South Carolina PingAdd me to the list. / Remove me from the list.
What do ya'll think about this? I have no money in the retirement system. But I question this.
Posted on 03/21/2008 7:59:25 PM PDT by BenLurkin
COLUMBIA, S.C. (AP) -- The subprime mortgage crisis has yielded at least one benefit for states: Mortgage-related investments have become so cheap that they are luring some pension funds to buy. Retirement systems in South Carolina and Pennsylvania are nibbling at the securities, betting that they have been beaten down so much that the ones with good credit ratings could yield strong returns later.
South Carolina is looking to buy $100 million of mortgage-related investments for its $30 billion state pension fund. Pennsylvania, which made money off those securities' troubles in its hedge funds last year, is also betting that they can offer long-term returns.
But the buying this time is very tentative, and may not presage a broader turnaround in these securities.
For South Carolina, the caution means buying into a managed fund. In Pennsylvania, the outside managers the fund hires are looking for bargains. But in both cases, the states emphasize they're only investing small amounts of their overall portfolios.
The bargains are the product of a crisis in the mortgage industry brought on by some lenders taking greater risks by lending to some people who had poor credit histories. The bet was that home values would continue to rise and that these borrowers would be able to refinance before their monthly payments moved higher.
That didn't happen. Home prices fell, the rates on adjustable-rate mortgages ratcheted higher, people began defaulting on their loans, and securities tied to mortgages plummeted in value.
Now, some see bargains as investors realize the underlying assets the securities represent are far from worthless.
"Some of the securities that have dropped in value were really very solid securities," said Robert Gentzel, a spokesman for the Pennsylvania State Employees' Retirement System.
"This really has no bearing to the fair market value of these assets anymore," agreed Bob Borden, who oversees South Carolina's pension investment decisions. South Carolina has only put $8 million into that fund that includes some subprime mortgages, but Borden expects the rest to go in rapidly as the market swings from extreme fear toward greed.
"It has gotten to be where this market is oversold," Borden said.
While the banks and other companies that created and sold an array of mortgage-related securities need cash now, pension funds have cash -- and long-term investment views.
"They can take advantage of the fact that other parts of the market need that short-term liquidity," said Allan Emkin, managing director of Pension Consulting Alliance in Portland, Ore.
Banks, for instance, also need to comply with federal regulations that require them to have assets backing a percentage of loans on their books. "These banks are strapped for cash and they are forced sellers in the market," Borden said.
Joe LaVorgna, chief U.S. fixed income economist for Deutsche Bank Securities Inc., said for some types of mortgage investments, default rates would have to hit 90 percent at current prices for an investor to lose money.
The beating mortgage-related investments have taken is "a sign that we are dragging along or at what at least is getting close to the bottom of reality," Borden said. "That's the real question. Are we at the bottom of the market? We seem to be getting pretty awfully deep and approaching the bottom."
Nonetheless, "the bottom is hard to call," he said.
Everyone is trying to find the bottom, LaVorgna said. "I think it's possible the bottom could be a little more elusive than current prices suggest."
With banks still cleaning up their balance sheets, "there's just not a lot of risk taking at the moment," he said.
So don't expect other state-run pension plans to immediately rush back in to mortgage-related investments, said Keith Brainard, research director for the National Association of State Retirement Administrators. "It's going to be a lot more subtle in most cases."
Clark McKinley, a spokesman for the California Public Employees' Retirement System said the nation's largest public pension fund has about $2.4 billion in structured investments related to mortgages -- less than 1 percent of its $250 billion fund. But McKinley won't say whether portfolio managers are now angling for bargains on underpriced mortgage investments.
Brainard said mortgage investments are typically only slivers of any state's portfolio.
"Florida last fall came to realize it had a lot more this stuff than anybody realized," Brainard said. But Brainard puts that in context: The state really had less than 1 percent of its more than $137 billion portfolio at stake.
Small or not, a downgrade in some securities tied to mortgages in that portfolio last fall prompted some Florida local governments to pull money from the fund. That created something of a run on the fund that forced the state to shut down access in December.
