Dear Mr. Landauer,

I am responding to your September 21, 2004, column:

“Head in sand won't secure retirees' pay”

Think of pension trusts as if they were banks. Banks are regulated in the interests of the depositors. One restriction is that they cannot own stock nor hold stock as collateral for loans. The modern pension trust is a legal entity and title that owes its existence to the restrictions on banks. The modern pension trust has gone hog wild in putting money into stocks. This investment in stocks went even further in that they built-in assumptions that did not discount the value because they are volatile but presumed future growth in value over time.

Many decades ago there were shady folks who promised a fixed, and guaranteed, return while they merely put the investments into stocks. (These shysters were in addition to the banks.) These are otherwise known as face-amount certificates. They are today banned outright.

If I accept deposits, put them into the stock market, and lure you to make a deposit based on claims of a guaranteed rate of return, am I not a banker and a shyster at the same time?

Below is one paragraph from my October 20, 2003, complaint against the State Treasurer when he sought to borrow 2 billion dollars to cover his ass for losses in the stock market.

A lesson learned 70 years ago but forgotten and abandoned reads as follows: “(a) After the expiration of one year after June 16, 1933, it shall be unlawful - (1) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor:[]” 12 U.S.C. 378.

I certainly did not think that the judge would fully understand what the hell I was talking about. The State Treasurer, though, should have known and so too his legal advisors. Below is another paragraph from my complaint:

The following features of the state created trust do not defeat the recharacterization of the trust as a State Bank: 1) an exclusive membership of public employees 2) a state guarantee 3) a retirement characterization of deposits to prevent a run on the bank 4) authority to freely include the face value of stocks as bank assets, 5) a tax break on both deposits and withdrawals, and 6) exclusion of the personal accounts of whatever balance from garnishment.

Then another paragraph:

The trust much more closely resembles a bank, as best described by the ability of depositors to request the balance of their account upon demand, than it resembles a fully unfunded retirement plan as best described by a retirement plan for retirees that is based clearly on years of service and age at retirement and demandable only as an annuity and only after attainment of a specified age.

The pension system of today is a skillful remake of the failed banking system that existed before 1933. Any dumb farmer, circa 1935, who had lost their farm because they took out a mortgage so as to get rich in the stock market would be smarter today than our State Treasurer. The lure of get rich schemes is the same thing as the lure to play video poker, and it is strong enough to overcome a rational analysis that not every one will get rich.

Let’s not forget the crazy compound problem posed by our interest-payment-only focus on housing. We are encouraged to borrow money for residential property. This frees up money, our savings, for us to place it into pensions that are then put into the stock market. The dumb 1935 farmer would again be able to point out the scam in a second.

The remedy, at least locally and within the power of a state rather than the federal government, is to encourage everyone to get out of their pensions and pay down their debt on their homes. This will not solve the problem but it will help soften the blow when the whole scheme comes tumbling down a few short years from now.

The SEC has rules for its members regarding allowing them to offer loans to traders. It pertains to margin accounts. The member can typically lend their client up to 50 per cent of the last traded value of the stock. The fair market value of a stock held by pension trusts should be similarly discounted, rather than assumed to grow.