Wednesday November 21, 09:05 PM
Thomson Focus: Pension funds seen posting huge losses from subprime investments
NEW YORK (Thomson Financial) - Over the past several years, U.S. pension funds have been among the top investors in the mortgage-backed securities (MBS) and collateralized debt obligation (CDO) markets, along with their real-money partners, insurance
companies and money managers. After years of funnelling money into MBS and CDOs -- portfolios of mortgages bundled and sold as debt securities -- the total size of pension funds' securitization holdings are massive.
With thousands of pension funds invested in housing debt either directly or through hedge funds, the figure could add up to tremendous losses for many of the nation's employees.
Thomas Martin, president of the Homeowners Consumer Center, a Washington, D.C.-based consumer advocacy group, estimates that pension funds will take a $1 trillion hit from the devalued securities. 'This is going to be scary,' he said in an interview with Thomson Financial News. 'We think the Fed will have to step in and bail out at least the pension funds.'
The California Public Employees Retirement System (CalPers), the nation's largest public pension fund with more than $255 billion in assets, has a residential housing portfolio of about $2 billion. Spokesman Brad Pacheco said CalPers does not have any loss estimates yet. 'As far the subprime [issue] is concerned, we are watching this closely,' Pacheco wrote Thomson Financial in an e-mail.
Ratings agencies have many of these securities on watch-negative, and on Tuesday, Moody's downgraded more than 70 of Countrywide (LSE: CWD.L - news) 's Alt-A deals, which are deals rated just above subprime. Those are but a few of the hundreds of downgrades at the ratings firms on tens of billions of dollars' worth of bonds issued over the past several years. More will come as defaults rise on adjustable mortgages which will soon reset to unaffordable levels. And as defaults rise, investors are finding their CDOs have no collateral backing them.
Public pension fund's debt portfolios must, under federal guidelines, consist mostly of investment grade securities, meaning pension funds may be forced to realize the losses by selling any downgraded securities. Asked whether CalPers will have to sell any below-investment grade securities, Pacheco said, 'we do have options to deal with these, instead of selling.'
The lawsuits against money managers have been rolling in from angry investors and employees who have incurred losses because of lenders' risky involvement in the subprime market. Countrywide Financial (NYSE: CFC - news) , Citigroup (NYSE: C - news) 's 401(k) plan, State Street Corp (NYSE: STT - news) ., Bear Stearns (NYSE: BSC - news) , and AIG are among those who have been sued.
In the suit against Citigroup, for instance, participants allege that the Citi plan breached fiduciary duties to employees by exposing them to the risky subprime market and by making off-balance sheet transactions.
And at least one pension fund, Teamsters Union Local 282, has filed a suit against Moody's for giving excessively high ratings to bonds backed by subprime mortgages.
Other large pension fund investments are being affected, even if they are not directly in the subprime market. Florida is reportedly planning to sell off about $2.2 billion in asset-backed commercial paper over the next several months. The securities have been downgraded because of concern over weakness stemming from the subprime meltdown.
The shock waves from the credit debacle are reaching overseas pension funds, such as Mexico's Afores. Like U.S. pension funds, Afores are also governed by strict asset allocation guidelines.
'We are a Mexican pension fund, so we don't invest in U.S. MBS, so on that side the subprime problems didn't hit us,' said Juan Carlos Pliego, president of Afore Azteca. 'However, we have found a lot of volatility in the debt markets because of the uncertainty in U.S. MBS and subprime markets.' His fund's losses, which he declined to quantify, 'are merely losses due to valuation of the assets. It has affected bond prices.'
Michelle Rama
mr/pc
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