Friday, October 22, 2010

 

Goldman Sachs poised to profit as Hawaii state pension fund tanks


by Larry Geller

The news that Hawaii is on the list of states whose pension funds will run out and precipitate a budget crisis is not new after all.

#5 Hawaii
Year pension fund runs out: 2020
Bill in the following year: $1.7 billion
Share of state revenue: 24%    [Business Insider, And Now, Here's The First 11 State Pensions Funds That Will Run Out Of Money, 10/18/2010]

What is omitted in the Business Insider article is that Hawaii’s trouble will be Goldman Sachs’ profit.

The pending pension fund crises in eleven states, including Hawaii, came to light in December, 2008 when New Jersey objected to Goldman Sachs simultaneously selling state bonds while betting against the state by selling credit default swaps, which imply that the state may not be able to repay its bonds.

In Merry Christmas Hawaii but no Happy New Year—Wall Street is betting against us with “credit-default swaps”  (12/25/2008) we made the connection:

For those of us in Hawaii wondering where our next manapua will come from, it was not good news to read that Wall Street is not only betting against our state economy, they are investing in its failure. In order to make their investments pay off, they have to work to see that we fail. Hey, it’s the free market, either you believe in it or you don’t.

Goldman Sachs, which received a $10 billion bailout, is using that money for a variety of investments (other than helping out homeowners facing foreclosure, of course). They are still playing with derivatives. In fact, they are using these exotic instruments to enrich themselves by worsening a recession that they, of course, helped to bring about.

They are pushing “credit-default swaps” that will work if they can find a way to drive 11 states farther into the economic dumps.

Here’s how it works.

As part of a September [2008] presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman recommended buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks,” including California, Florida, Nevada, Ohio, Wisconsin and Michigan.

The firm also recommended the derivatives on states with “significant unfunded pension” and other retiree obligations, including Illinois, Connecticut, Hawaii, New Jersey, Massachusetts and Nevada.

The practice of betting against such states is “distasteful,” said Frank Hoadley, Wisconsin’s director of capital finance in Madison. [Bloomberg News, Goldman Draws Ire for Advising Default Swaps Against New Jersey, 12/10/2008 ]

In order to profit from Hawaii’s pilikea, Goldman and other firms offering these credit default swaps must trash talk the state and do their best to see that we fail.

The problem for Hawaii is far enough away that no state legislator that I have questioned since the 2008 article has ventured a solution to the predictable crisis. At some point, though, it will have to be dealt with, most likely by the incoming administration, which could be in office until just before the pension crisis takes hold.

(Thanks to Leihinahina Sullivan, Viviane Lerner and the others who forwarded the Insider article to me)

 




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