Ouroboros

[wonderpup]

Some of Britain’s biggest banks have begun quietly ridding themselves of billions of pounds of assets they have found difficult to sell following the financial crisis, moving them off their balance sheets and into staff pension funds.

The moves – designed with the dual purpose of clearing unwanted assets from the banks’ own books while at the same time closing pension fund deficits – have been made as exceptional top-up payments into the pension schemes over recent months.

HSBC made a £1.76bn exceptional payment into its pension scheme, comprising a portfolio of assets ranging from subordinated debt to asset-backed securities, last December. Lloyds also made a £1bn commitment to its pension fund as part of a £5bn transfer of assets into an intermediary funding vehicle. Lloyds did not respond to requests for information about the arrangement, but pensions experts said the measures were comparable with the HSBC plan. [..]

Nobby Clark, who runs HSBC’s pensions solutions group, said the transfer of illiquid assets into pension schemes was a sensible way for banks to deal with funding deficits. "The pension scheme has the ability to take liquidity risk with assets that aren’t liquid temporarily," Mr Clark said. Pension funds’ liabilities are long-term, so short-term illiquidity is unimportant.

Many big banks found themselves with vast portfolios of illiquid assets, such as asset-backed securities tied to the US mortgage market, following the 2008 financial crisis. Not only must banks mark the value of the assets, held in their trading books, to still-low market rates, but the majority also attract higher capital requirements under new regulations. The rules do not apply to assets in pension funds, however.

Banks gain from capital and tax relief on the transfer transactions, while the pension fund typically secures contributions much sooner than if it were to wait for cash payments. Some pension fund trustees have expressed concern that they are receiving questionable assets in place of cash. "[Trustees] might say: ‘If I can have a crisp new white shirt why would I want one you wore yesterday?’" said Dawid Konotey-Ahulu, co-chief executive of consultancy Redington.

But bank executives point out that transfers into bank pension funds have occurred at impaired book values. In addition, some assets have been given another valuation "haircut" of as much as 20 per cent, according to pensions experts – sufficient to placate pension fund trustees.

Ilargi: Yes, you read that correctly: Britain's banks, having been propped full with taxpayer money but still lost 75%-95% of their market value, are busy unloading their landfilling toxic waste (a term that comes straight from the banking world) unto their very employees. Who at least to some extent should be bankers, and understand what this stuff is worth; they may have well sold it themselves. And all this is presented as being beneficial to all parties. No scruples there.

Got to love this, though: ”... transfers into bank pension funds have occurred at impaired book values. In addition, some assets have been given another valuation "haircut" of as much as 20 per cent [..]" Oh, is that a fact? Now that makes me wonder what these"securities" are carried on the banks' books for.

The people whose pension funds are poisoned with the toxic paper can stand in line with all the others who -will- have no pensions left.

http://theautomaticearth.blogspot.com/

Got to love those banksters- even animals draw the line at eating their own.

[bogbrush]

If true then the Trustees either have a claim or would be in trouble.

The duties on Trustees are far more onerous than on directors.

[interestrateripoff]

Genius.

I'm sure it won't happen as these assets are clearly high quality but what happens if these assets lose value and can't be sold on?

[leicestersq]

http://theautomaticearth.blogspot.com/

Got to love those banksters- even animals draw the line at eating their own.

Well it is odd. If the assets underperform, they will have to put in more money anyway as the law stands.

I remain of the opinion that the state should intervene and unwind all public and private sector defined benefit pension schemes.

[bogbrush]

Well it is odd. If the assets underperform, they will have to put in more money anyway as the law stands.

Yep, plus exposes the Trustees to extreme sanction if it goes wrong.

[_w_]

Ha ha. Filling their own staff pension funds with toxic sludge. Sick.

[_w_]

Well it is odd. If the assets underperform, they will have to put in more money anyway as the law stands.

I remain of the opinion that the state should intervene and unwind all public and private sector defined benefit pension schemes.

Small detail: it only underperforms if it is marked to market. Under the mark to fantasy model, everyone makes profit.

