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When Wall Street Offers Free Money, Watch Out
http://www.propublica.org/article/when-wall-street-offers-free-money-watch-out?google_editors_picks=true
When Wall Street Offers Free Money, Watch Out
Bankers and new accounting rules are emboldening governments to borrow-and-bet their way out of pension problems, a strategy that’s backfired in the past.
by Cezary Podkul, ProPublica, and Allan Sloan, The Washington Post July 10, 2015, 10:15 a.m.
If there were ever a time not to bet the moon on the stock and bond markets, it's now, with U.S. stocks at near-record highs and interest rates on quality bonds at near-record lows. But Wall Street is urging state and local governments to do just that — and they're listening.
Despite the risks, governments are lining up to issue billions of dollars in new debt to replenish their depleted pension funds and, as a bonus, take some pressure off strapped budgets. In some cases, the borrowing makes their balance sheets look vastly better.
Bankers, who make fat fees for raising the money, are encouraging this borrow-and-bet trend. Their sales pitch is that borrowing at today's low interest rates all but guarantees a profit for the governments because they can invest the proceeds in their pension funds and for decades earn returns higher than the 5 percent or so in interest that they will pay on the bonds.
But there's a catch: If the timing is wrong, these so-called pension obligation bonds could clobber the finances of the government issuers. Pension funds and beneficiaries will be better off because pensions will be more soundly financed. But taxpayers — present and future — might be considerably worse off. They will be running huge risks and could get stuck with a massive tab.
When Wall Street Offers Free Money, Watch Out
Bankers and new accounting rules are emboldening governments to borrow-and-bet their way out of pension problems, a strategy that’s backfired in the past.
by Cezary Podkul, ProPublica, and Allan Sloan, The Washington Post July 10, 2015, 10:15 a.m.
If there were ever a time not to bet the moon on the stock and bond markets, it's now, with U.S. stocks at near-record highs and interest rates on quality bonds at near-record lows. But Wall Street is urging state and local governments to do just that — and they're listening.
Despite the risks, governments are lining up to issue billions of dollars in new debt to replenish their depleted pension funds and, as a bonus, take some pressure off strapped budgets. In some cases, the borrowing makes their balance sheets look vastly better.
Bankers, who make fat fees for raising the money, are encouraging this borrow-and-bet trend. Their sales pitch is that borrowing at today's low interest rates all but guarantees a profit for the governments because they can invest the proceeds in their pension funds and for decades earn returns higher than the 5 percent or so in interest that they will pay on the bonds.
But there's a catch: If the timing is wrong, these so-called pension obligation bonds could clobber the finances of the government issuers. Pension funds and beneficiaries will be better off because pensions will be more soundly financed. But taxpayers — present and future — might be considerably worse off. They will be running huge risks and could get stuck with a massive tab.