As if the pension fund weren't in enough trouble itself ...

August 05, 2012|By TIM ROWLAND |

Somewhere, Del. Andy Serafini is coming to life.

He does this — he has earned that right — every time there is more bad news about the Maryland pension fund.

And there was bad news again this week, following reports that the fund had earned a meager 0.36 percent return in fiscal 2012, when the state had been counting on 7.75 percent.

And don’t bother with any jokes about buying Facebook stock, because the state reported that it was done in by its “international investments.” Oh no. Please don’t tell me Maryland was long on ouzo.

The Maryland pension system covers 370,000 retired and not-so-retired public employees. Those who are still in the work force are probably already aware that the state has $20 billion more in obligations than it has in its investment accounts.

This is the message Serafini has been trying to get across for years now, with limited success.

It’s a valuable, if dangerous position to take, because events can make a profit of doom look like Chicken Little. Except this time, perhaps the sky really is falling.

There have been warnings about Maryland’s pension fund in the past. But traditionally, the lawmakers who have been too generous with state employees at the negotiating table have been bailed out by big run-ups in the markets. And that might happen yet again.

So maybe we’re OK. We’ll just hang around until the next big bull market.

But old investors — old in this case being over the age of 40 — might be getting a queasy feeling that the markets of today are less like barometers of earnings and risk, and more like casinos. And that the inevitable long-term rally might not be inevitable, at least not for your average investor and perhaps not for the average institutional investor, either.

Just recently, we saw how J.P Morgan Chase lost $6 billion by essentially putting its chips on red. To put this into perspective, Chase made a flawed bet on interest rates and in so doing, wound up destroying value well in excess of the entire capitalized worth of J.C. Penney and Popeyes Chicken and Biscuits combined.

(For extra credit, think to yourself how much more good would have been achieved had the bank — Chase is a bank, remember — loaned that $6 billion to small, American business owners.)

Many would be quick to say that the stock market is not the same as gambling. Historically, this is true. A reasoned analysis of earnings, liabilities, risk and potential could weed the good companies from the bad.

But that formula is fading and that’s the problem.

Both political parties have tried to assign blame for the housing crash to each other, masking the truth that it wasn’t the bad loans themselves that got us into trouble. The financial system could have weathered bad loans.

The problem was that bad loans were packaged in such a way that they looked like good investments. But we probably could have stood that too; at root, there was still a physical asset, a house, involved.

The implosion came when the gamblers moved in and started betting on whether or not these loan packages would fail. In some cases, the same financial institution that ensured the loan packages would fail was, incredibly, betting on them to succeed. These financial houses are so big that one arm doesn’t know what the other is doing.

And the gamblers are so prevalent in Wall Street and the world around that it is increasingly hard to get a good read on the market. When the price of oil goes up, how do we (or the State of Maryland) know whether the demand for oil is increasing, or whether it’s just gamblers making a big side bet on war in the Middle East?

Today’s market is becoming exclusive, just like everything else — the playground of the insanely wealthy. It’s all a game now, and those 20 percent returns are no longer the product of sound investment, they are the product of hunches, hedges, guesses and blind wagers.

As far as state pensions are concerned, it is a curious irony that the machinery of capitalism has to date always bailed out social spending sprees. But with investment houses looking more like fun houses, it’s becoming a gamble to even play the game. One bad bet by some rogue banker somewhere could make a tenuous pension situation one from which there is no return.

Tim Rowland is a Herald-Mail columnist.

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