I missed this yesterday. From Paul Krugman:
So in 2007 the Pension Benefit Guarantee Corporation — which stands behind corporate pensions — switched from bonds only to lots of stocks, buying in at, natch, the peak of the market. Oops. And this is big stuff: the Bush administration may have left us all a gratuitous loss of hundreds of billions.
Okay, first of all, the PBGC has assets of $62 billion (the original Boston Globe story said $64 billion, but the PBGC annual report says $62 billion so from now on I’m going with that). It would be kind of hard to lose hundreds of billions on that. I mean, I’m sure Joseph Cassano could have found a way. But they can’t afford people like him at the PBGC.
Second, the money wasn’t in bonds only. The PBGC appears to have been in a three-quarters bonds, one-quarter stocks allocation for years.
Third, as I figured out Tuesday after five minutes of research, the PBGC had yet to make any change in its asset allocation as of Sept. 30, 2008. You know, two weeks after Lehman Brothers failed and the financial world began to implode. I’ve since heard from somebody with first-hand knowledge that the shift from 75% fixed-income and 25% stocks to 45% fixed, 45% stocks, 5% real estate and 5% private equity did start after that, and was about 10-15% completed as of Dec. 31. I’d really much rather see an actual report from the PBGC on this, but even without one it’s clear that the agency did not move into stocks at the peak of the market (the S&P peaked in late 2007, slid for most of 2008, then fell off a cliff in October and November).
I’m still torn about whether the asset allocation switch makes any sense: The PBGC is a weird entity whose investment needs are not the same as those of a pension fund or an insurance company. For example, when the economy’s really bad and lots of companies go bankrupt, the PBGC’s assets rise as it swallows their pension plans. Its liabilities rise by even more, but those obligations get paid out over decades. Its challenge lies in dealing with a chronic funding deficit that’s inherent in its design, not in insuring against sudden big payouts.
Anyway, I’ll have more on that when I’ve done some more reporting and thinking. In the meantime, here’s my issue: The Boston Globe article that started all this was misleading. It implied, although it never actually said it, that the PBGC had moved into stocks in a big way before the market crashed. The TPM Muckraker article that Krugman relied upon amped up the misleadingness a little (update: a later TPM Muckraker piece dialed it back down a little, with reference to my earlier post), but as best I can judge didn’t go over the line into outright falsehood. Krugman did. I’m sure he didn’t prevaricate intentionally. The story confirmed some (partly justified) feelings he had about the Bush administration, so he ran with it and embroidered upon it. But this is how falsehoods spread. And as a proud member of the reality-based community I’d like to put an end to this one right here.
Update: An alert reader notes that I joined Krugman in spreading the falsehood that it’s the Pension Benefit Guarantee Corporation, rather than the Pension Benefit Guaranty Corporation. My apologies.