Riley: Magaziner Was Barely Alive Then, But I Lived Through 1987 Crash
Wednesday, October 18, 2017
Michael G. Riley, GoLocalProv MINDSETTER™
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Seth Magaziner
Thirty years ago today I was a “specialist” on the American Stock Exchange. My specialty was making a two-sided market in the put and call options on several listed equities. I remember watching several members as they went out of business due to the mass one-way exit from markets by individual and institutional investors alike. In just a few hours of trading the market fell over 20% in a single day and pension funds, both public and private, were devastated.
Today, such a decline would be far more dangerous due to the low level of interest rates and the many poorly funded pension plans including Rhode Island. I project a similar decline would cost the Rhode Island pension fund approximately 15% or $1.2 billion in a single day. Can our pension fund survive that? Maybe, but that kind of decline would virtually eliminate any hope of current retirees ever receiving a cola.
Shouldn’t we hedge?
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What kind of protections are in place now in our “back to basics” portfolio? We know the hedge fund experiment under Raimondo and now Magaziner has failed badly. Yet Magaziner has been ironically bailed out by the Donald Trump “boot off the throat of business” bull market. The rally may or may not extend from here, however, experience tells me that it is amazing how quickly sentiment can change and a bull market can end.
To guard against that, I would recommend that the treasurer put in safeguards including clear and concise plans to deal with a market meltdown. These hedges do exist and the treasurer should articulate through stress testing what we should expect in terms of losses in a negative scenario. As a risk manager, my eye is always on the downside. We all know a monkey can make money in a market up 15 or 20%. it’s the job of professionals to ensure principal and worry about the downside. I suggest periodically spelling out how much we could lose under a down 25% and 50% stock market scenario and a description of how our managers intend to deal with such a scenario.
This is a completely normal exercise in most financial institutions ranging from Insurance companies to banks and is periodically required by the Federal Reserve. Taxpayers and Rhode Island retirees deserve the same amount of analysis and transparency.
Why I Might Run for Rhode Island Treasurer
I hope I never experience a crash like that of October 1987 again, but “hope” is not a plan. Prudence suggests that a pension fund that is still woefully underfunded at well under 60% cannot afford a large hit like 1987 or 2008. Or even August of 2015. My instinct would be to purchase protection on indexes correlated to the pension portfolio after long rallies like we’ve just had. With volatility currently low and recent gains high I would strongly encourage that Mr. Magaziner spends pension dollars to protect the assets of the portfolio.
If this market falls 25% or more over the next year and Mr. Magaziner has made zero effort to protect recent gains, then voters should boot him from office and I will run for Treasurer. If, on the other hand, he takes action and moves to protect retirees and taxpayers from losses, as any fiduciary would, then he fairly deserves another term and I will not need to fix anything.
Merely suggesting that regulators would be reigned in was good enough for several thousand point rally, much to the dismay of progressive liberal like Elizabeth Warren and Bernie Sanders who prove every day how little they know about what the economy likes. In Rhode Island, we still don’t get it. If Gina Raimondo even mentioned cutting taxes or fees and regulation she could win next year in a landslide.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
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2005-2010
In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
Read the Senate Fiscal Office's Brief
here.
(Photo: 401(k) 2013, Flickr)
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January 2009
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
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2009
Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions.
Read the NCSL report here
(Photo: FutUndBeidl, Flickr)
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2010
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
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November 2010
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
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April 2011
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
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May 2011
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
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October 2011
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
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October 2011
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
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November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
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November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
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January 2012
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
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March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
See WPRI's coverage of Chafee's attempt to cut pension fund deposits
here.
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March 2013
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
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April 2013
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
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June 2013
Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.
Read GoLocalProv's investigation into the rising pension costs here.
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September 2013
Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform.
Read Taibbi's article in Rolling Stone.
Read GoLocalProv's response to Taibbi here.
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October 2013
As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.
Read more from GoLocalProv about the players in the pension battle here.
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