February 2002 Newsletter
Issue Two, Volume Three

THE PENSION PLAYGROUND

By Mike Gasior

Let me begin this newsletter by admitting that I took quite a battering at the hands of readers after last month's edition about Enron. Quite frankly, I am totally amazed that this story has gotten as much traction as it has from the American public since I wonder why anybody even gives a damn about the whole matter.

I hosted our Mortgage & Asset Backed Securities Seminar in New York City just two days ago, and wound up driving down literally to "ground zero" by a total screw-up on my part as I tried to locate the Holland Tunnel. I will confess that I was heavily moved, actually, to the point of tears. You have all read my laments about how I have struggled with the events of September 11th and how I have emulated my old pet Teddy in trying to just avoid the whole situation by staying away. I drove down the West Side Highway of Manhattan as I have done hundreds and hundreds of times, and my chest began to tighten as I approached the site of the World Trade Center and my old neighborhood. I wondered aloud why it seemed so infrequent that I would hear the name of Osama Bin Laden even mentioned by the news media, and why people seem interested at all in Ken Lay, Jeff Skilling, Enron, or any of these other idiots I am forced to watch on Capitol Hill either taking the Fifth Amendment, or claiming they can't remember their own shoe size. These people are either criminals, or morons…or both. But I still wonder why anyone even cares.

The answer is "yes"; plenty of investors and employees lost their jobs, their life savings and perhaps both and that is a tragedy. It is not, however, a tragedy of epic proportion as September 11th is, and will always remain. These people will find new jobs and save new money, while over 3,000 people remain dead and their loved ones still cry every morning and every evening in the disbelief that someone they loved is never coming home again…ever.

So screw Ken Lay, Jeff Skilling and all the self- important politicians I now watch daily from Washington beating their breasts about the "tragedy" of this whole Enron fiasco. PLEASE do me a favor and print this out to put into your desk drawer so you can read it sometime in the future and send me a fabulous note about how smart and intuitive I was about this whole matter. Are you ready?? Okay…here goes:

--There is a damn good likelihood that NO ONE will end up in jail over this whole fiasco. Not a single person. Millions of dollars will remain in the hands of the executives who busted the company and the employees and the shareholders will remain screwed.

--The politicians who are so "outraged" by this entire matter will ultimately not do sh** about the state of things that caused this. Nothing. They all took money from Enron as well as every other Enron lurking in the shadows that might rear its ugly head at any moment. Politicians are cowards and I completely expect them to remain cowards in this current climate. Even though I wrote last month that there was no political angle to report here, let me take a moment to share the following story with you. The House and Senate pass a bill, which will force accounting firms to become more liable financially, should a situation like Enron ever occur. President Clinton signs the Bill into law. Senator Chris Dodd of Connecticut (my home state remember) organizes the vote, which overrides the President's veto, and therefore limits any liability on the part of the accounting firms. The surprising thing is that Senator Dodd accepted exactly $54,843 from his friends at Arthur Anderson during his last Senate campaign, which is the most that ANY Democratic Senator received from them. Hmmmmm?? Sound pretty dirty to you? Good. Because it ought to. Like I said…nothing is going to change with regard to revamping the system, and you can bet on that.

I received a scathing email scolding me for being a sell-out to the accounting profession, defending politicians, using too many cuss words, and for being an overall moron. None of these things are true of course, but the notes that suggested that I was somehow defending big business and/or politicians were particularly annoying. Once again, your buddy Mike relies on FACTS to defend himself. Consider the following list and tell me how big business somehow has politicians in their back pockets:

BIGGEST CAMPAIGN CONTRIBUTORS FOR THE 1999/2000 CAMPAIGNS

--$5,900,000 American Federation of State, County and Municipal Workers
--$4,300,000 Service Employees International Union
--$3,800,000 AT&T
--$2,900,000 Carpenters & Joiners Union
--$2,400,000 Communication Workers of America
--$2,400,000 Freddie Mac
--$2,400,000 Phillip Morris
--$2,300,000 Microsoft
--$2,100,000 United Food & Commercial Workers Union
--$2,100,000 Global Crossing
--$1,900,000 SBC Communications
--$1,700,000 Bristol-Myers Squibb
--$1,700,000 International Brotherhood of Electrical Workers
--$1,700,000 Enron
--$1,700,000 American Federation of Teachers

