One Chart Explains What Bernie Madoff And Kentucky Public Pensions Have In Common

If Bernie Madoff taught us anything it"s that every successful ponzi scheme requires precisely one critical component to keep it afloat: a steady stream of fresh capital to fund redemptions.  Absent that key component, even the most carefully crafted ponzi, with the best, most creative accounting fabrications in the world, will inevitably fail from a lack of real, cold, hard cash to keep the illusion going.

Unfortunately, it seems that Kentucky"s public pensions are now running into the very same problem that ultimately brought down Madoff"s multi-billion dollar "empire".  As the Lexington Herald Leader points out today, it"s no coincidence that the Kentucky public pension system is suddenly collapsing just as the number of retirees (redemptions) has surged beyond the number of active employees (fresh capital) required to keep the ponzi going.

It’s impossible to know exactly who, where or when, but one day in 2016, a Kentucky state employee packed up her desk, said goodbye to her colleagues and retired.

Once she hit the exit, the number of retirees drawing a pension from the Kentucky Employees Retirement System (Non-Hazardous), the struggling $2.6 billion fund that serves most of state government, officially topped the number of active workers paying into it.

The 60-year-old fund has been mathematically upside down from that day forward.

Social Security, by comparison, has a roughly 3-to-1 ratio of workers supporting retirees, but KERS’ ratio is less than 1 to 1. Its numbers are expected to worsen as state government continues to cut its work force and aging baby boomers keep heading into retirement. The average age of a worker in KERS is 45, up from 43 just a few years ago. And they retire at age 57 on average to draw a lifetime pension.

“You just can’t depend on this model anymore,” said state Sen. Joe Bowen, R-Owensboro.

As Senator Joe Bowen notes, "it creates a cash flow problem"...

Bowen is working with Gov. Matt Bevin and other GOP lawmakers on proposed changes to Kentucky’s public pension systems, which face tens of billions of dollars in unfunded liabilities due to inadequate contributions and unrealistic financial assumptions by state government over much of the past two decades.

Bowen said Wednesday that an outline of their pension proposals could be unveiled within the next week, with a special legislative session to enact those changes possible later this year.

“The model of a defined-benefits plan doesn’t work for us anymore because we can’t raise enough money from this work force to pay for everyone who is going into retirement,” Bowen said. “This is why moving to 401(k) accounts, moving to defined-contribution plans, and then committing to paying down the existing liabilities … that’s really the only option we have.”

“It creates a cash-flow problem,” said David Eager, interim executive director of Kentucky Retirement Systems, which manages KERS (non-hazardous) and other state and local government pension funds. “The benefit payments are going to continue to go up. The contributions are going to continue to go down. That’s just the math of it.”

Of course, the demographics of the Kentucky pension system are hardly unique.  A surge in Baby Boomer retirements over the next couple of decades, combined with technological advancements that ensure that only a fraction of those retirees will have to be replaced with actual human workers, will inevitably result in a wave public pension ponzi failures as they meet with the same "cash flow problem" as Bernie Madoff.

That said, unlike the Madoff ponzi, no one will go to jail when the public pension ponzi schemes of the U.S. are exposed because, for some reason, defrauding taxpayers, as opposed to investors, is perfectly legal.

This Is How A "Bail-Out" Becomes A "Bail-In"

Authored by Simon Black via SovereignMan.com,

Here’s the perfect example of how insane our financial system has become.

It was announced yesterday that, after a 24-hour white-knuckled ride, Spanish banking giant Banco Popular had been sold to Banco Santander for the price of just 1 euro.

Note- that’s 1 euro in TOTAL. Not 1 euro per share.

Banco Popular had once been one of Spain’s largest banks.

But just as certain banks tend to do from time to time, Popular sacrificed responsibility and good conduct for quick profits.

They spent years gambling their depositors’ savings away on idiotic, dangerous, pitiful loans. And those bad loans eventually came back to bite them.

The modern business of banking is all about pooling customer deposits together and making various loans and investments with those funds.

