Epsilon Theory has published an in-depth review of Britain’s financial crisis over the past couple of weeks, as its major pension funds were pushed right to the brink of bankruptcy by a liquidity crunch that threatened to take the entire British banking sector down with them. The crisis was averted – for now – by some very rapid fancy footwork from the Bank of England, but it’s still looming, and may rear its ugly head again at any time. What’s more, the British financial crisis was no more than a foretaste of what might happen in many advanced economies at any time – including the USA.
Epsilon Theory concludes:
The real problem is that every pension fund in the world has implemented some sort of Wall Street securitization/leverage concoction, intentionally designed to make the managers look good in their quarterly reviews, intentionally designed to use short-term leverage against long-term obligations, intentionally designed to use the math of the past thirty years to obfuscate the risks of a regime change not found in the past thirty years.
Wall Street has infected some pension funds a lot with their words of riskless return through the magic of securitization and leverage. Wall Street has infected some pension funds a little with their words of riskless return through the magic of securitization and leverage. But Wall Street has infected ALL pension funds.
Because that’s what Wall Street DOES.
I have no idea where the next [fiscal] insanity will come from.
All I know is that leverage is being repriced, globally.
All I know is that this global repricing of leverage is a wrecking ball around the world, through both interest rates and currencies.
All I know is that what we saw happen in the UK last week is the first shock, not the last, and all the massive pension funds and asset owners who have turned themselves into shadow hedge funds, full of swaps and leverage through the sweet whispers of Wall Street Wormtongue, will be our undoing.
There’s more at the link.
I highly recommend reading the entire Epsilon Theory article for an excellent overview of why this crisis happened, and why it may happen again. It’s a clear and present danger for every one of us, particularly those currently living on a pension or expecting to have to do so in the not too distant future.
In this case, forewarned may not be forearmed, because there isn’t much an individual can do about this mess. However, we can prepare for hard times as best we can, and position ourselves to ride out storms in the short to medium term. Longer-term . . . well, that’s going to need wholesale reform in the credit markets and stock exchanges of the world. Whether or not that will happen (or be allowed to happen) is anyone’s guess.
Peter
"The real problem is that every pension fund in the world has implemented some sort of Wall Street securitization/leverage concoction, "
"Every bit of financial innovation over the past ten thousand years or so – all of it! – has been in service to one or both of those two activities: securitization and leverage."There's a bogus claim, of which there are many in the article. In summary:
WallStreet did it! Not the actual people managing the fund, nor the regulators in the UK, nor Parliment. WallStreet! America! Because they have no agency in the UK. Certainly not the Bank of England, or the European Central Bank, and the people of the Davos crowd (not even mentioned in the article) are not involved at all.
"Jay" Powell. Glad to see the former professor and now rich guy in CT is on a first name basis with the chairman of the Federal Reserve. "Jay" is busy blowing up the Euro dollar markets and taking away control of the value of the USD from the European central bankers and the City of London. Yellen and Bernanke are no longer in charge and available to bail out the EU bankers like those two, along with Obama, did last time around. GOOD!
I notice the author did not say "Davos". I wonder what those financial novices have been doing for decades? It was probably nothing.
You should read/listen to Tom Luongo to get a different take on things. As to pension plans, Yves Smith at Naked Capitalism has been writing about the shenanigans of the California pension systems for years. WallStreet is not the causation of that systems problems.
https://tomluongo.me/2022/10/18/when-they-call-for-the-bailiff-you-know-youre-winning/
As I posted elsewhere just this morning, someone I've found worth reading
https://usawatchdog.com/weeks-away-from-whole-shithouse-coming-down-bill-holter/
Seems pretty soon as credit freezes the EMERGENCY needed for the E-Dollar replacing the "Broken system" will suddenly be ready. Almost like they pre-planned it, eh?
Naaah, my tinfoil hat is too tight
One alternative an individual may be able to do is take a cash out on retirement. That's what we did and rolled the money into a self directed IRA. Not immediate tax consequence and we have control of where the money is invested. Not all pensions allow that, mine did. Very glad we did that. I sleep better knowing I decide the management of my money. Grumpy
The "Wall Street forced them to do it" mantra is incorrect. The pension funds require a certain rate of return, but are also required (by law) to invest a certain percentage of their assets in low-risk products. When the central banks of the world set the interest rates at zero or even negative numbers, those low-risk assets yield nothing. The pensions have to use these sorts of tricks to attempt to get yields that will fund their future obligations while complying with regulations. This is another casualty of government interference in the private sector.
While I respect your decision Old Timer your cash is still on the casino tables.
Well, retirement was pretty much a boomer thing and this boomer (maybe) plans on continuing my retirement with side gigs and gentleman farming until He takes me home.
Or as I posted elsewhere what you have in hand and the skill in your brains is harder to steal from you.
This is missing the big picture.
It doesn't matter how much your pension is increasing, no market is keeping pace with how quickly the dollar is being devalued by inflation.
Everyone was talking about the average 401k being knocked down by around 25%, but that's only half of the double whammy. If your portfolio decreases by 25%, that decreases the amount you can withdraw but you need to withdraw more because of the inflation in the cost of everything.
Nothing can appreciate in real value as fast as the central banks can devalue it.
There's an attempt to get rid of that real problem currently in congress, H.R. 9157, the Gold Standard Restoration Act. The chances it will advance are so low they're indistinguishable from zero. The only way that lesson will be learned is after paper money collapses, as it always does. Give it a couple of years.
There was some talk back in the early part of Obama's presidency of the government taking over pensions and individual retirement accounts. It seems they may have found a way to get a majority of the people to accept that now, once the majority of pension funds start becoming insolvent, and the stock market craters.
The real goal is for the "elites" to hoover up all valuables and crash the system to get rid of useless eaters. They don't care if you die of starvation, disease or violence, as long as you die. They only need 500 mil for slave service providers. Plan accordingly.