Risk Won, Florida Taxpayer's Lost

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elgob.bogle
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Risk Won, Florida Taxpayer's Lost

Post by elgob.bogle » Sun Sep 19, 2010 6:01 am

An in-depth front page St Petersburg Times article on how Florida's public funds were depleted with risky investments.

http://www.tampabay.com/news/politics/a ... 122607.ece

It makes me want to take a cash settlement instead of a monthly annuity check when I retire in May.

elgob

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Adrian Nenu
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Post by Adrian Nenu » Sun Sep 19, 2010 6:40 am

The article should have been titled "Wall Street Firms Won And The Taxpayers Lost".

These articles have become the best possible marketing for the dozens of financial firms which are trolling all over Florida attempting to get public employees enrolled in the Florida Retirement System (FRS) to take their pensions as lump sums and invest the money with their firms. I know because as a Florida public employee with 2.5 years until retirement, I have attended more than a few "lunch and learn" seminars on this subject.

One of the lessons here is that investors should inform & educate themselves to fully understand the risk and consequences of an investment before investing their money. If they don't or can't do this, don't invest in it. Period.

This is all the commentary I am willing to contribute about this article so that the discussion doesn't end up locked or deleted on my account. I hope the rest of the readers refrain from making politically tinged statements or engage in pointless debates about who was at fault, etc. The reason I ask for self control and restraint is because everyone who lives in Florida needs to read this article. And everyone can learn about the importance of transparency of investment risk and the consequences of taking on too much risk.

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Last edited by Adrian Nenu on Sun Sep 19, 2010 6:57 am, edited 2 times in total.

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Post by nisiprius » Sun Sep 19, 2010 6:42 am

Astonishing. There's probably no way ever to know, but I read stuff like this, "Going back at least seven years, state money managers had been trying to find a way around rules that restricted them from buying certain risky securities. Time and again they asked, time and again lawyers told them no. But so eager were Florida's money managers for higher yields, they bought them anyway." And I read stuff about Lawrence Summers insisting that Harvard invest its day-to-day operating funds in the endowment fund.

What was going on? Did all these people suffer from gambling addiction--did the whole country go risk-mad? Did towns and universities hand over their money management to the Market Timers of the world? Did people who were supposed to be stewards of other peoples' money get tulip fever? Maybe I'm naïve, because I don't automatically assume they were in the bag--standing to profit personally if they could get their institutions to invest in risky securities.

Was there a mindset that risk is good for people, and that everyone with a pension really ought to be willing to accept the possibility of losing part of it in exchange for a chance of multiplying it?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by kenbrumy » Sun Sep 19, 2010 7:20 am

Why would anyone expect otherwise. The advisers compensation is based on their return. They make serious money in a so-so year but are looking to score big by knocking it out of the park. If it blows up which they think is unlikely because they are "geniuses," they get another high paying job at another state pension fund because they had managed the Florida fund.

The State of Florida is also prodding these guys to get a better return because they know they are seriously underfunding the pension plan unless they get outsized returns.

The incentives and downsides are exactly the same as the guys at AIG that loaded up on all the credit default swaps. I'm willing to bet they are either reemployed somewhere or have retired on their years of massive bonuses.

As to the OP, you have to look at whether the pension is "guaranteed" by the Feds or are you depending on the largess of the State of Florida. The other is to see what the imputed interest rate is for your annuitized payout. If you are not impressed with the interest rate for your expected lifespan, I'd definitely recommend taking the cash. At the risk of closing this thread, there are enough issues with state and municipal pensions that it is realistic to expect a realignment of benefits in some form. Whether it impacts current retirees is left to ones imagination. Our great models of social welfare states (Europe) are addressing this now with great pain amongst their populations.

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What it's like at the top

Post by Taylor Larimore » Sun Sep 19, 2010 7:35 am

Hi Elgob:

Most of us have little understanding of how financial firms and their lobbyists influence public officials. I learned from experience.

At the request of a good friend who was Chairman of the Dade County Housing Authority, I became a volunteer Director. The Housing Authority issues tax-deductible bonds for local housing. It was up to us to decide which bond underwriter would get the lucrative contracts to issue bonds totaling many millions of dollars.

My first question was why were'nt these lucratrive contracts put out for bid? I never got a satisfactory answer.