Mike McCauley, a spokesman for the board overseeing Florida Retirement System investments, said he's not aware of any new emphasis being placed on the mortgage sector. The state's plan "maintains a highly diversified portfolio, including mortgage-related securities within our fixed-income and equity asset classes and we tend to be plain vanilla relative to other public pension systems."
Maryland is nosing around at the urging of its independent advisers. "There's probably a chance we're going to do something there," said John Greenberg, acting chief investment officer for the Maryland Retirement and Pension System. The state relies mostly on asset-backed mortgage investments such as real estate investment trusts. "We're not looking to invest in any mortgage-backed only fund."
REITs, which trade like stocks and are a good proxy for owning commercial and institutional real estate, took a beating last year too. "We're going to increase our position in overall real estate and since we're doing that and REITs are part of our real estate portfolio, we're definitely going to increase our position in REITS," Greenberg said. Maryland has $1.9 billion, or 5 percent, the pension's $37.5 billion in real estate now, but that will double.
Other states see opportunity beckoning, but are waiting on the sidelines.
"No decision has been made to date to make any significant purchases of mortgage-backed securities," said Chris Rackers, who manages Missouri's pension investments.
Oh...please don’t let my pension fund do this!
Crashes always happen in oversold markets.
Pretend it is 2001 and replace the words “mortgage-related investments” with “tech stocks. No thanks...
Crap. Just crap.
“What could possibly go wrong?”
I agree. The pension funds have no business catching falling knives. But, at this time they may be no risk since the government is going to back all the secuirties with tax money.
-ccm
Stock in quality large caps is the way to go, IMO.
Nothing is safe from margin calls. If someone has to sell, they will sell the high quality large caps in order to pay their margin calls. I have been seeing behavior in my stocks that I attribute to this. They will recover though, so you have to hold them courageously through the sell offs.
South Carolina Ping What do ya'll think about this? I have no money in the retirement system. But I question this.
When I was in institutional sales South Carolina had the touch of a jewel thief in picking the low in interest rate cycles. They would always issue debt when long term rates hit bottom.
Don't bet against them in picking the bottom of the sub prime mess.
I think it’s a good move. A chance to pick up investments dirt cheap.
This summer I’ll be looking at buying what I consider key property for the next round of home building. The market involves risks. Don’t like risk? Go buy a mattress to hide your money.
People will never stop building homes.
True. But new construction may be very slow for a while. I was reading yesterday that builders ramped up their output over the last 6 years and now we have an over-supply and excess capacity condition. Inevitable result: lower prices.
The conclusion of the article was that housing inventories remain high and it will take 3 years of slack construction before demand catches up again.
Now, some see bargains as investors realize the underlying assets the securities represent are far from worthless.
"This really has no bearing to the fair market value of these assets anymore,"
"They can take advantage of the fact that other parts of the market need that short-term liquidity,"
for some types of mortgage investments, default rates would have to hit 90 percent at current prices for an investor to lose money.
I was thinking about buying some undervalued property,....maybe I would be better off buying some undervalued mortgage based securities. It's too bad I know very little about them. Land and houses I can inspect, I wouldn't know where to start on these things.
“But new construction may be very slow for a while.”
In states where speculation ran wild and money was loose that’s true. States run by liberals will also take a big hit and slide into recession. Michigan, for example, has a clueless communist as governor and she’s completely destroying that state.
States like SC, run mostly by conservatives, seem to be better situated to weather an economic storm. I’m still seeing construction of subdivisions and calls for carpenters and electricians in this part of SC. Plus BMW is building a $750 million addition to its plant here. More jobs, more money, more investments.
I’m critical when reading these economic doom and gloom stories that try to project the troubles of liberal states onto the entire nation. I try to analyze regions rather than tossing everything into a big pot, read the tea leaves and project some “big picture” from that.
SC, I believe, is a good place for investment of many types, one being land purchase. I’m looking long term - five years or more. But I have a hunch that my bet might pay off sooner. We shall see.
Roll the dice, mama, baby needs a new pair of shoes.
Not much market for this stuff in blocks of less than 5 million or so. IOW, you won't be able to sell an odd lot when the time comes.
It sounds risky but these people apparently have a record of knowing what they are doing, I certainly hope so anyway. I would probably be inclined to say buy tons of gold at this point but who knows.
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