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Exclusive: Too big-to-fail pension insurer agrees to liquidation trust in ResCap NY bankruptcy

22 May 2014 5 Comments

Is a taxpayer bail-out inevitable? Pension Benefit Guaranty Corporation represents 44 million Americans and runs a record deficit of $36 billion.

If you think it is only your mortgages and homes which are at stake in the largest bankruptcy in history where the simultaneous Chapter 11 bankruptcy filings of 51 residential mortgage companies occurred, think again.

The ResCap bankruptcy is being heard in the Southern District of New York’s Bankruptcy Court.

Embedded within the claims/creditor section is Pension Benefit Guaranty Corporation (PBGC).

Established in 1974, PBGC is a federal chartered agency that insures more than 26,000 private-sector pension plans. The agency protects the retirement incomes of over 44 million Americans and is running a record $36 billion deficit.

A wholly-owned government corporation, PBGC filed claims against all 51 bankrupt residential mortgage companies that are directly or indirectly owned by Residential Capital, also known as ResCap.

Does GMAC, Residential Capital, Residential Funding Company, Residential Asset Security Corporation, Residential Accredit Loan, Residential Asset, Residential Consumer, ditech, Equity Investment, Homecomings Financial, and DOA Holding Properties sound familiar?

Is your pension insured by this public-private agency, PBGC?

As previously, exclusively reported, at stake in this N.Y. bankruptcy, as of March, 2012, according to court records, are over 2.4 million mortgages and residential mortgage-backed securities (RMBS) representing over 6.2 million Americans, according to U. S. census statistics.

This bankruptcy is currently valued at over $400 billion.

While there has been virtually no press coverage of this bankruptcy that affects the U.S. economy, millions of homeowners, pensioners and nations who purchased RMBS securities are affected.

In 2011 PBGC reported a $26 billion deficit—2 years later that deficit increased by $10 billion.


As Ivan Osoio, reported at Forbes.

The PBGC is funded through premiums paid by insured companies, not by federal dollars [PBGC also earns money from investments including RMBS—and loses money when investments go bad]. But taxpayers should still worry; while they aren’t directly on the hook for the PBGC’s unfunded liabilities that could well change. The agency’s massive, mounting deficit makes for a very likely target for a federal bailout.

In fact, some politicians have already proposed such a bailout. A bill introduced in the last Congress by Sen. Robert Casey (D-Penn.) sought to make the federal government liable for multiemployer plans under the PBGC’s purview. Thankfully, the bill failed, but similar schemes could come to the fore if the PBGC’s deficit were to get much worse.

In 2013, PBGC’s deficient ballooned to $36 billion. As PBGC Director Josh Gotbaum warned at the time, “PBGC stands ready to help, but PBGC’s growing deficit is a reminder that our current resources are inadequate. Without adequate funding we can’t pay benefits or preserve pensions.”

According to PBGC’s website, “PBGC may face, for the first time, the choice between asking for taxpayer funds or running out of money and undoing the pension safety net. That’s a situation no one wants to face.”

For decades the Government Accountability Office (GAO) has repeatedly warned PBGC and America’s elected officials about the dangers of its growing deficits to millions of pensions. PBGC has operated with deficits for all but 6 of the 38 years it existed.

In this 1992 GAO High Risk Series report, for instance, the GAO warned how PBGC’s growing “deficit threatens the insurance program’s long-term financial viability.”

Fast forward two decades. Little has changed.

In this 2011 GAO report: Pension Benefit Guaranty Corporation: Asset Management Needs Better Stewardship, one learns that PBGC is still is not using best practices to “ensure” that they “can effectively and consistently meet its obligation to manage a fund of this size and its liabilities.”

The pink elephant in the room is PBGC’s Ponzi-scheme business model. It is destined for failure like all Ponzi-schemes eventually do.

While it is true that PBGC receives funds from pension plans it takes over from bankrupt companies, when a bankrupt company (like American airlines) offloads their pension liabilities to PBGC, this helps the bankrupt company’s restructuring efforts but dumps an enormous and unsustainable strain onto PBGC.