Each issue of our bonds required a director's signiture. To do this, the underwriting bank would buy us first class airline tickets to New York for signing at the bank which handled the deal. This usually involved a 3 day visit at the most expensive hotels with a limo and lavish meals paid for by the host underwriter. I asked why we couldn't just sign the forms in Miami. I never got a satisfactory answer.

One Christmas a large box arrived at our house from the Bank. The box contained a large expensive clock with my name and "In Appreciation" engraved across the front. I sent it back. All my fellow directors kept theirs.

Soon after this, although the Chairman and I were the only two directors with a financial background, I quit.
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by SP-diceman » Sun Sep 19, 2010 8:11 am

nisiprius wrote:Astonishing. There's probably no way ever to know, but I read stuff like this, "Going back at least seven years, state money managers had been trying to find a way around rules that restricted them from buying certain risky securities. Time and again they asked, time and again lawyers told them no. But so eager were Florida's money managers for higher yields, they bought them anyway." And I read stuff about Lawrence Summers insisting that Harvard invest its day-to-day operating funds in the endowment fund.

What was going on? Did all these people suffer from gambling addiction--did the whole country go risk-mad? Did towns and universities hand over their money management to the Market Timers of the world? Did people who were supposed to be stewards of other peoples' money get tulip fever? Maybe I'm naïve, because I don't automatically assume they were in the bag--standing to profit personally if they could get their institutions to invest in risky securities.

Was there a mindset that risk is good for people, and that everyone with a pension really ought to be willing to accept the possibility of losing part of it in exchange for a chance of multiplying it?
Most of these things go under the assumption that market returns
will be 8% per year.
As soon as there are "bad return" years they are in trouble.

Why hasnt the market gone up like it is supposed to?
Silly market.


Thanks
SP-diceman

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Post by saurabhec » Sun Sep 19, 2010 8:14 am

nisiprius wrote:And I read stuff about Lawrence Summers insisting that Harvard invest its day-to-day operating funds in the endowment fund.
I am almost certain that you are misinterpreting or misinformed on this topic. I suspect you read something critical of the Harvard endowment fund and they used this as a talking point to raise people's hackles. Most likely the source of this comment sufferes from "mental accounting bias". The endowment has to support the operating funds of Harvard (at least the shortfall after tutition, donations, and grants) in perpetuity. So funding that liability without keeping money in equities is impossible.

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Post by Index Fan » Sun Sep 19, 2010 8:15 am

Corrupt business as usual is only questioned when things go really bad.

Lots of people have been finding this out recently.
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Re: What it's like at the top

Post by saurabhec » Sun Sep 19, 2010 8:29 am

Taylor Larimore wrote:Most of us have little understanding of how financial firms and their lobbyists influence public officials. I learned from experience.
This is yet another example of why it is not wise to grant too much power to government officials through regulation. Power corrupts. Local government in the US is astonishingly corrupt. It never ceases to amaze me that what is considered legal in this country. Emerging markets might be rife with public sector and political corruption, but there they don't use euphemisms for it. The American way in this regard is far more dangerous. It fools citizens into thinking there is no corruption when it is pervasive.

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Re: What it's like at the top

Post by iceport » Sun Sep 19, 2010 9:07 am

saurabhec wrote:
Taylor Larimore wrote:Most of us have little understanding of how financial firms and their lobbyists influence public officials. I learned from experience.
This is yet another example of why it is not wise to grant too much power to government officials through regulation. Power corrupts. Local government in the US is astonishingly corrupt. It never ceases to amaze me that what is considered legal in this country. Emerging markets might be rife with public sector and political corruption, but there they don't use euphemisms for it. The American way in this regard is far more dangerous. It fools citizens into thinking there is no corruption when it is pervasive.
While I wholeheartedly agree with most of your post, I can't follow the logic by which you arrive at the first sentence. If police are found to be corrupt and abuse their authority, would the solution be to eliminate the laws they enforce so we wouldn't need the police anymore?

--Pete

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Post by Sam I Am » Sun Sep 19, 2010 9:15 am

Message deleted.
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Re: What it's like at the top

Post by Beagler » Sun Sep 19, 2010 9:16 am

Taylor Larimore wrote:Hi Elgob:

Most of us have little understanding of how financial firms and their lobbyists influence public officials. I learned from experience.

