Cost of Insuring Illinois Debt from Default Hits All-Time High; Illinois Pension Fund Loses $Billions in OTC Derivatives Positions
by ilene - June 17th, 2010 5:26 pm
Cost of Insuring Illinois Debt from Default Hits All-Time High; Illinois Pension Fund Loses $Billions in OTC Derivatives Positions
Courtesy of Mish
Congratulations of sorts go to the State of Illinois for having the most hopelessly underfunded pension plans in the US and also one of the biggest per capita budget deficits.
Topping off the misery, the Illinois Teachers Retirement System is losing money in risky derivatives bets in what one analyst says amounts to “collecting nickels ahead of the bulldozer.”
Given that sorry state of affairs it should be no surprise to discover Illinois Debt Default Insurance Climbs to Record.
The cost of insuring Illinois bonds against default rose to a record as lawmakers sought to close a $13 billion deficit in the state’s proposed budget for the year starting July 1.
The cost of a five-year credit-default swap for the state rose 2 basis points today to 304.64 basis points, or $304,640 per $10 million of debt according to CMA DataVision.
Illinois Loses $Billions on OTC Derivatives
Inquiring minds are reading Illinois pension fund uses OTC derivatives to recoup returns, jeopardizes pensions
Dale Rosenthal, a former strategist for Long Term Capital Management, the hedge fund known for its epic collapse in 1998, and a proprietary trader for Morgan Stanley, has seen his share of financial complexities.
But when shown a seven-page list of derivatives positions held by the Illinois Teachers Retirement System as of March 31, obtained by Medill News Service through a Freedom of Information Act request, the University of Illinois-Chicago assistant professor of finance expressed disbelief.
“If you were to have faxed me this balance sheet and asked me to guess who it belonged to, I would have guessed, Citadel, Magnetar or even a proprietary trading desk at a bank,” Rosenthal said.
How bad is it? After losing $4.4 billion on investments in fiscal year 2009, and 5 percent on investments in fiscal 2008, the teachers’ pension is now underfunded by $44.5 billion, or 60.9 percent, according to the Commission on Government Forecasting and Accountability’s March 2010 report. By comparison, only 20.3 percent of the Chicago Teachers’ Pension Fund is unfunded.
For the quarter ended March 31, according to derivatives experts who studied TRS’ financial documents, the fund lost some $515 million on its derivatives portfolio. Since then, the fund’s derivatives positions have likely soured further, the experts