Safe, responsible banks make sensible investments.

They maintain extremely high loan standards. And they keep a SUBSTANTIAL rainy day fund set aside in case those loans and investments go bad.

Banco Popular did none of those things.

Back in 2006 during the height of the real estate bubble, for example, Popular maintained a liquidity ratio of less than 2% according to its annual report that year.

This means that over 98% of its customers’ savings had been gambled away on bad loans and bad speculations.

Eventually those risky loans started failing, and the bank started losing money.

Last year alone Popular lost 3.5 billion euros, which is about as much as they earned in all of the bubble years combined.

Fearing for the banks ability to continue servicing its customers, European regulators stepped in on Tuesday and forced a fire sale.

Banco Santander “won” that auction, again, paying a symbolic price of just 1 euro.

This means that Banco Santander will now inherit all the toxic loans (and consequent losses) that Popular had on its books.

The insanity here is that Santander had almost no time to conduct its due diligence, i.e. research the business to understand what they were buying.

Banco Popular had a balance sheet worth over $150 billion with hundreds of thousands of different loans.

It would take months to even begin scratching the surface of such a massive balance sheet.

By comparison, the last time I bought a business I paid $6 million and spent more than a year conducting due diligence.

Santander bought a $150 billion business and spent less than 24 hours trying to understand what they were buying.

This is nuts. And ENORMOUSLY risky for Santander.

But perhaps even more insane is that this deal is now being hailed by European governments and financial media as a wonderful solution to the looming problem of bank insolvency.

It doesn’t take a rocket scientist to understand that this problem wasn’t really solved.

It was just transferred from one bank to another. The assets are still toxic. They just happen to be owned by Santander now.

Most importantly, Banco Popular is FAR from alone.

Here in Italy, in fact, a number of smaller banks are teetering on insolvency.

And regulators have been scrambling trying to find potential suitors to copy this shotgun wedding ‘solution’.

But so far, no success.

Not a single bank in Italy has sufficient capital to absorb the toxic debts of another.

Plus the government itself is totally bankrupt.

So basically an insolvent government and insolvent large banks are trying to figure out how to bail out insolvent smaller banks.

It’s total madness.

And this is the important lesson: eventually they run out of options.

There’s no one left to bail out a bad bank… no taxpayers, no white knight, no bondholders, no shareholders. Nobody.

Except for depositors.

This is when a “bail out” becomes a “bail in”, and the depositors get stuck with the bill.

Bottom line: This matters. It’s your money at stake.

Don’t simply assume that your bank is in good condition. Examine their financial statements and find out for sure.

Don’t keep 100% of your life’s savings at a single institution. Make sure you diversify. If a bail-in ever occurs, it will be the largest depositors who get hit first.

And definitely consider diversifying geographically. Avoid keeping everything in the same country, especially if that country is bankrupt– the bail-in risk is much higher.

The world is a big place and there’s a ton of opportunity out there, including plenty of responsible, conservative places to bank.

And it’s hard to imagine you’ll be worse off because a portion of your savings is in a safe, well-capitalized bank.

Ponzi Scheme: What The Chicago Teachers' Pension Would Be Called If It Were A Hedge Fund

A long, long time ago, back in 2008 when most of today"s hedge fund analysts were still stressing over what to wear to prom, a man named Bernard Madoff was arrested for bilking unsuspecting investors out of $65 billion.  Madoff ran what is traditionally referred to as a ponzi scheme in which new investments were solicited as a means to fund massive redemptions that otherwise would have resulted in a collapse of his fund long before the FBI finally caught up with his scheme. 

But, Madoff was eventually caught and in 2009 he was sentenced to 150 years in prison for his scheme. 

Ironically, many of our states and cities today are running very similar ponzi schemes (aka "massively underfunded pension funds"), using taxpayer money nonetheless, but it"s completely legal and not many people seem to notice and/or care. 

