Banquo’s Ghost

Floyd Norris’s blog post on the day’s declines in the stock market closes with the observation that, assuming that today’s closing levels remain firm for the rest of October, October 2008 will be the seventh worst performing month for the Dow-Jones of any in history. But that’s not what caught my eye in his post.

It was this little snippet about the PBGC (Pension Benefit Guaranty Corporation):

The head of the Pension Benefit Guaranty Corporation was called to testify before a congressional committee today about the decision to put more of the agency’s money into stocks.

As I wrote in August, doing that enabled the agency to assume it would make money in the stocks, and thus get out of the deficit it faced. The explanation for the strategy offered then is memorable:

“What we’re doing here is literally less risky,” Charles E. F. Millard, the director of the guaranty corporation, told me this week.

The PBGC lost $4.8 billion in the stock market last year. So much for that theory.

In fairness I don’t object to the agency having part of its funds in equities, indeed, I think it’s prudent to do so. But, according to the PBGC’s annual report, they’ve got more than $17 billion in equities, more than a quarter of its total assets. That strikes me as too high for an institution of this sort.

The analogy of the PGBC’s investing in stocks as a way of reducing its deficits being like an insurance company investing its premiums from hurricane insurance in Florida in Florida real estate strkes me as not being completely off-target.

As I’ve written before over at my place there are only two ways of making money in the insurance business: investments and the insurance business. The PBGC is an insurance company and to make money in the insurance business premiums have got to be proportional to risks. That’s not the way the PBGC works and it never has.

I’ve been saying and writing for a decade that the great scandal of the 2000-teens would be the default of company pension plans and the attendant spectre of people who don’t have company-paid pension plans paying for the pensions of people who do. Going along with my Shakespearean theme today, the problems of the Pension Benefit Guaranty Corporation are, like Banquo’s ghost, a prophecy of impending disaster.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.