At the request of a good friend who was Chairman of the Dade County Housing Authority, I became a volunteer Director. The Housing Authority issues tax-deductible bonds for local housing. It was up to us to decide which bond underwriter would get the lucrative contracts to issue bonds totaling many millions of dollars.

My first question was why were'nt these lucratrive contracts put out for bid? I never got a satisfactory answer.

Each issue of our bonds required a director's signiture. To do this, the underwriting bank would buy us first class airline tickets to New York for signing at the bank which handled the deal. This usually involved a 3 day visit at the most expensive hotels with a limo and lavish meals paid for by the host underwriter. I asked why we couldn't just sign the forms in Miami. I never got a satisfactory answer.

One Christmas a large box arrived at our house from the Bank. The box contained a large expensive clock with my name and "In Appreciation" engraved across the front. I sent it back. All my fellow directors kept theirs.

Soon after this, although the Chairman and I were the only two directors with a financial background, I quit.
That's an amazing story. Most of us would never know this type of thing goes on.
Last edited by Beagler on Sun Sep 19, 2010 9:22 am, edited 1 time in total.
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Post by neverknow » Sun Sep 19, 2010 9:21 am

..
Last edited by neverknow on Mon Jan 17, 2011 4:01 pm, edited 1 time in total.

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Post by saurabhec » Sun Sep 19, 2010 9:23 am

neverknow wrote:
nisiprius wrote:Was there a mindset that risk is good for people, and that everyone with a pension really ought to be willing to accept the possibility of losing part of it in exchange for a chance of multiplying it?
nisiprius - I think you're on to something here. A mindset of the more risk the better, or you were somehow a wimp, a looser, a pansy. The terms "cowboy up", "man up" became part of the language in the past 10 years.

Always - the term is "risk tolerance", rather then "need for risk". What does "risk tolerance" mean? Can I chug 1 bottle of whiskey? How about 2 bottles of whiskey? How about 3 great big bottles of whiskey all in under 30 minutes.

It became a "status" thing.
neverknow
It is just as likely that pension funds are taking on more risk because they are struggling to meet the liabilities incurred by politicians and unions colluding to hand out generous retirement benefits funded by taxpayers.

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Post by nisiprius » Sun Sep 19, 2010 9:27 am

saurabhec wrote:
nisiprius wrote:And I read stuff about Lawrence Summers insisting that Harvard invest its day-to-day operating funds in the endowment fund.
I am almost certain that you are misinterpreting or misinformed on this topic. I suspect you read something critical of the Harvard endowment fund and they used this as a talking point to raise people's hackles. Most likely the source of this comment sufferes from "mental accounting bias". The endowment has to support the operating funds of Harvard (at least the shortfall after tutition, donations, and grants) in perpetuity. So funding that liability without keeping money in equities is impossible.
Here's what I read:Harvard ignored warnings about investments
On Nov 29, in the Boston Globe, Beth Healy wrote:Advisers told Summers, others not to put so much cash in market; losses hit $1.8b....

...when it came to handling Harvard’s cash account, the former US Treasury secretary had no doubts. Widely considered one of the most brilliant economists of his generation, Summers pushed to invest 100 percent of Harvard’s cash with the endowment and had to be argued down to 80 percent, financial executives say.
It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Post by richard » Sun Sep 19, 2010 9:35 am

Florida politicians are corrupt and break the law. Who would have thought such a thing?

Out of curiosity, what actions are we supposed to take in response to this thread? Is it more than just one of many "whines and rants about the crimes, shortcomings or stupidity of other people"?

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Post by Adrian Nenu » Sun Sep 19, 2010 9:37 am

Thank you for sharing your experience with us Taylor. It is something I had long suspected.

Adrian
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Re: What it's like at the top

Post by iceport » Sun Sep 19, 2010 9:40 am

Beagler wrote:
Taylor Larimore wrote:Hi Elgob:

Most of us have little understanding of how financial firms and their lobbyists influence public officials. I learned from experience.

At the request of a good friend who was Chairman of the Dade County Housing Authority, I became a volunteer Director. The Housing Authority issues tax-deductible bonds for local housing. It was up to us to decide which bond underwriter would get the lucrative contracts to issue bonds totaling many millions of dollars.

