Mary Williams Walsh again puts an issue before the general public for consideration. This time she reveals that the SEC is looking at the assumptions used in the pension plan investments of both Ford and GMC. But, she does not delve deeper.

Recall that the US Airways bankruptcy court decision a few months ago dealt a blow to businesses maintaining defined benefit plans by requiring that upon default the Pension Benefit Guarantee Corporation would insist upon conservative investment assumptions rather than rosy assumptions. The net effect was that the bottom line, at least as far as bankruptcy looms for covered businesses, is that the equity of the company that is left over for shareholders and corporate bond holders after covering pension obligations is dramatically reduced.

Mary notes that the strategic manipulation of assumptions can be used to manipulate the apparent profits of a corporate entity that sponsors a pension plan. They are encouraged to invest in risky investments because it is good for the bottom line, so long as the downside risk is never seen.

Just imagine the mutually reinforcing effect of the pumped up stock values of companies that hold each other’s stock in their own pension plan portfolios. This is simple stuff making an artificial spiral up inevitable.

If you start from the perspective that the health of the pyramid scheme has suffered a fatal blow, a chronic degenerative disease, that is guaranteed to result in death then you might understand the recent moves by various players. There are too many to note them all here.

The move to use hedge funds is an effort to reduce risk, by transferring the risk to someone else. This trend actually reduces the proportion of remaining investors who still openly accept the risk of price variations. (This assumes, for the sake of argument that the hedge funds actually achieve their risk transfer goal.)

Who is left holding the bag? 401k folks and local governments, that’s who.

When local government’s issue Pension Obligation Bonds they DO NOT obtain a final release from further liability. Rather they merely expand their risk exposure. The assumptions that allow corporate folks to manipulate profits are used by local governments to justify extraordinary pension payouts and prospective pension payouts. The assumptions are treated as fact to justify paying interest to bondholders so as to obtain money to put into the stock market and get profits (if you can call it that) by selling stocks at a higher price later to a greater fool.

The only pension obligation bond that makes potential sense is one where the public entity sponsor does it only upon obtaining a full release from further liability and ends all further assumptions on returns in excess of the conservative investments considered in the US Airways bankruptcy case. In which case, the rate of return is less than the cost to borrow; which makes all Pension Obligation Bond schemes inherently unwise. It is theft by transfer of risk through compulsion by Bond Rating agencies with the complicity of Actuaries.

I do not know how else I can make the case any plainer and simpler that this is virtually identical to the populist excesses of a country like Argentina.

To be honest, I have seen some wise, and candid, pension analysis originate out of Nigeria of all places.