Great Idea from Geniuses

3shell_aaronBloomberg has the scoop on a new Federal Deposit Insurance Corporation plan to encourage state employee pension funds to buy up failed banks:

Oregon’s retirement fund may contribute $100 million as regulators seek “the support of state pension funds to solve the crisis surrounding ongoing bank failures,” Jay Fewel, a senior investment officer at the Oregon State Treasury, said in a presentation at the fund’s Feb. 24 meeting. New Jersey’s fund may also participate, said Orin Kramer, chairman of New Jersey’s State Investment Council.

This is ridiculous. Pension systems already run significantly higher risk than would be acceptable, essentially gambling taxpayer money that should be designated for public employees’ retirement. This mocks any notion of fiscal accountability. If the gambles fail, and according to this New York Times article they likely will, taxpayers will be left holding the bag.

Risk is the enemy of retirement investments. It’s not rocket science, but state legislatures, public unions, and state bureaucracies continue to make promises they can’t afford and gamble that either a booming market or future taxpayers can cover their debts:

Oregon would invest in Community Bancorp LLC, a bank being formed by Sageview Capital LLC, according to the Oregon presentation. Sageview was founded by former Kohlberg Kravis Roberts & Co. executives Scott Stuart and Ned Gilhuly. Sageview is looking to raise about $1 billion from pension funds and similar investors, the presentation said.

While the structure makes sense, pension funds would be better off investing in existing banks, said Chris Whalen, managing director of Institutional Risk Analytics of Torrance, California. At those lenders, management will oversee details of buying failed lenders and save pension funds the time and effort needed to launch a new bank, he said.

Buying out failed banks with state pension funds is nothing more than a shell game, moving failure from private banks to public employees to taxpayers. It’s a terrible plan, and Oregon and New Jersey should soundly reject it.

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