My first question was why were'nt these lucratrive contracts put out for bid? I never got a satisfactory answer.

Each issue of our bonds required a director's signiture. To do this, the underwriting bank would buy us first class airline tickets to New York for signing at the bank which handled the deal. This usually involved a 3 day visit at the most expensive hotels with a limo and lavish meals paid for by the host underwriter. I asked why we couldn't just sign the forms in Miami. I never got a satisfactory answer.

One Christmas a large box arrived at our house from the Bank. The box contained a large expensive clock with my name and "In Appreciation" engraved across the front. I sent it back. All my fellow directors kept theirs.

Soon after this, although the Chairman and I were the only two directors with a financial background, I quit.
That's an amazing story. Most of us would never know this type of thing goes on.
Consider yourself lucky. Here in Connecticut, we see it all the time. For example: Ex-Treasurer of Connecticut Tells of Life in Jail

Taylor, this is another example of your honesty and integrity. The path you chose was far more difficult than the alternative. (Unfortunately, it's probably "the road less traveled".)

--Pete

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Re: What it's like at the top

Post by Chas » Sun Sep 19, 2010 9:59 am

Taylor Larimore wrote:Hi Elgob:

Most of us have little understanding of how financial firms and their lobbyists influence public officials. I learned from experience.

At the request of a good friend who was Chairman of the Dade County Housing Authority, I became a volunteer Director. The Housing Authority issues tax-deductible bonds for local housing. It was up to us to decide which bond underwriter would get the lucrative contracts to issue bonds totaling many millions of dollars.

My first question was why were'nt these lucratrive contracts put out for bid? I never got a satisfactory answer.

Each issue of our bonds required a director's signiture. To do this, the underwriting bank would buy us first class airline tickets to New York for signing at the bank which handled the deal. This usually involved a 3 day visit at the most expensive hotels with a limo and lavish meals paid for by the host underwriter. I asked why we couldn't just sign the forms in Miami. I never got a satisfactory answer.

One Christmas a large box arrived at our house from the Bank. The box contained a large expensive clock with my name and "In Appreciation" engraved across the front. I sent it back. All my fellow directors kept theirs.

Soon after this, although the Chairman and I were the only two directors with a financial background, I quit.
The surprising thing is to notice how cheaply such lucrative business is bought by companies from those with the power to choose. I really do accept Taylor's story as to the benefits being a luxury trip and an expensive clock without any cash under the table or such. The value of influence has really depreciated due to good law enforcement over the years. Now a company can buy a million dollar profit deal for the cost of a fishing or hunting trip. The times are hard and it just doesn't pay well to be a crook selling influence any more.
Chas | | The course of true love never did run smooth. Shakespeare

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Post by Adrian Nenu » Sun Sep 19, 2010 10:06 am

http://online.wsj.com/article/SB1000142 ... Collection

In addition to understanding the risk taken, overly optimistic return assumptions (projected 8% average annual return for pension funds in aggregate) can cause havoc with financial goals if the returns fall short. Investors should do projections with various rates of return to get a better understanding of the variability of their retirement lump sum. Individual investors face the same problems pension funds do.

Adrian
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Post by Chas » Sun Sep 19, 2010 10:32 am

richard wrote:Florida politicians are corrupt and break the law. Who would have thought such a thing?

Out of curiosity, what actions are we supposed to take in response to this thread? Is it more than just one of many "whines and rants about the crimes, shortcomings or stupidity of other people"?
I think the only way to control officials with power is with a zero tolerance rule. That means not even a McDonald's meal or a bottle of whiskey for Christmas, because some people can be bought that cheaply. Additionally the number of people with the power should be as numerous and independent as possible, but of course a bidding system should be used whenever possible. Also, it is a mistake to tie a manager's pay to performance as most people here are erudite enough to know. Managers should be given a salary and benefits appropriate to attract those that would make a career of the job and an independent audit should be performed annually.

Now that all sounds good, but it is impossible to accomplish if the control is political. I don't think anyone has figured out that yet. Socrates was undoubtedly a wise man, but he had one big failing. Socrates believed that if a person truly understood virtue they would automatically be virtuous because of its inherent rightness. Unfortunately, that just isn't so.
Chas | | The course of true love never did run smooth. Shakespeare

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Post by heyyou » Sun Sep 19, 2010 11:01 am

Like weeds growing in newly exposed soil, the greedy will follow the money. All we can do is remove the corrupt as they are exposed, hopefully with plenty of media attention. There is not a permanent solution to human greed.

