Monday, August 01, 2005

New York Times Pension Smear

"How Wall Street Wrecked United's Pension"

reads the headline on a featured article by Mary Williams Walsh in this past Sunday's New York Times.

That's a heck of an accusation. It sure is eye-catching and it got my attention. When I see a headline like that I quite reasonably expect to see a smoking gun. Unfortunately, and sadly but rather predictably, not only do you not get a smoking gun all you get is a whiff of something burning in the air.

These two paragraphs form the basis of Ms. Walsh's charge against Wall Street:

HAD anyone listened to Doug Wilsman, tens of thousands of United Airlines employees would not be facing big cuts in their pensions. And the federal agency that guarantees pensions might not be struggling with its biggest losses ever.

So who is Doug Wilsman? He is a retired pilot and a former fiduciary of United's pension plan for pilots, and in 1987 he discovered that the company had abandoned its older, tried-and-true approach of investing retirees' money in bonds timed to pay when the pensions came due. Instead, it had bought into the promises of Wall Street that it could put less money into the plan - and take out more later - if it just put most of the assets into the stock market.


The four page article continues, somewhat disjointedly, in pointing out how regulation of the pension industries is lacking in some areas. But as far as facts that go further in supporting an extremely strong accusation you will be hard pressed to find any.

Further, Walsh contradicts her story in several places:

On page 1, Walsh writes:

Pension investing is largely unregulated, even though the federal government effectively covers the investment losses when a defined-benefit plan fails. At United, this freewheeling approach gave rise to investments in junk bonds, dot-coms and even what appears to be an energy venture in Albania.

However, on page 2, she writes:

United's actions offer a typical example of how most companies manage their pension funds. Its portfolio may look aggressive in hindsight - including high-yield bonds in companies like Adelphia and Bethlehem Steel that eventually went bankrupt, technology stocks that evaporated when the bubble burst and an assortment of private partnerships.

But the general approach was in keeping with what most companies do: about 60 percent stocks, 30 percent bonds and a mixture of "alternatives" including real estate and private equity investments. Local governments often invest their pension funds much more aggressively.
"Pensions are heavily regulated," Mr. Siedle said, "yet it's a kind of funny regulation where the regulators who are responsible for pensions really don't know much about managing money."

Thus there are rules to make sure that pension plans are not really tax shelters in disguise, rules to make sure companies treat low- and high-income workers equitably and, since 1989, rules to keep companies from taking money out of pension funds and using it to run their businesses.

But there is no rule limiting aggressive investment strategies or requiring companies that want to pursue them to pay more for their pension insurance.

And, on page 3:

THE Internal Revenue Service provides yet another layer of protection to pensions, but it has authority only over how companies design their benefits and contribute money to their plans - not over whether they have fulfilled their fiduciary duty to invest prudently. That is a job for the Labor Department.

So which IS it?


I believe that there is an extremely high probability that some significant malfeasance occurred in the short and long-term management of United's pension fund. It is likely to be some combination of very aggressive assumptions made by United -- not caught by their auditors -- and rather poor performance in various investment areas coupled with a sudden demographically related surge in liabilities that led to the $10.2 billion shortfall cited by Walsh in her article. All things considered I think there's a better chance that negligence by United's pension auditors had more to do with this failure than bad advice or poor performance. You don't get a ten billion dollar shortfall over a short period of time unless entire market segments crash (being heavily invested in the NASDAQ during the bubble in 2001 might quailfy but if United's pension woes started then Walsh does not mention it but rather indicates that insolvency came to a head this year) or it's occurred over a long period but the auditor hasn't raised any flags.

To say that Wall Street wrecked United's pension plan is basically slander. Now the notion of "Wall Street" means different things to different people and Walsh is careless not to at least try and define who she meant. So it's easy slander because it is unlikely that anyone from Wall Street would sue her or the NY Times. It's like accusing "fat cats" of "stealing people's money".

To her credit, Walsh does make some good points including pointing out that certain asset classes are chosen for the potential for accounting gains than because they are the best investments. And she does a decent job in showing how different agencies how regulate different parts of pensions need much better coordination.

Now if this was the NY Daily News I wouldn't bat an eyelash. But the Times is not supposed to be tabloid its supposed to be the "newspaper of record". For the Times to publish a feature article with a headline like this and precious little to back it up is a disgrace. A much better and more accurate headline would have been "United Disaster Raises Significant Questions On Pension Regulation". That would be true but not nearly as interesting.

By the way, according to the Times website this was the most emailed article yesterday.

Another good reason why Bernard Goldberg is probably not far from the truth when he rated Arthur Sulzberger, the Publisher of the Times, #2 in 100 People Who Are Screwing Up America.

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