Calpers Down 20%, Plans to Hike Contributions

The Wall Street Journal is reporting that the California Public Employees' Retirement System has seen a decline of more than 20% in its assets.  The nation's largest public pension fund may begin to ask for an increase in employer contributions to the fund of 2% to 4% starting in July 2010 and July 2011.  Back in April, I noted that it was highly suspicious that three top money managers at Calpers had left the fund within days of each other.  Media reports claimed their departures were related to boardroom disagreements, while I speculated that it was more likely due to poor performance of the fund, as Calpers had a tendency to invest in alternative assets (such as land deals with homebuilders.)  Needless to say, it seems clear now that the managers who left Calpers in April did so to avoid having to face the music when angry California employees need someone to blame for losing their retirement funds.

On the bright side, angry California employees are probably much better off than anyone who hoped to have a pension in Argentina.  Argentina's government seized the private pension system in order to "protect investors from losses."  The surprise move caused the markets in Argentina to plummet 15%, thereby causing losses for investors.  According to the Wall Street Journal story, "While no one knows for sure what the government would do with the private system, economists said nationalization would let the government raid new pension contributions to cover short-term debts due in coming years."  So the government has seized private retirement assets to pay the public debt.  Now that is depressing.  Argentina, can we cry for you now? 

Rising Libor Defies Global Interest Rate Cuts

Three-Month Libor rose again to 4.75%, as global central bank interest rate cuts had little affect on banks willingness to lend to each other.  Meanwhile, Iceland's government seized control of Kaupthing Bank, the nation's largest lender, completing the nationalization of the country's banking industry.  Iceland's banks were saddled with $61 billion in debt, 12 times the size of the economy according to Bloomberg.  The government is seeking a loan from Russia and may ask the IMF for help guaranteeing deposits.  Pegging the krona to the euro apparently lasted less than a day and all trading in Iceland's equity markets is suspended until October 13th.

My reasons for writing about Iceland are twofold.  First, Iceland's problems are a fantastic lesson in the consequences of allowing too much leverage in a country's banking sector.  Assets at Iceland's three biggest banks have grown five-fold since 2004 and were financed primarily from debt sales not domestic deposits.  More importantly, I am writing about Iceland to make everyone in the US feel a little bit better about the current debacle taking place in front of our eyes every day when we pick up the paper.  Despite all of the turmoil in our markets, it could obviously be alot worse.  We could live in Iceland and be extremely pissed-off at the three banks that basically tanked our economy due to excessive greed.  In the US, we can spread the hate around to Wall Street for its greed, the government for its lack of supervision of Wall Street, and maybe a few real estate flippers that lied about their incomes to buy 17 condos in Florida.  So if you think things are bad, they are way worse elsewhere.  The US stock market is down considerably less than others, and, despite everything, global markets consider Treasury securities as the safest assets in the world.  Amidst the global panic, investors the world over are still flocking to Treasuries, which is nice, because we have lots of Treasuries to shovel down their throats to finance all of our government bailouts.