Charles Millard Behind Switch to Higher Risk Strategy

In another unbelievable act of buffoonery, the Pension Benefit Guaranty Corporation reportedly plunged headfirst into stocks and other high-risk investments just before the year-end market collapse of 2008.

The Pension Benefit Guaranty Corporation is a "federal agency that insures the retirement funds of 44 million Americans". This corporation works much like the FDIC does with bank deposits - they charge premiums to private pension funds in exchange for promising to back the pensioners (up to $54,000 per year per individual) in the event that a financially troubled company goes bankrupt and "loses their retirement funds".

Anyways, according to this recent article on Boston.com, the agency decided to stray from their long-standing policy of investing heavily in "safe" investments such as bonds, and instead invest more of the money under their management in speculative investments such as stocks, real estate and private equity funds.

The fund was reportedly down 6.5% overall as of September 30th, with their stock-related investments dropping 23%.

However, the article notes that:

a) much of the decline in the market occurred after September 30th
b) the corporation had yet to implement its higher-risk strategy, which was scheduled to begin shortly after September 30th

Who was responsible for this switch from the more conservative policy?

Charles Millard, a former Lehman Brothers executive who ran the agency from "2007 until the end of the Bush Administration".

He reportedly decided to plunge much of the $64 billion dollar insurance fund into various stock markets, citing a need to eliminate the deficit in the fund by putting money to work in higher risk investments.

Millard claimed that the agency didn't have the option of raising premiums, so instead he felt the need to go after bigger returns, in the form of higher risk investments.

Prior to Millard taking over, director Bradley Belt felt that the agency could only invest 15-25% of its total money in the stock market in order to maintain a conservative approach.

Millard developed a strategy in which the agency would invest 55% of its funds in stocks and real estate. 20% would be allocated in US stocks, 19% would be allocated in foreign stocks, 6% would go towards stocks in emerging markets, 5% would go towards private real estate and an additional 5% would be invested in private equity firms.

So now we are left with a "perfect storm" of problems for the fund and the private pension funds that it insures.

The insurance fund will have presumably taken a heavy hit from October 1st until now, and lost a good portion of its funds under management.

Not only that, but the fund will presumably have to pay out a very large portion of its funds to pensioners as companies continue to go under.

A number of questions spring to mind after researching this issue:

1. Didn't it seem like a bad idea to anyone to chase losses (the fund was operating with a deficit) by buying speculative investments?

2. Should a government agency that is charged with protecting the pension plans of 44 million Americans be investing in such a manner?

3. Assuming that the pace of bankruptcies continues to accelerate in the United States, how much money will need to be withdrawn from the fund to pay out pensions?

4. Assuming that more money is needed to pay out pensioners - who will cover the difference?

5. What are the stocks that make up the American investments in the fund?

6. How were these stocks selected?

7. Which private equity firms received investment money?

8. How were the private equity firms chosen?

This is a pretty disturbing problem, and I can guarantee that we will hear much more about this over the coming months.

Filed under: Stock Market Scandals