[blackgoose]

About time. Bankers have been rewarded far too generously during this downturn, with huge bonuses after bonuses while shareholders have been well and truly done over. For once, the Bankers themselves are going to feel some pain (though they wont notice it for a few years until after they retire).

Probably the top decision makers are not in this pension pot, but some other "protected" pot.

[leicestersq]

Small detail: it only underperforms if it is marked to market. Under the mark to fantasy model, everyone makes profit.

The pension schemes are separated from the main banks. They have no incentive to overvalue assets. Quite the opposite.

[_w_]

The pension schemes are separated from the main banks. They have no incentive to overvalue assets. Quite the opposite.

I was being disingenuous.

[bogbrush]

The pension schemes are separated from the main banks. They have no incentive to overvalue assets. Quite the opposite.

Which makes me think this has to be a non-story; if these assets have been put in to increase funding but fail then the Trustees will simply have their hands out for more.

If the fund has "invested" in them then the Trustees will have to sort it or they'll find themselves in trouble. Their exposure is much greater than Directors or Managers.

[wonderpup]

If true then the Trustees either have a claim or would be in trouble.

The duties on Trustees are far more onerous than on directors.

You assume they will be in a position to accurately assess the true value of the 'assets'- a feat apparently beyond the professional ratings agencies whose sole raison d'être was to do just that.

I'm sure that the trustees have been given lavish assurances that this toxic waste is safe- after all, bankers don't lie- do they?

Anyway by the time it blows up all interested parties no doubt intend to be well gone, with their loot intact- except, of course, the pensioners- but they don't matter.

Edited August 22, 2011 by wonderpup

[bogbrush]

You assume they will be in a position to accurately assess the true value of the 'assets'- a feat apparently beyond the professional ratings agencies whose sole raison d'être was to do just that.

I'm sure that the trustees have been given lavish assurances that this toxic waste is safe- after all, bankers don't lie- do they?

Anyway by the time it blows up all interested parties no doubt intend to be well gone, with their loot intact- except, of course, the pensioners- but they don't matter.

Well Pensions need cash, not just book value. And unless the company vanishes the interested party remains.

[Guest tbatst2000]

Yep, plus exposes the Trustees to extreme sanction if it goes wrong.

Since these are transfers - not sales - desigjned to close the funding gap in the scheme I'm not sure that's true. So long as they take the stuff with their eyes open and mark it an appropriate price, I don't see how they would be exposed. If they used existing cash in the fund to buy the stuff off the bank, then that would be a whole different issue.

[leicestersq]

You assume they will be in a position to accurately assess the true value of the 'assets'- a feat apparently beyond the professional ratings agencies whose sole raison d'être was to do just that.

I'm sure that the trustees have been given lavish assurances that this toxic waste is safe- after all, bankers don't lie- do they?

Anyway by the time it blows up all interested parties no doubt intend to be well gone, with their loot intact- except, of course, the pensioners- but they don't matter.

It isn't pensioners you need to worry about with these schemes, they are sorted. It is those working and contributing that get the shaft when the scheme goes pop without a sponsor.

It would be far better for the law to be changed so that this group takes their share of any hit, instead of placing their burden on others. Current winding up rules for these schemes are immoral.

[wonderpup]

Well Pensions need cash, not just book value. And unless the company vanishes the interested party remains.

The Greenspan error- assuming the interests of the company and those of it's management are aligned- in reality the short term bonus situation of the incumbents may well be vastly improved by offloading toxic waste onto the company pension scheme- and they will be long gone before the shite hits the fan.

[bogbrush]

Since these are transfers - not sales - desigjned to close the funding gap in the scheme I'm not sure that's true. So long as they take the stuff with their eyes open and mark it an appropriate price, I don't see how they would be exposed. If they used existing cash in the fund to buy the stuff off the bank, then that would be a whole different issue.

100% Agree.

In neither case is there a problem because if the stuff is supposed to close the funding gap but doesn't they'll just be back with their hands out later. And it's not like the can will be kicked down the road forever as they need actual cash to pay pensions.

