AUSTIN, Texas—On the 13th floor of a sleek downtown office building here, the trading desks are manned overnight. The chief investment officer favors cowboy boots made of elephant skin. And when a bet pays off, even the secretaries can be entitled to bonuses.
The office's occupant isn't a highflying hedge fund but the Teacher Retirement System of Texas, a public pension fund with 1.3 million members including schoolteachers, bus drivers and cafeteria workers across the state.
It is a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other nontraditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.
Oh, they promise high, steady returns eh?
Sounds like Charlie to me. You know.... Charlie PONZI?
Now I have no quarrel with a private pension system that has no recourse to the public purse making such a decision, provided that the beneficiaries decided to go down this road and accept the risks from doing so.
But that's not the case here, nor with any other public pension system. In these cases if the "strategy" winds up with the result that is mathematically inevitable over time (that is, it is not possible to obtain reward without risk, and the more reward you expect the more risk you take) then the taxpayer will be attacked to make up the difference.
The solution to this problem is quite simple -- remove the backstop.
That is, go ahead and do what you want, but if you can't pay down the road then the system goes into receivership just like anyone else who makes a bet that doesn't pay off, and the pensioners take it in the ass.
If that's an acceptable trade-off for the pensioners then this sort of arrangement is fine. That's called the "free market" and is how things are supposed to work.
But there is no such thing as a free lunch, and there is utterly no argument that one can raise for this sort of arrangement where public employees are able to gamble with the taxpayers money -- getting paid irrespective of whether their bets win or lose.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
Looking for "The Best of Market Ticker"? Check out Ticker Classics.
Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.
The Market Ticker content may be reproduced or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media or for commercial use.
Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.