A margin call by any other name

(Or should I say, “pension for understatement”?)

From the “then and now” file…

November 2007

“This should put to rest the myth regarding the financial soundness of public pension funds. CalPERS is a good example of a fully funded system with most of our plans at 100 percent funding level,” said Rob Feckner, President of the CalPERS Board of Administration.

…

Under a new law (AB 554) that goes into effect on January 1, 2008, all California public employers will be able to participate in the trust fund.

CalPERS, with more than $250 billion in assets, is the largest public pension fund in the U.S.  It administers retirement and health benefits for 1.5 million active and retired California public employees and their families.

October 2008

The nation’s largest public pension fund, known as Calpers, is unloading stocks in a falling market to make sure it has enough cash to meet its obligations.

The pressures come as the California Public Employees’ Retirement System has had to raise cash to fulfill commitments to private-equity firms and real-estate partners.

…

During the recent market selloff, however, distributions have dried up while capital calls continue. That’s created a mismatch and a cash strain.

Since the credit markets have tightened up and real estate and alternative investments aren’t very liquid, Calpers has been compelled to sell off stocks to raise large sums quickly. Those sales are turning paper losses into realized losses.

Calpers said it had $188.8 billion under management as of Wednesday, down 21% from the end of June.

See, if you take out a loan and use the money to buy stocks, and consequently you are forced to liquidate into a falling market precisely because the market is falling, that is known as a “margin call”.  And it means you are not an investor; you are a speculator at best and a gambler at worst.

But if you ink deals with private equity firms that require you to pony up cash whenever they ask for it, and consequently you are forced to liquidate into a falling market precisely because the market is falling, that is known as “making sure you have enough cash to meet your obligations”.  And it means you are merely a wise custodian of $250 billion $188 billion of other people’s retirement money.

And if you, like I, do not really see the difference, then clearly you lack the qualifications to work in the financial industry.