[bogbrush]

The Greenspan error- assuming the interests of the company and those of it's management are aligned- in reality the short term bonus situation of the incumbents may well be vastly improved by offloading toxic waste onto the company pension scheme- and they will be long gone before the shite hits the fan.

I don't overlook that at all, but it doesn't adversely affect the Pension fund either way.

[_w_]

The Greenspan error- assuming the interests of the company and those of it's management are aligned- in reality the short term bonus situation of the incumbents may well be vastly improved by offloading toxic waste onto the company pension scheme- and they will be long gone before the shite hits the fan.

There's no other explanation. In a vengeful sort of way I am taking some pleasure at the idea that those who assisted bank executives in harming so many people are now finding themselves at the receiving end of the stick.

Dog eat dog, eat what you kill, etc. Now they are the ones on the menu.

[bogbrush]

There's no other explanation. In a vengeful sort of way I am taking some pleasure at the idea that those who assisted bank executives in harming so many people are now finding themselves at the receiving end of the stick.

Dog eat dog, eat what you kill, etc. Now they are the ones on the menu.

If the bank has obligations then no amount of shimmying will get them out of it because the fund has an appetite and it'll be back if these assetscan't produce the cash the fund needs to pay pensions.

I still don't see quite how this shafts pensioners. The Pension fund isn't going away. The Trustees have exposure far greater than Directors.

[wonderpup]

I don't overlook that at all, but it doesn't adversely affect the Pension fund either way.

Then why are the banks involved so reluctant to talk about it? It seems clear now that having run out of other people's pension funds to bury their toxic waste in the bankers have decided to foul their own back yard with it.

The idea that these 'assets' are temporarily impaired is just speculation- they might never recover, in which case their own pensioners are left holding the empty bag.

It's breathtakingly cynical but somehow totally predictable as well.

[wonderpup]

If the bank has obligations then no amount of shimmying will get them out of it because the fund has an appetite and it'll be back if these assetscan't produce the cash the fund needs to pay pensions.

I still don't see quite how this shafts pensioners. The Pension fund isn't going away. The Trustees have exposure far greater than Directors.

You assume the banks won't go bust- I doubt some of the current management share that optimism- the essence of looting is to get in and get out fast with the loot- in that respect the financial services sector are way ahead of the pack.

[porca misèria]

It says exceptional top-up payments. I read that as the pension funds getting some extra freebies at peppercorn (if any) price so a win-win for them. Banks unloading toxic assets so they can write down the value on their own books to zero, leaving the losses with shareholders and taxpayers, and themselves with a cleaned-up asset base.

[_w_]

Banks unloading toxic assets so they can write down the value on their own books to zero, leaving the losses with shareholders and taxpayers, and themselves with a cleaned-up asset base.

The only reasons for banks to do this is if they transfer the assets without writedowns. All banks are facing regulatory pressures to increase their capital ratios. They are in deep sh*t over this. They could reduce their capital stripping via bonuses (impossible with the current pack still in charge), or make more profits to accumulate capital (unlikely since they immediately take it all out via bonuses), issue shares (would be catastrophic to the share price and share option bonuses), or reduce the size of their balance sheets without a hit to capital e.g. without writedowns.

They've obviously found a way to do the latter, with the blessing of regulators.

[bogbrush]

Then why are the banks involved so reluctant to talk about it? It seems clear now that having run out of other people's pension funds to bury their toxic waste in the bankers have decided to foul their own back yard with it.

The idea that these 'assets' are temporarily impaired is just speculation- they might never recover, in which case their own pensioners are left holding the empty bag.

It's breathtakingly cynical but somehow totally predictable as well.

You don't know the value they've gone in at and you haven't addressed the fact that the fund will simply come back calling if the asset can't yield the cash to cover its obligations, short of speculating that the bank will go bust, which is impossible given you believe they have governments by the balls to safegyuard them.

If they're worth nothing how is that going to damage pensioners, given they can keep coming back to the bank?

And if they were, what's the object of disposing of these assets given they won't be marked down short of that day and so wouldn't impair any payouts anyway?

Edited August 23, 2011 by bogbrush