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Post by Index Fan » Sun Sep 19, 2010 11:20 am

I'm afraid it's the human condition. 'If only the right people were in charge' always seems to fail in the long run. Having stern rules in place can help, but over time, they become ignored or even flouted.

Then it is the responsibility of concerned citizens to say 'enough'. Overall, we get the government we deserve.
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Post by saurabhec » Sun Sep 19, 2010 11:36 am

nisiprius wrote:It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
I am not sure there is any "there" there. There are plenty of universities that did not puruse this strategy and are still cutting operating budgets and laying off staff. It seems like the surplus earned by the cash account in the good years should have more than compensated for the shortfall in this bear market. One has to look across the full cycle. Summers was not loved much at Harvard and has plenty of enemies and he is not a favorite of liberals either. It would not surprise me to see people seek to blame him for all the downsizing. I don't consider his strategy to be prudent, but it is mental accounting to focus on one bad year and ignore the surplus in the good years.

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Post by the intruder » Sun Sep 19, 2010 11:59 am

Adrian Nenu wrote:http://online.wsj.com/article/SB1000142 ... Collection

In addition to understanding the risk taken, overly optimistic return assumptions (projected 8% average annual return for pension funds in aggregate) can cause havoc with financial goals if the returns fall short. Investors should do projections with various rates of return to get a better understanding of the variability of their retirement lump sum. Individual investors face the same problems pension funds do.

Adrian
anenu@tampabay.rr.com
All pension funds have calulations that show how much a change in the projected investment rate of return affect contributions. For example, CALSTRS, the state pension plan that covers 300,000 CA school teachers currently has a projected return of 8% which pays for 75% of the cost of each years benefits. 25% of the benefits are paid from contributions. However, according to the actuaries, the contribution rate needs to be increased by 14% to pay benefite in full if the projected rate of return remains at 8%. Under CA law the contributions to CALSTRS as a % of payroll are as follows: employees 8%, SD 8.25%, State 2%. If the projected rate of investment return is reduced to 7.75% the contribution rate must increase by 3%. If CALSTRS reduces its investment rate to 7.75% the contribution rate of 18.25% must increase by 17% or about 3% of payroll.

Since CA is broke the 3% increase in contributions would require a 1.5% increase by both employees and SDs.

I dont know what the projections are for the FL RET plan if the projected investment rate of return decreases but you should be able to find the answer in the most recent report of the plan's actuaries.

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Post by EO 11110 » Sun Sep 19, 2010 2:50 pm

just my opinion:

the action to take is to support creation of state banks. like south dakota has -

the nyc banks' monopoly on bond underwriting has created this mess.

a state bank doing the underwriting would assure that the profits of such endeavors stay within the state treasury and benefit the state's citizens....and not carted off to nyc for tens of billions in bonuses.

the current system is full of fraud and misaligned incentives (as the previous posters have shown)

thanks for the great thread and comments.

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Post by kenner » Sun Sep 19, 2010 4:27 pm

Home prices in America will always increase and will never decrease.

It is perfectly safe for any bank or other financial institution to loan hundreds of thousands of dollars to individuals who have no job, no income, no assets and no credit history.

The above falsehoods were the underlying premises that fueled Wall Street's sale of trillions of dollars of toxic assets all over the planet, including Florida.
The greedy masters of the universe on Wall Street hired computer experts (including physicists) to create computer programs that seemingly justified sales of toxic assets based on the above mentioned falsehoods.

Anyone can try to blame relatively investment-naive Florida politicians for the massive investment losses in the state.

I say that Wall Street's greed and its ability to sell garbage makes Wall Street much more guilty than the Florida officials who thought that Wall Street was honest.

P. S. It would be interesting to hear from anyone who thinks that the first two sentences in this post are really true. They might have a future on Wall Street.