The reason I provided you with this list of campaign contributors is so you can discern for yourself who is buying any influence in Washington and how much. Certainly Enron and Global Crossing (both now bankrupt) are on the list and are cause for worry, but the more telling statistic is this one:

--$21,000,000 Contributed by unions
--$18,300,000 Contributed by "big business"

It seems very apparent to me where the allegiances of the politicians lie, and I refuse to accept that any of these contributions even matter. The simple fact remains that when Enron came calling on their political friends for help, all they got was a busy signal. Yet now I have to listen to these same exact politicians who took every dime they could from these contributors thump their chest and spout words like "I did not have political relations with that company…Enron". It's enough to just make you puke. And that is enough on this boring, and hideous topic.

THE MAINSTREAM MEDIA

I got a few notes from my friends in the financial media last month that felt I had slighted them by lumping them in with the mainstream media. The truth of the matter is that I somewhat regret this. I actually do feel that my friends at CNBC, CNNfn, Bloomberg TV and even MSNBC do indeed do a better job than their brethren in the mainstream media. I still maintain that even my financial market reporter friends can give a little too much time to the "talking head stooges" that I have been lamenting about for several years now. The VERY few people who actually seem to know what the markets might do never, EVER talk to the media. Think about the last time you saw Warren Buffet, Peter Lynch, George Soros or Bill Gross do an interview about anything. This is the extremely SMALL group of people who I feel might actually know something about what the market will do, and they never seem to show up in the media. Just remember this the next time you see some bozo on television talking about how much they like a particular stock. Perhaps it might be because they own a million share of it in the mutual fund they manage. Do you ACTUALLY believe that if they truly felt they knew what the markets were going to do that they might tell you?? If I knew what the markets might actually do, I'd be on my 118-foot yacht off of Grand Cayman watching NCAA basketball on my digital satellite dish. I most certainly wouldn't be talking to anyone about it, that much I know.

One of my seminar participants this week in New York was kind enough to bring me an article that was in the Sunday New York Times on February 24th. The article was written by a gentleman named Daniel Altman and is a fitting example of the kind of total garbage that undermines the press when they venture into topics, which they know literally NOTHING about. Here is the headline of the article along with the first paragraph by our Mr. Altman:

"CONTRACTS SO COMPLEX THEY IMPERIL THE SYSTEM"

"Can what we don't know hurt us? Though trading in those devilishly complex financial tools known as derivatives did not contribute much to Enron's collapse, the contracts did allow the company to conceal the aims of it's financial dealings. The veil of complexity, whose weave is tightening as sophisticated derivatives evolve and proliferate, poses subtle risks to the financial system – risks that are impossible to quantify, sometimes even to identify."

Let me break this down for you into the most simple of terms by taking Mr. Altman's comments one by one:

Derivatives can be complex – TRUE

Derivatives are evolving and proliferating – TRUE

Derivatives did not contribute to Enron's collapse - TRUE

Risks posed by derivatives are hard to quantify – TRUE ONLY FOR MORON REPORTERS

Derivative usage is hard to identify – TRUE ONLY FOR MORON REPORTERS

Derivatives allowed Enron to hide stuff – TOTAL CRAP

I feel somewhat bad for busting ugly on our poor friend Mr. Altman, but the truth is that 60 Minutes did an equally horrible job covering the derivative market about seven years ago, and it actually seemed to me that much of this story was a total lift from that piece back then. I am by no means accusing Mr. Altman of plagiarism. All I am saying is that the he and 60 Minutes should stick to stories they might actually know something about. In summary, the story was stupid, misleading, inflammatory, and has absolutely nothing to do with the Enron story. The next time someone in the media decides to write such nonsense, perhaps they will first call me, or someone else who knows something, for a measure of perspective. My phone number is (860)347-6568.

PENSION FUND PLAYGOUND

Would you believe that as recently as 1990, the majority of public pension funds in the United States were horribly under funded. Back then these pension funds were only reporting assets, which covered about 80% of their liabilities.

