September 21, 2008
Some Tennessee pension investments have taken a beating in the historic economic gyrations that have shaken Wall Street in recent days, state officials said.
Between June 30 and Friday, the state pension fund may have lost as much as $197.6 million on stocks and bonds it held in four companies hit hardest by the crisis, officials said. Losses could be less depending on a variety of factors, they said.
However, officials said the estimated $30 billion Tennessee Consolidated Retirement System remains solid and able to meet its promises to retirees and members.
“We’re like most major investors; we’re going to have positions in virtually all the companies that are out there,” state Treasurer Dale Sims said of the state’s holdings.
At one point last week, the Dow Jones average had dropped 954 points but had recouped most of that by week’s end.
The affected companies are investment bank Lehman Brothers, which sought bankruptcy protection Monday; insurer American International Group Inc., which was bailed out by the Federal Reserve last week with an $85 billion loan; and mortgage giants Fannie Mae and Freddie Mac, which have been taken over by the federal government.
Ed Hennessee, a top assistant to Mr. Sims, said the pension fund is widely diversified.
“Any one of these companies is not going to have a catastrophic impact on the plan,” he said.
Arturo Perez, a fiscal expert at the National Conference of State Legislatures, said state pension funds “are trying to provide the best return for their retirees over the long term, so they’re often widely diversified in terms of their investments.
“You don’t see any one single state retirement system that has all its eggs in one basket,” he said.
Both Mr. Sims and Mr. Hennessee said the state pension, long considered one of the most solvent among the 50 states, easily will weather the current financial crisis that experts blame at least in part on Wall Street’s inserting rotting subprime home loans into mortgage-backed securities.
“Members and retirees can expect to receive all the promises they’ve been given,” Mr. Hennessee said. The fund, he noted, has “positive cash flows as far as the eye can see.”
He estimated that, since June 30, the pension fund has lost $52 million in stock it held in AIG. The fund lost another $20 million in the insurance giant’s bonds, he said.
The Fed’s $85 billion loan to AIG will give it a 79.9 percent stake in the firm, according to news accounts.
The Tennessee pension fund also was holding an estimated $101 million in preferred and common stock in Fannie Mae and Freddie Mac. About $88 million of that was in preferred stock.
On Sept. 7, federal officials seized control of Fannie Mae and Freddie Mac and agreed to back their troubled mortgage-backed loans. But the value of the stock remains unclear.
“There’s a school of thought that the preferred stock owners may end up owning those two companies,” Mr. Hennessee said. “That’ll be the federal government’s call.”
Even if that does not happen, Mr. Hennessee said, the government takeover has preserved the values of some $295 million in bonds issued by Fannie Mae and Freddie Mac as well as $2.9 billion in Fannie’s and Freddie’s mortgage-backed securities.
In fact, the government takeover could increase the value of those securities by $50 million to $100 million, Mr. Hennessee said.
The pension’s investment losses also include about $24.6 million from Lehman Brothers that the state still had as the investment bank went down, Mr. Hennessee said. Included in that amount is $2.6 million in stock the pension fund held after dumping 650,000 shares earlier this month, he said.
Mr. Hennessee said the major Lehman loss for the state came from $22 million of Lehman bonds.
But Mr. Hennessee said the larger movements of the stock market dwarf the losses the state faces from the four troubled companies. At one point Thursday morning — after the stock market plunged — the pension fund was down 5.8 percent for the fiscal year that began July 1, he said.
Speaking Friday afternoon, he said the stock market’s weekly losses were erased by soaring prices pumped by federal efforts to put together a comprehensive plan to quell the financial panic.
“In the last 26 hours, we’ve moved from being down 5.8 (percent) for the year to being down about 4 percent,” Mr. Hennessee said. “My point is, the broader market movements make a much bigger impact on the system than four or five companies. We’re even for the week.”
At the end of the week, the pension fund held about $30.5 billion, he said.
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