Take, for example, the Chicago Teachers" Pension Fund ("CTPF") which has roughly $10 billion in assets to cover $21 billion in future payment obligations.  The fund has to payout roughly $1.4 billion to retirees each year to cover benefits.  That said, in 2016 it actually lost $28 million on it"s $10 billion in assets. 

So how did they make up the difference?  Well, the CTPF simply took the $700 million that was contributed to the fund in 2016 from taxpayers and the $192 million contributed by teachers from their paychecks, money that was intended to be invested until those teachers retired, and gave it to current retirees.  Put another way, just like Madoff, the CTPF takes money from "new investors" (current teachers) and uses it to fund redemptions (benefit payments to retirees) even though the managers of the fund know that current claims don"t have a chance of ever being paid in full. 

Now, you could argue that returns in 2016 were not normal which, for the sake of Chicago"s taxpayers, we hope is true.  That said, even if the fund earns the 5.6% returns that it"s averaged for the past 10 years going forward, it will still have to borrow roughly $850 million from new contributions each year just to cover annual benefit payments. 

As a side note, we would point out that Chicago"s teachers have made roughly 1.4% off their investments in hedge funds, on average, over the past 5 years...which is probably just under the 1.5% management fee they pay to those same hedge funds. 

Of course, you could also argue that reducing principal balances could be justified to the extent the number of future retirees is expected to decline versus current retirees.  Unfortunately, that argument is also flawed as the number of current teachers actually exceeds the number of current retirees...not to mention the fact that their salaries, and therefore future benefit packages, are nearly double those of current benefit recipients.

Source:  Chicago City Wire.

Of course, like most financial grenades with a huge tail risk, the devastating consequences of America"s failed public pensions will not be addressed until it"s already too late.  Unfortunately, with ~$5 trillion in underfunded pension obligations in the public sector alone, the pension catastrophe will be too large for even America"s overly generous taxpayers to bail out.

Wayfair Tumbles After Amazon Launches Furniture Seller Program

It looks like another "retailer" is about to be "Amazon"-ed. Wayfair - the retail household goods seller - is tumbling this morning after Amazon reportedly pitches a new furniture seller program. Additionally, not helping the stocks, Citron"s Andrew Left goes negative on the stock, comparing the company"s controls to Madoff.

As FurnitureToday reports,

Speaking to about 40 retailer members of the Furniture Marketing Group buying group here, Amazon representatives in the furniture category said the e-commerce giant hopes to launch the new “Unified Delivery with Services” change to its platform late in the third quarter.

Under the plan, furniture sellers, such as stores, won’t be required to sell nationwide. The retailers will set their own pricing that can change with the services an Amazon customer chooses. White glove delivery (to a dry room) is the bare minimum service requirement — no drop-off at the door — but retailers can offer additional services, including delivery to the customers’ “room of choice,” set-up and haul away.

And the cost: Amazon is asking for a $39.99 monthly fee for an unlimited number of listings as well as 15% on the product sale and 20% on the services, according to Brett Hobson, Amazon business development representative in the furniture category. He added that retailers can choose to roll their services into the product price and offer just one price to customers for that 15% fee. However, in that case, Amazon shoppers wouldn’t see a menu of service options.

Read more here...

The result is not good...

And was not helped by Citron"s Andrew Left comparing the company to a ponzi scheme...

Wayfair may have buyers excited about rock-bottom prices for home goods, but its business model is unsustainable, Citron Research analyst Andrew Left says.

"The accounts payable, the cash flow, the business model – it"s stupid," Left said in a phone interview with Real Money. "They"ll never make money."

Left, a notable short seller, says shareholders should be alarmed that a company of Wayfair"s size, with more than 10,000 suppliers, uses manual internal controls, or does accounting by hand instead of automation. He compared the process to that used by convicted Ponzi? schemer Bernie Madoff, who personally supervised his company"s manual process.

In other areas of concern to Citron, Boston-based Wayfair’s accounts payable comprises 50 percent of its total assets and are 10 percent more than its revenue. Its accounts payable is also more than its $100 million cash on hand, Left says in an unpublished report obtained by Real Money.

Read more here...