61% Underfunded Illinois Teachers Pension Fund Goes For Broke,...By Selling Billions In CDS

Zero Hedge ^ | 06/14/10 | Tyler Durden

[TigerLikesRooster]

61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS

Submitted by Tyler Durden on 06/14/2010 14:47 -0500

“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank.” So begins a story by Alexandra Harris of the Medill Journalism school at Northwestern, which, however, does not focus on some exotic product-specialized hedge fund, or some discount window (taxpayer capital) backed prop desk (hedge fund) at a TBTF bank, but instead at the 61% underfunded, $33.7 billion Illinois Teachers Retirement System (TRS), which just happened to lose $4.4 billion in 2009 (a year when, courtesy of America's conversion from capitalism to socialism, the market rose 60%), and 5% in2008.

Yet underperformance can be explained. What can not, is that the TRS has now become a shadow AIG. As Harris notes "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps, insurance-like contracts that guarantee payment in the event of a default, that were blamed in part for the 2008 collapse of Lehman Bros. and bailout of insurance giant American International Group Inc., or AIG."

Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S!

[TigerLikesRooster]

There are many big bangs in waiting all over the world.

[TigerLikesRooster]

P!

[Gondring]

Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out [...]

Good ol' Illinois-style fascist economics...

"In actual fact, it is the State, i.e. the taxpayer, who has become responsible to private enterprise. In Fascist Italy the State pays for the blunders of private enterprise. As long as business was good, profit remained to private initiative. When the depression came, the Government added the loss to the tax-payer's burden. Profit is private and individual. Loss is public and social."

--Under the Axe of Fascism, by Gaetano Salvemini, p. 416 (1936).

On the bailouts, which were targeted to large corporations but not small businesses:

"In December 1932 a Fascist financial expert, Signor Mazuchelli, estimated that more than 8.5 billion lire had been paid out by the Government from 1923 to 1932 in order to help depressed industries (Rivista Bancaria, December 15th, 1932, p.1,007). From December 1932 to 1935 the outlay must have doubled."

--Under the Axe of Fascism, by Gaetano Salvemini (1936).

[Uncle Chip]

All it will take is another Flash Crash-like event, or a liquidity crunch, and the 355,000 "full-time, part-time and substitute public school teachers and administrators working outside the city of Chicago" will likely end up with a big, fat donut in their retirement portfolios courtesy of some deranged lunatic, portfolio manager, situated externally at a bank like Goldman Sachs, who in taking a page straight out of Obama's bailout nation, has decided there is no such thing as risk. And to those naive enough to think the TRS is the only such fund which has now gone all-in on "no risk and infinite return", wait until such stories start emerging about every single massively underfunded pension and fully insolvent fund in the US.

It couldn't happen to a more deserving group of greedy underperforming overpaid unionists.

[SAJ]

Geez, whereinhell can I (or any private investor) buy a CD swap on Illinois debr regarding teacher/education pensions?

I'll **cheerfully** pay anyone who offers a solid and doable recommendation on this!

Talk about toast, good grief! Their pension system is absolutely guaranteed to fail w/in 10 yrs' time, and no way on this planet to bail it out.

What do I have to pay? 400 bp? 600? Even 900 is highly acceptable from a risk standpoint.

DEFINITE CASH AWARDS (and HAPPY to pay them) to anyone who can steer me to a bank/lender/financier dumb enough to sell CD swaps on the IL 'education' pension fund!

Good trading to all, SAJ

[Da Coyote]

The only thing more pathetic than progressives attempting to practice economics is progressives attempting to understand science.

[Extremely Extreme Extremist]

BTTT

[TitansAFC]

Chew on this:

There are more education majors currently enrolled in U.S. Colleges than there are teachers teaching in classrooms in all of America.

Teachers are going to soon endure multiple life lessons.

[razorback-bert]

it is the fourth-riskiest investment portfolio for a pension fund in the U.S!

Wonder who the top three are and how deep in the doo-doo they are?

[sarasmom]

“It couldn't happen to a more deserving group of greedy underperforming overpaid unionists.

AGREED!

And soon to be repeated throughout the USA by their ideological brethren.

[dennisw]

amazing!!

[1010RD]

You mean two subjects they’re supposed to be teaching?

[RegulatorCountry]

If I were to venture a guess, CalPERS would be one of them.

[TigerLikesRooster]

We are heading for epic grand-finale even Hollywood would be envious of.

[dennisw]

We are heading for epic grand-finale even Hollywood would be envious of. >>>>>>>>>

Then people better get prepared mentally and in all other ways

[pointsal]

The juicy story may be in the expense and commission section of the P&L. Wonder who and how much got paid out for “performance” albeit poor performance.

[pointsal]

Which outfits have the honor of being 1-2-3 for risky portfolios?

Help please! Names

[supercat]

Demonstrating just how far the fund is willing to go in the "for broke" category, knowing full well that if it repeats AIG's implosion, the government will likely bail it out, is the disclosure that a stunning 81.5% of the fund's investments are considered risky - this means it is the fourth-riskiest investment portfolio for a pension fund in the U.S!

Fundamentally, the U.S. government is allowing pension fund managers to gamble with U.S. taxpayer funds. Since those managers have no particular fiduciary responsibility to the U.S. taxpayer, allowing them to free-roll with U.S. taxpayer money is a recipe for disaster.

That having been said, are they really on the 'insurer' rather than 'insured' side of credit default swaps? If so, I would think that would open them up to liabilities larger than any assets they could possibly possess.