EQUITY TRANCHES IN YOUR PENSION FUND?
The financial industries have come up with a colorful, appropriate name for the equity tranches of CDOs - the toxic tranch. Also sometimes called, ‘first loss’ portions, these tranches promise the highest return and are the first to default. The subprime crisis hit the equity tranches first and hardest, and, incongruously, pension funds across the nations lost millions of dollars.
David Evans of Bloomberg wrote in July 2007 about the increase in equity tranch purchases by pension funds. “Seven percent of all the equity tranches sold in the U.S. in the past decade were purchased by pension funds, endowments and religious organizations…. Public pension funds have bought more than $500 million in CDO equity tranches in the past five years.” These equity tranches are riddled the very subprime debt that plummeted throughout the second half of 2007.
Evans spoke with Chriss Street, the treasurer of Orange County, California, who “says the big risks taken by public pension fund managers to juice up their investment performance with CDO equity tranches could result in big losses. Those tranches are filled with risky debt, which is sometimes in the form of subprime mortgages… ‘Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans,’ [Street] says.”
All of the players involved in peddling toxic securities are responsible for the losses due to pension participants and individual investors. Financial Institutions have advertised the high returns, and pension fund managers have accepted the bait, sometimes unwittingly exposing their clients to risky subprime debt.
Read the story:
http://www.bloomberg.com/news/marketsmag/pension.html