Paladin

Post by Paladin » Sun Sep 19, 2010 4:35 pm

saurabhec wrote:
nisiprius wrote:It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
I am not sure there is any "there" there. There are plenty of universities that did not puruse this strategy and are still cutting operating budgets and laying off staff. It seems like the surplus earned by the cash account in the good years should have more than compensated for the shortfall in this bear market. One has to look across the full cycle. Summers was not loved much at Harvard and has plenty of enemies and he is not a favorite of liberals either. It would not surprise me to see people seek to blame him for all the downsizing. I don't consider his strategy to be prudent, but it is mental accounting to focus on one bad year and ignore the surplus in the good years.
It was the cash account. How much clearer can that be? If you Google you will see a number of articles on Summer's approach to managing Harvard's operating monies.

Paladin

Post by Paladin » Sun Sep 19, 2010 4:36 pm

nisiprius wrote:
saurabhec wrote:
nisiprius wrote:And I read stuff about Lawrence Summers insisting that Harvard invest its day-to-day operating funds in the endowment fund.
I am almost certain that you are misinterpreting or misinformed on this topic. I suspect you read something critical of the Harvard endowment fund and they used this as a talking point to raise people's hackles. Most likely the source of this comment sufferes from "mental accounting bias". The endowment has to support the operating funds of Harvard (at least the shortfall after tutition, donations, and grants) in perpetuity. So funding that liability without keeping money in equities is impossible.
Here's what I read:Harvard ignored warnings about investments
On Nov 29, in the Boston Globe, Beth Healy wrote:Advisers told Summers, others not to put so much cash in market; losses hit $1.8b....

...when it came to handling Harvard’s cash account, the former US Treasury secretary had no doubts. Widely considered one of the most brilliant economists of his generation, Summers pushed to invest 100 percent of Harvard’s cash with the endowment and had to be argued down to 80 percent, financial executives say.
It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
And what is Mr Summers doing now I wonder? :lol:

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How does it continue to happen?

Post by antiqueman » Sun Sep 19, 2010 4:51 pm

What I dont understand or maybe I do understand but cant comprehend it, is that this sort of thing has been happening for years and it continues to occur with such frequency. It is very hard to grasp how they things can happen to a STATE pension system. Its one thing for individuals to be misled but a STATE pension. I am sure its not limited to Florida.



I note Taylors post but its hard to believe that fiduciarys over a plan would make decesion on a free trip to New York and a clock ( or something similar)

All of this is so depressing and scary for all people who rely on pensions.

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Post by saurabhec » Sun Sep 19, 2010 5:33 pm

Paladin wrote:
saurabhec wrote:
nisiprius wrote:It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
I am not sure there is any "there" there. There are plenty of universities that did not puruse this strategy and are still cutting operating budgets and laying off staff. It seems like the surplus earned by the cash account in the good years should have more than compensated for the shortfall in this bear market. One has to look across the full cycle. Summers was not loved much at Harvard and has plenty of enemies and he is not a favorite of liberals either. It would not surprise me to see people seek to blame him for all the downsizing. I don't consider his strategy to be prudent, but it is mental accounting to focus on one bad year and ignore the surplus in the good years.
It was the cash account. How much clearer can that be? If you Google you will see a number of articles on Summer's approach to managing Harvard's operating monies.
Yeah but what about the excess returns they earned in the good years on the cash account? Like I said I don't consider what was done prudent, but one can't just pick one year.

Paladin

Post by Paladin » Sun Sep 19, 2010 5:37 pm

saurabhec wrote:
Paladin wrote:
saurabhec wrote:
nisiprius wrote:It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
I am not sure there is any "there" there. There are plenty of universities that did not puruse this strategy and are still cutting operating budgets and laying off staff. It seems like the surplus earned by the cash account in the good years should have more than compensated for the shortfall in this bear market. One has to look across the full cycle. Summers was not loved much at Harvard and has plenty of enemies and he is not a favorite of liberals either. It would not surprise me to see people seek to blame him for all the downsizing. I don't consider his strategy to be prudent, but it is mental accounting to focus on one bad year and ignore the surplus in the good years.
It was the cash account. How much clearer can that be? If you Google you will see a number of articles on Summer's approach to managing Harvard's operating monies.
Yeah but what about the excess returns they earned in the good years on the cash account? Like I said I don't consider what was done prudent, but one can't just pick one year.
Nothing to do with one year. It's like investing your checking account in securities that you cannot easily liquidate and that's exactly what happened.

