In the unfolding nightmare that is the subprime loan debacle, it turns out that a large segment of the population invested in these loans are the pension funds of retirees and baby boomers. Many of these funds are administered by religious and public pension fund entities for service workers, teachers, firefighters and police. The pension funds hold these loans in the form of bundled-up "toxic waste" Collateralized Debt Obligations (CDOs). Yet the current spiraling out-of-control that we are seeing now with the subprime loan foreclosures didn't begin yesterday, it was a little further back.
This is ironic because many of these same retirees and baby boomers elected a Republican Congress back in 2000 and 2004, whose majority made it possible for such a slanted mortgage playing field to be created without inquiry or investigation. And the Bush Administration appointed the sleaze-bag lawyers, accountants and business people charged with oversight responsibilitites over Wall Street and in the real estate banking industry. Who then turned their backs. As one low-to-moderate income family after another slides into mortgage default and loses their home. A now it comes full-circle....
Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund By David Evans
June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of Collateralized Debt Obligations (CDOs) to public pension funds. At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO. ``It has a very high cash yield to it,'' Fleischhacker says at the March convention. ``I think a lot of people are confused about what this product is and how it works.''
Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches. They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out. Fleischhacker, 45, says she doesn't associate toxic waste with the equity tranches she's selling. Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.
Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called ``first loss'' portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody's Investors Service or Standard & Poor's.
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Because CDO contents are secretive, fund managers can't easily track the value of the components that go into these bundles. ``You need to monitor the collateral in your investment and make sure you're comfortable there will be no defaults,'' says Satyajit Das, a former Citigroup banker who has written 10 books on debt analysis. Most investors can't do that because it's extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody's and Morgan Stanley.
Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO. ``It's grossly inappropriate to take this level of risk,'' he says. ``Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig.''
Street says the big risks taken by public pension funds managers to juice up their investment performance with CDO equity tranches could result in big losses. Those tranches are filled with risky debt, which is sometimes in the form of subprime mortgages, he says.
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More at link:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aW5vEJn3LpVw&refer=news ============================
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