The Exponentiality of Municipal Costs (and Some Advice for Endowments and Foundations)

The pension costs of states and municipalities in years hence are often stated in a calculation of future liabilities. For instance, the future obligations of state and municipal pension funds are calculated (in frequently cited studies) at between $1.5 trillion to $3.5 trillion.

Among the reasons for this range are the assumptions used by the actuary who produces the pension valuation, an annual exercise that shows a pension plan’s current state of affairs. The liabilities, which, in turn, become pension payments, extend out 50 years or more: until the last member of the plan and all plan dependents have died. The actuary chooses an expected rate-of-return that will apply over the lifetime of the plan. The actuary also makes assumptions about the retention rate of current retirees, since benefits usually increase by years of service; the correct actuarial life table (how long will members and dependents live); and combines these with several other probabilities. Different assumptions are a reason for the $2.0 trillion range of future obligations, shown above.

In general, the rate-of-return being assumed by states and municipalities is too high, often 8.0%. Thus, the discount rate for future payments is too high. (The discount rate is the same as the rate-of-return assumption in municipal plans. This is not true in corporate plans.) Projections of future payments by plans using such assumptions are unrealistic

An informal history of the Savings and Loan Crisis

Here is a good video from Bill Black on the origins of the Savings & Loan crisis in the U.S. The roots of the crisis go back to the stagflation of the 1970s when interest rates spiked under Paul Volcker. As S&L’s borrowed short and lent long, it meant a mismatch between their long-lived and

How to Regulate Mortgage Lending, Part 3

By William K. Black (cross-posted with Benzinga.com) Honest accounting is essential for effective regulation – and for integrity. It is also very helpful to prosecuting accounting fraud. The banking industry lobbyists, including the Chamber of Commerce, with Bernanke’s support, induced the House to extort successfully the Financial Accounting Standards Board (FASB) to gimmick the accounting

Can the Fed Go Bankrupt?

Former Atlanta Fed President William Ford says, technically, yes, the Fed can go bankrupt. He argues that the Fed’s balance sheet is highly leveraged as a result of quantitative easing expanding its balance sheet. The result is that the Federal Reserve is thinly capitalized despite its having just transferred a record $80 billion in profit

John Hussman on the Fake Recovery

John Hussman has a piece out today that dissects the current economic environment in two parts. In part one, Hussman puts a spotlight on quantitative easing (QE) and why it is unlikely to have the intentioned effect on the U.S. economy. And in part two, Hussman explains how the current technical recovery has been what

A Trio of Bank Ratios

by Annaly Capital Management Lest anyone think we missed it, on August 31st the FDIC put out its Quarterly Banking Profile for the second quarter of 2010. The headline was glowing: “Quarterly Earnings Are Highest in Almost Three Years.” The insured institutions reported aggregate net income of $21.6 billion in the quarter, impressive when compared

Does History Repeat, Rhyme or Just Have Coincidences?

This week the following graph from http://www.chartoftheday.com http://www.chartoftheday.com/ has been annotated by the author to highlight similarities of the current era for stocks to a corporate earnings pattern traced out nearly a century ago. Annotation by John B. Lounsbury     August 20, 2010 The time scale of the current era (right hand oval) is compressed relative

Hiding Bank Losses

In a recent post on the money multiplier, a reader Luis Enrique asked about bank lending and capital constraints. Anecdotally, much of the reduction in credit is supply-constrained as well as demand-constrained. That means it’s a matter of banks not lending; it’s not just about firms and individuals not borrowing. Banks are capital-constrained even if

Tepid Top Lines

The market is engaged in a discussion over what the Federal Reserve will do next. St. Louis Fed president James Bullard published a provocative paper about ratcheting up quantitative easing to avoid the Japanese dilemma. Conversely, Philly Fed president Charles Plosser has said that any more stimulus at this juncture would be premature. Chairman Bernanke

The Shadow Knows

From Annaly Capital Management For those who missed it (and we had, until we were tipped by James Aitken, thank you very much), a vital paper was posted to the New York Fed’s website in the beginning of the month. “Shadow Banking,” a staff report authored by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley

Davidowitz: Credit Crisis ‘A Gigantic Ponzi Scheme, Lies And Fraud’

Below is a very entertaining interview with Howard Davidowitz on financial reform and the credit crisis with Aaron Task and Henry Blodget of Tech Ticker (hat tip Scott). Davidowitz says don’t expect any substantive changes, especially when the underlying problem from the credit crisis was "a massive fraud" and nothing is being done about it.

Free money: JPM paid to borrow on $271 billion worth of repos

We know that JPMorgan is not substantially increasing lending anytime soon. And we also know that banks are recapitalizing courtesy of a steep yield curve and near zero rates, what I would call free money.  What I didn’t know is how free these funds truly were. An investor friend pointed out something curious buried deep