saurabhec
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Post by saurabhec » Sun Sep 19, 2010 5:51 pm

Paladin wrote:
saurabhec wrote:
Paladin wrote:
saurabhec wrote:
nisiprius wrote:It was the cash account. It was invested in the endowment fund. It was not "mental accounting;" the university had to stop construction, stop funding research project and lay people off because of it. If it had been mental accounting, they ought to have been able to liquidate appropriate assets from the endowment fund to avoid the cutbacks.
I am not sure there is any "there" there. There are plenty of universities that did not puruse this strategy and are still cutting operating budgets and laying off staff. It seems like the surplus earned by the cash account in the good years should have more than compensated for the shortfall in this bear market. One has to look across the full cycle. Summers was not loved much at Harvard and has plenty of enemies and he is not a favorite of liberals either. It would not surprise me to see people seek to blame him for all the downsizing. I don't consider his strategy to be prudent, but it is mental accounting to focus on one bad year and ignore the surplus in the good years.
It was the cash account. How much clearer can that be? If you Google you will see a number of articles on Summer's approach to managing Harvard's operating monies.
Yeah but what about the excess returns they earned in the good years on the cash account? Like I said I don't consider what was done prudent, but one can't just pick one year.
Nothing to do with one year. It's like investing your checking account in securities that you cannot easily liquidate and that's exactly what happened.
It is still mental accounting. You can't ding him for just the one bad year (by which time it seems he had already left) without comparing that loss to the excess returns generated in prior years the strategy was used (oh wait did they spend the surplus?). Also, Harvard has such a large endowment that a few holdings could easily have been sold to meet any shortfall. It's not like that is untouchable. Plenty of universities have been downsizing, its not just Harvard, so that in itself would suggest that this is not the proximate cause for cutting back and layoffs.

Paladin

Post by Paladin » Sun Sep 19, 2010 6:00 pm

saurabhec wrote:
Paladin wrote:
saurabhec wrote:
Paladin wrote:
saurabhec wrote: I am not sure there is any "there" there. There are plenty of universities that did not puruse this strategy and are still cutting operating budgets and laying off staff. It seems like the surplus earned by the cash account in the good years should have more than compensated for the shortfall in this bear market. One has to look across the full cycle. Summers was not loved much at Harvard and has plenty of enemies and he is not a favorite of liberals either. It would not surprise me to see people seek to blame him for all the downsizing. I don't consider his strategy to be prudent, but it is mental accounting to focus on one bad year and ignore the surplus in the good years.
It was the cash account. How much clearer can that be? If you Google you will see a number of articles on Summer's approach to managing Harvard's operating monies.
Yeah but what about the excess returns they earned in the good years on the cash account? Like I said I don't consider what was done prudent, but one can't just pick one year.
Nothing to do with one year. It's like investing your checking account in securities that you cannot easily liquidate and that's exactly what happened.
It is still mental accounting. You can't ding him for just the one bad year (by which time it seems he had already left) without comparing that loss to the excess returns generated in prior years the strategy was used (oh wait did they spend the surplus?). Also, Harvard has such a large endowment that a few holdings could easily have been sold to meet any shortfall. It's not like that is untouchable. Plenty of universities have been downsizing, its not just Harvard, so that in itself would suggest that this is not the proximate cause for cutting back and layoffs.
They seemed to have trouble meeting their current year commitments. I can ding him for a strategy whereby there are no short term holdings. I'm sure that would go over well with the Bogleheads.

If you think this is a good idea I won't be able to convince you otherwise.

SP-diceman
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Post by SP-diceman » Sun Sep 19, 2010 6:15 pm

kenner wrote:Home prices in America will always increase and will never decrease.

It is perfectly safe for any bank or other financial institution to loan hundreds of thousands of dollars to individuals who have no job, no income, no assets and no credit history.

The above falsehoods were the underlying premises that fueled Wall Street's sale of trillions of dollars of toxic assets all over the planet, including Florida.
The greedy masters of the universe on Wall Street hired computer experts (including physicists) to create computer programs that seemingly justified sales of toxic assets based on the above mentioned falsehoods.

Anyone can try to blame relatively investment-naive Florida politicians for the massive investment losses in the state.

