Pension Fund Bailout

I think there is a strong likelihood that there will be a significant government bailout of major pension funds across the country. If one thinks of the fact that the government is run by the Democrats, and the traditional Democrat constituencies consist of academics (university endowments), unions (corporate pension plans), teachers (CalSTRS, TIAA-CREF, etc), one envisions that the government will step in somehow to shore up these funds' balance sheets.

It would seem to me that the losses suffered by groups such as CalPERS which may be staring at a loss of upwards of 50%, will have significant troubles servicing their obligations to their pensioners. That is where the Federal Government will step in. So while the Government does have the ability to tax its people up the wazoo that will be viewed as a politically impossible solution over the next couple of years. I can't imagine they will fund that bailout through budget cuts, so that leaves more borrowing against the short end of the yield curve. There will be literally hundreds of pensions to bailout. The first amongst them all will be General Motors. That is a likely consequence of any bailout by the government.

My guess is that it will be the US Government via the Pension Benefit Guaranty Corporation will be the vehicle for these bailouts. But in the article below, it appears that that bailout will need a bailout too. How many dollars will be needed? The shortfall for underfunded liabilities in 2007 (not 2008) was $14 Billion. Imagine what happens once these fund suffer 50% losses? This number may be $50 Billion or more for 2008 alone. Smells like trouble.

http://news.illinois.edu/news/08/1015pensions.html

So who cares? Well the follow on effects of this are that private equitym, hedge funds, real estate, stocks, bonds, basically every conceivable asset class will lose willing investors that mainly consisted of these pension funds. Forced sales in the markets will continue in rapid succession. This will likely push many funds to go out of business.

As of right now, investors in illiquid assets effectively hold cheap/free out-of-the-money options on their properties, considering that their equity investments up front are significantly impaired. Once these options start getting expensive through required equity contributions to cover debt drawdowns, interest carry, and other costs, then suddenly investors will likely break because of a lack of availability of capital from pension funds which may have no liquid assets left to cover these additional commitments (heck, they may not even have the capital to cover their actual commitments).

Sounds like there will be much more forced sales and unwinding. Pension funds, endowments, insurance companies and the like will be continue to crater and losses will shift to government balance sheets.