With the war in Russia, sanctions happened. Sanctions crippled the Russian stock and debt markets. Those markets weren’t ready for prime time anyway. Clearing, settlement, and other structural issues in those markets make them primitive compared to the western democratic markets we are used to.
A long while ago, my friend’s daughter Alex Harris wrote a piece about how public pension funds that were underwater were searching for yield. I searched on search engines for her piece but can’t find it.
The gist was her investigation into the Illinois Pension fund system. The people running that system engaged in high-risk derivative contracts to squeeze more yield out of their investments. They were atypical investments for a public pension fund and would be catastrophic if they went the wrong way.
This week, the Kentucky Pension fund almost experienced a catastrophe. Kentucky is almost as bad as the state of Illinois is when it comes to unfunded public pension debt. It is a reason not to move to Kentucky. The fund was lucky in that it was able to unload its position a day ahead of the Russian invasion of Ukraine.
We won’t know the exact truth until financial reporting is due and audits are completed. Pardon my cynicism. I don’t believe hardly anything quoted in the newspaper when it comes to stuff like this anymore.
What other pension funds have investments like that which could essentially bankrupt the fund? Calpers reported they had $900MM of exposure but that is small when it comes to the overall size of their portfolio.
In an article in the Financial Times on worldwide pension funds losing a lot of money on Russian investments, I pulled this quote:
“If you’re left holding Russian assets either you sell at a very low price, assuming that it’s possible and you can actually find a buyer,” said Cristian Maggio, head of emerging markets portfolio strategy at TD Securities. “Otherwise you may have to write them off to zero.”
When panic hits markets, it is sometimes time to buy. I recall in October 1987 when Eurodollar options traders had positions go upside down on them and they had to get out. They were ruined. But, traders who had cash picked up their positions for a song and made millions of dollars.
Potential panic is one reason Warren Buffett keeps a huge cash pile at Berkshire Hathaway. It always reminds me of “It’s A Wonderful Life” when Potter tries to buy the Bailey Building and Loan for “fifty cents on the dollar”.
When I saw the shutdown of the Russian financial system, I immediately thought of the debt that institutions held. It was suddenly in default and no good since the debt market was totally closed down. When the market re-opens, there will be little to no meaningful bid for it. Even if there are new highly restrictive covenants placed on the debt, do you trust enough in the Russian law system to enforce them?
I realize a lot of people in America aren’t “invested” in the stock market. But, if you work for a government or company that has a pension program, you are indirectly invested in the stock market.
https://www.ft.com/content/299c95ec-8c01-472e-99ec-feeb1a4b2c66 Today, Russia says it will make external debt payments in Russian rubles. This is basically saying we are going to default on our debt. They did this in 1998 too, so it is not as if they are averse to doing it. They have also asked China to help them with the war. China will not do that. They need to be aligned with the winning side and it's not clear Putin is going to win in the long run.
which Illinois pension systems did Yra's daughter say were using excess leverage?