I say that Wall Street's greed and its ability to sell garbage makes Wall Street much more guilty than the Florida officials who thought that Wall Street was honest.

P. S. It would be interesting to hear from anyone who thinks that the first two sentences in this post are really true. They might have a future on Wall Street.
It takes two to tango.
Wallstreet cant do anything unless the folks want a home for nothing.
Ooooops! did I just let a cat out of the bag.



Thanks
SP-diceman

jon-nyc
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Location: New York

Re: Risk Won, Florida Taxpayer's Lost

Post by jon-nyc » Mon Sep 20, 2010 4:45 am

elgob.bogle wrote:Risk Won, Florida's Taxpayers Lost

Florida has taxpayers? Who knew? :P

leo383
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Location: Durham, NC

Post by leo383 » Mon Sep 20, 2010 6:47 am

neverknow

It is just as likely that pension funds are taking on more risk because they are struggling to meet the liabilities incurred by politicians and unions colluding to hand out generous retirement benefits funded by taxpayers.
Plus, with aging populations and a near zero interest rate environment, the heat is on to get any kind of return that may keep things afloat a little longer.

I don't envy anyone running a pension fund right now.

Patchy Groundfog
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Post by Patchy Groundfog » Mon Sep 20, 2010 7:38 am

During the boom years, econmists and financial advisors were warning about the risk of being too conservative.
AT LONG LAST, S.C. WADES INTO MARKET
State, The (Columbia, SC) - Sunday, July 11, 1999
Author: C. GRANT JACKSON, Staff Writer

South Carolina finally has some of its state retirement money invested in the stock market.
In 1996, voters approved investing the pension money, and a little over a week ago, the state finished placing $917 million into the market. The event was heralded by the appearance of Senate Finance Committee Chairman John Drummond, House Ways and Means Committee Chairman Henry Brown and other state officials at the New York Stock Exchange, where they rang the bell to close trading.
South Carolina was the last of the 50 states to include stocks in the portfolio of its retirement system.
While other states were reaping the gains of a stock market fueled by the longest peacetime expansion in our country's history, South Carolina sat on the sidelines.
Getting back into the market required voters' approval of a constitutional amendment that had banned putting state money into equities since 1895, when the state was swindled by investments in canal and rail project stocks .
The best things in life aren't things.

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StoneReader
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Post by StoneReader » Mon Sep 20, 2010 7:54 am

Taylor,

My mom lives in Largo, Florida and is too old to follow all of this. But for her, I say "Thanks" for your lonely and quiet effort to bring some honesty to local government.

Stone

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rcshouldis
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Post by rcshouldis » Mon Sep 20, 2010 8:23 am

nisiprius wrote:Astonishing. There's probably no way ever to know, but I read stuff like this, "Going back at least seven years, state money managers had been trying to find a way around rules that restricted them from buying certain risky securities. Time and again they asked, time and again lawyers told them no. But so eager were Florida's money managers for higher yields, they bought them anyway." And I read stuff about Lawrence Summers insisting that Harvard invest its day-to-day operating funds in the endowment fund.

What was going on? Did all these people suffer from gambling addiction--did the whole country go risk-mad? Did towns and universities hand over their money management to the Market Timers of the world? Did people who were supposed to be stewards of other peoples' money get tulip fever? Maybe I'm naïve, because I don't automatically assume they were in the bag--standing to profit personally if they could get their institutions to invest in risky securities.

Was there a mindset that risk is good for people, and that everyone with a pension really ought to be willing to accept the possibility of losing part of it in exchange for a chance of multiplying it?

Things had been going well for so long that the people learned to TRUST Wall Street. their advisers, and the financial system as a whole. Most younger investors never knew that they had to have a healthy distrust when it comes to investing.
I remember a number of years ago our church was planning for a new building. They didn't have all the money they needed but they had a good portion. The church financial leadership conducted a meeting on how they should raise the remaining money. I was surprised at the number of people who suggested that they just put the money in the stock market ( at the time the market was rising in the dot com bubble). They talked like it was some sure thing and they would get a 20% return on their money. How childish and foolish I thought.
Thank goodness that the financial leadership had the wisdom to reject the idea. The scary part is the fact that most did not even consider risk or the fact that the building fund was not a long term investment. The new building was planned within a few years.

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