixed Income Investments. The following is from their most recent June 30, 2007 Annual Investment Report:
FIXED INCOME REPORTS - Calpers
- ASSET BACKED SECURITIES
- COMMERCIAL MORTGAGE LOANS
- CORPORATE SECURITIES
- DIRECT LOANS
- DOMESTIC CASH EQUIVALENTS
- GOVERNMENT SECURITIES
- HIGH YIELD
- INTERNATIONAL CASH EQUIVALENTS
- INTERNATIONAL DEBT SECURITIES
- INTERNATIONAL FIXED INCOME
- MORTGAGE BACKED SECURITIES (CMO)
- MORTGAGE BACKED SECURITIES (FHLMC)
- MORTGAGE BACKED SECURITIES (FNMA)
- MORTGAGE BACKED SECURITIES (GNMA)
- MORTGAGE LOANS
- SOVEREIGN SECURITIES
- SWAPS
For the purposes of saving you readers a bit of time, represented above are 245 individual asset backed securities, 564 mortgaged backed securities of varying descriptions, 66 individual currency and interest rate swaps and two entries in the high yield category totaling more than 400 million in reported market value.
Selected Calpers Equity Highlights:
Having glanced through the equities portion of the same Calpers report, we see no less than 641 thousand shares of Bear Stearns with a reported market value of 140 bucks per share, more than 22 million shares of B of A with a reported value of 48+ bucks, 23 million shares of Citibank with a reported value of 51+ dollars per share, 565 thousand shares of AMBAC with a reported value of 87+ bucks per share, 948 thousand shares of MBIA valued at 62 bucks+ per share and for a bit of international diversification, let’s not forget 819 thousand shares of good ole Northern Rock valued at 17.70 per share.
Calpers is soon due to release their updated June 2008 Annual Investment Report. Anyone want to place a friendly wager on the extent of losses that are going to be reported?
Run for the Roses?
Isn’t it amazing that some folks REALLY DO KNOW when they’ve had too much of good thing?
The Rats [or at least some of the smart ones] Are Jumping Ship:
CalPERS resignations not connected - turmoil denied
Sam Zuckerman, Chronicle Staff Writer
Wednesday, April 30, 2008
The resignation of the CEO of California's public employee retirement system, announced Monday, was its second high-level departure in less than a week, prompting speculation about turmoil at the $240 billion pension fund.
It seems Calpers is not alone – misery really does love company, eh?
State Street Corp. Is Sued Over Pension Fund Losses
By VIKAS BAJAJ
Published: January 4, 2008The State Street Corporation, which manages $2 trillion for pension funds and other institutions, ousted a senior executive on Thursday and said it would set aside $618 million to cover legal claims stemming from investments tied to mortgage securities.
State Street made the announcement after five clients sued it, claiming they had lost tens of millions of dollars in State Street funds that they were told would be largely invested in risk-free debt like Treasuries. One fund lost 28 percent of its value during the credit troubles in the summer after placing big bets on mortgage-related securities, according to the lawsuits.
I’ve got a ‘sinking feeling’ that State Street’s woes – cited above – are “jacks for openers.”
So who owned the rest of Bear Stearns stock anyway? According to Wikipedia:
Major shareholders [Bear]
The largest Bear Stearns shareholders as of December 2007 are:
- Barrow Hanley Mewhinney & Strauss - 9.73% of the company
- Joseph C. Lewis - 9.36%
- Morgan Stanley - 5.37%
- James Cayne - 4.94%
- Legg Mason Capital Management - 4.84%
- Private Capital Management - 4.69%
- Barclays Global Investors - 3.60%
- State Street 3.01%
- Vanguard Group - 2.67%
- Janus Capital Management - 2.34%
- Legg Mason Funds Management - 1.95%
- Fidelity Management- 1.93%
- Putnam Investment Management - 1.90%
- Neuberger Berman - 1.55%
- UBS - 1.54%
- Mr. Aglamaz - 0.85%
So it wouldn’t be a “stretch” to suggest that State Street [or whoever the beneficial owner of those shares really was] lost a pile of money.
Conclusion[s]: Damage to the financial system is, in all likelihood and despite claims from the likes of Mr. Paulson or Mr. Bernanke, much, much greater than has already been reported. While banks have reported ‘write downs,’ the pension funds have barely, to date, uttered a word.
The public retirement/pension system has likely been “looted.” We just don’t know how bad – yet.
As Catherine Austin Fitts reminds us,
“Remember, UBS, Merrill, Citigroup...these firms package mortgage securities and sell them to investors, with a significant amounts going to pension funds and insurance companies. They traditionally do not hold large amounts of inventory.”
What we can take away from the clarity and wisdom of Ms. Fitts – another shoe is going drop - and soon.
Historically, ownership of physical precious metals has served to insulate investors from systemic mishaps in monetary systems.
Have you adequately protected your assets?
Today’s Market
Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 50 points to 14,269. North American markets were mixed with the DOW ahead 41.40 points to 13,028.20, the NASDAQ down 12.76 to 2,516.09 and the S & P adding 1.30 points to 1,426.65. NYMEX crude oil futures gained 1.08 to end the day at 127.38 per barrel.
On foreign exchange markets the U.S. Dollar Index gained .25 to 73.07.
In the interest rate complex the benchmark 5 yr. government bond finished the day at 3.08% while the 10 yr. bond closed at 3.82%.
Precious metals ended the day higher with COMEX gold futures ahead by 3.80 to 906.20 per ounce while COMEX silver futures added .07 to 17.04 per ounce. The XAU Index gained 1.08 to 188.95 while the HUI added 3.20 to 437.90.
On tap for tomorrow, April PPI data is due. Headline number expected +.4% vs. prior +1.1%. Core [ex food and energy] expected +.2% vs. prior +.2%.
Wishing you all a pleasant evening!