Thank God for the bull market in stocks which helped these exact same pension funds become OVER funded to the tune of 116% of liabilities by the beginning of 2000. Isn't that a fantastic situation for these funds, and these governments to be in?? Of course, the decline in price of many stocks has eroded this margin of over funding by quite a bit, but you would expect that these pension funds would still be sitting pretty with a 16% margin of error. Right? Of course not. Not if we let politicians get involved in anything concerning money, finances in general, or them getting re-elected.

Here is a story which relates what at least eleven states have done with their "surpluses" in employee retirement plans, which totals something more than $22 BILLION.

We all know Tom Ridge as the head of "Homeland Security" now since President Bush appointed him after the events of September 11th. Up until that appointment, Mr. Ridge had been governor of Pennsylvania and his most important agenda item was to pass an education bill in his state. The only problem was he faced huge opposition from his state legislature and from the state teacher's union. So how could he possibly get his education initiative passed you ask? Well, by buying off both of these groups with MASSIVE increases in their pension plans. Imagine this:

--State Legislators got a 50% increase in retirement benefits

--109,000 state workers and 234,000 state teachers got a 25% increase

WOW!! This must have cost taxpayers a fortune, right? Perhaps some across-the-board tax increase? Nope. Governor Ridge simply went directly to the pension funds of these precise groups and raided about $10 BILLION in surplus money, which is the amount by which the account was over funded at that time. This may not seem like much of a big deal, since if there was really all this "extra" money involved, why not use it for some noble cause like helping these people enjoy a more comfortable retirement?

Because there really isn't any "extra" money there.

The bizarre rules, which regulate pension fund accounting, allow for a technique known as "smoothing". This simply let's the pension plans use the average value of the fund over the previous two years. Although this may seem like a reasonable idea in principle, you must ask yourself what stock market values in 1998 have to do with stock market values in the year 2000. If your thought was "not much" then you have arrived at the crux of our problem here. Current values have nothing to do with values of a few years ago. Here are the precise statistics about Pennsylvania:

Level of funding June 30, 2000 using "Smoothed" values – 123.8%

Level of funding June 30, 2000 using actual market values – 97%

In one fell swoop, the state of Pennsylvania went from being comfortably OVER funded to under funded depending upon what math you use. God forbid that market values in the stock market decline further and we could be looking at a total train wreck here.

And who would need to pick up the tab for this disaster you ask?? Well, tax payers of course. There were contracts signed with these workers around the world with regard to the amount of pension they are supposed to receive, and they will need to be paid. Simple as that.

Please remind yourself that this story is not isolated to Pennsylvania either. Many other government programs in the U.S. and around the world are in a similar situation now, where politicians raided these surplus funds and spent the money on many things. Never mind what corporations may have done with their over funded amounts. Your friend Mike thinks this might be yet another area where we could be in for a massive hangover sometime down the road when the bill comes in for all these people after they begin to collect on their pensions.

DERIVATIVES SEMINAR IN MARCH

I just want to remind you that I will be hosting my two-day Derivative Seminar in Manhattan on March 25th and 26th if you, or some misguided journalist, might like to attend. I just held the Mortgage & Asset Backed Securities Seminar this past week at our new location, The Madison Towers Hotel on 38th Street and Madison Avenue which was absolutely terrific. I must confess that I am totally pleased with our new location in New York.

If you would like more information about the Derivatives Seminars, please call my office at (860)347-6568, or visit the following link:

http://www.afs-seminars.com/derivatives.html

We will also be posting the programs to be held in Bermuda and Grand Cayman in the coming days and I will keep you posted with regard to these.

You can also view all our program offerings, or register for any sessions by visiting:

http://www.afs-seminars.com

In three days I will be getting my remaining three wisdom teeth removed, even though I tried in vain to convince my dentist that they will most certainly fall out over the coming 30 or 40 years. I'll be spending some time recuperating from this ordeal and will look forward to any harassing e-mail you might want to send me.

In the meantime, I hope all is well with you.

http://www.afs-seminars.com

Copyright 2002, Michael Gasior. All Rights Reserved.

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