Last February PBGC withdrew their claims against the 51 bankrupt residential mortgage companies and agreed to a Liquidation Trust found in this order confirming the Second Amended Joint Chapter 11 Plan in the N.Y. bankruptcy. Watch PBGC’s deficits keep climbing north. Liquidations are always accompanied with pennies on the dollar.

It is notable and should be emphasized that PBGC’s own website states, “Without changes in PBGC premiums, both the single-employer program and the multiemployer program will run out of money … if PBGC’s finances aren’t reformed, the agency will eventually run out of money to pay benefits.”

How might your pensions be affected in the meantime. Last February Bloomberg’s Lorraine Woellert reported after the “Twinkies” bankruptcy, that 342 Hostess truck drivers were taken out of the pension plan “to rescue benefits for about 360 others. It was the third time in its 40-year history that the Pension Benefit Guaranty Corp. had carved up a fund.”

What is happening with PBGC appears to be a repeat of the General Motors bankruptcy where unions were protected and taxpayers footed the bill. By operating as a public-private agency and commingling all the assets and liabilities—the good pensions mixed with the bad subprime pensions together—taxpayers will be left holding the bag to bail out PBGC when it free falls or watch millions of pensions be destroyed.

Senator Casey already tried to bail them out in his failed “Create Jobs and Save Benefits Act.”

Matt Taibbi reported in a 2013 Rolling Stone Magazine article, “Looting the Pension Funds,” a February 2011 study by the noted economist Dean Baker at the Center for Economic Policy and Research, “Had public pension funds not been invested in the stock market and exposed to mortgage-backed securities, there would be no shortfall at all. He said state pension managers were of course somewhat to blame, but only “insofar as they exercised poor judgment in buying the [finance] industry’s services.”

Baker was right. Look no further than at the ResCap bankruptcy in New York.


Did your pension fund manager invest in any of the residential mortgage-backed securities?

The Pension Ponzi-scheme

How pensions have operated over the last several years, typically, is simple.

A pensioner receives a monthly pension check for $1 thousand. They deposit the check believing everything is fine. What that pensioner does not know is that 60 to 70 percent of that $1 thousand check is borrowed money—that is more than half of their pension check.

Previously pension checks were funded with real money as opposed to borrowed money. This bait and switch pension scheme is unsustainable

As Taibbi also wrote, “It’s the governmental equivalent of stealing from your kids’ college fund to buy lap dances … Thanks to a deadly combination of unscrupulous states illegally borrowing from their pensioners, and unscrupulous banks whose mass sales of fraudulent toxic subprime products crashed the market, these funds were out some $930 billion.”

Across the nation banks and securities firms have been selling “toxic waste” to pension funds for years. As Bloomberg’s David Evans reported back in 2007, “Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.”

However, this is not simply an American problem but a global problem. The fallout is already being felt around the world.

In the Netherlands, for instance, as Asset International.com reported, “After filing a suit against JP Morgan, Dutch Pension Stichting Pensioenfonds ABP (ABP) has sued Credit Suisse as many of the scheme’s once triple-A rated mortgage-backed securities now carry junk grades.

“The scheme asserted that the Swiss bank misled the financial firm about the quality of residential mortgage-backed securities it bought. The result of “multiple and material misrepresentations” in Credit Suisse’s offering documents resulted in significant losses, the Dutch pension said.”

Your homes and pensions are at risk because residential mortgage-backed securities are junk. They were junk when the economy collapsed in 2008 and they are still junk today.

Have the culprits been held accountable? Not according to New York Attorney General Eric Scheiderman. He was appointed as co-chair to Obama’s Mortgage Backed Securities Working Group. He is also sounding the alarm.

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Update: March 10, 2016: US faces ‘disastrous’ $3.4tn pension funding hole, Financial Times.

Update: April 2017: Don’t count on that government pension, Chicago Tribune.