Blog: Dermot Cole
State faces $1 billion paper loss in emergency reserve fund
Published Sunday, January 25, 2009
The Legislature added billions to the Constitutional Budget Reserve last year, which was a good thing.
In doing so, it said it wanted the CBR invested “in a manner maximizing the long-term earnings of the fund while meeting the minimum liquidity requirements of the state.”
So, in April, the Department of Revenue moved $4 billion into an account that was two-thirds invested in stocks, for long-term earnings.
That was bad timing, given the stock market collapse less than six months later, which drained $1 billion from the account. They are "unrealized losses" at the moment.
But with oil prices down, the state may need the money sooner rather than later from that portion of the CBR, so decisions may need to be made about swallowing those paper losses.
The Legislature is planning a hearing to take stock of the situation, so to speak.
Perhaps the Legislature and the Palin administration should have been more cautious, but the Wall Street geniuses didn't see what was coming either.
I have more on this in my column at http://newsminer.com/news/dermotcole
<<<<<<The Legislature is planning a hearing on what happened and why>>>>>>
...i can't stop laughing....wait, give me a minute...
what happened? turn the tv on.
why? turn the tv on.
big surprise, the markets crashed. markets always crash. and, they, almost, always recover over the long, or should that be LONG?, run. which is why the markets are places to GAMBLE with money you don't need for ten or twenty or more years. they are not someplace to place money that you might need, say, oh, when a economic downtown would reduce state revenue requiring dipping into savings. (especially when your revenue stream is notoriously erratic!)
but, having blind faith in the markets is why the state "lost" (assuming its a paper loss rather than an actual loss) a billion, and, why, a defined contribution plan for people isn't necessarily better than a defined benefit plan.
Dermot, you've been in this business too long to generalize as you did when you wrote, "Perhaps the Legislature and the Palin administration should have been more cautious, but the Wall Street geniuses didn't see what was coming either."
Nope. Not even close. Lots of smart people saw this coming. In fact key people within the administration were challenged about their asset allocation strategy during the transition. The usual answer heard was that this is how everybody else does it and we are looking at long performance trends in the market.
With time we should be able to recover paper losses- but the tragedy is that we could have avoided these paper losses to begin with. What could we have done with the 12 billion in paper losses? How about investing in an All Alaskan gasline that offers low priced energy for Alaskans and a 14% rate of return on equity? 12 billion would've given Alaska a 100% equity ownership in the line. A 14% ROR would've thrown off about 1.68 billion to Alaska each year, tax free. For giggles- that would be enough money to pay each Alaskan $2,500 dollars per year...
As far as folks on Wall Street, the Oracle of Omaha, Warren Buffet, predicted this situation. Buffet recently wrote, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. Buffet has been going through his cash reserves (created when the market was over valued) and has been on a buying spree. There are some great bargains on the NYSE right now.
Year ago, Buffet also said this about mortgage backed securities and derivatives, “Financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Warren was spot on. And Dermot, he was saying these things publicly. Reporters and investors who paid attention did well.
Last point- Buffet's Mid American refused to participate in the Canadian gasline deal because they looked at the energy markets in the Lower 48, saw the LNG regas overcapacity as well as the massive shale gas deposits and predicted the Gas line into Canada would be a loser. They were also concerned about the corruption in Alaska influenced by the producers.
"As you are painfully aware the ongoing corruption investigations coupled with previous indictments, guilty pleas and convictions draw into question virtually every major Alaskan project participant and governmental levels from State to Federal," said the letter from MidAmerican CEO David Sokol to Gov. Palin.
With every passing day we see how correct Buffet and his people were. Buffet makes billion dollar deals on a regular basis while the biggest deal some advising the governor have ever made was the purchase of a new car. Maybe if Palin had listened to those with greater expertise and experience we would not be in the situation we are in today. Billions lost, an economy about to crash, no gasline, and no hope of a gasline anytime soon.
The market always goes up . and the market always goes down . There are always predictions both ways . One will always say "I knew it" , "I was right" . There is always a genius ,and a told you so , one way or the other !!! The real answer is in the mayonnaise jar on Funk & Wagnalls porch . Remember that ?
At 1 pm today, resources is having a presentation overview of the Alaska Gasline by TransCanda and Denali. You can tune into it at the Alaska legislature web site.
I'm with Tranquility Base (as usual).
Another source who has been documenting the meltdown has been James Kunstler whose newsletter and books have been available for years. His newsletter Clusterf..k Nation will give perspective to anyone who did not, or in the Dept of Revenue's case, refused to see the writing on the wall.
Both the ADN and FNM are giving incompetent state government a pass on this and I'm not surprised with Zencey at the helm in Anchorage, but you giving this a pass?
Not to be a jerk, I do respect you Dermot, but just whose butt are you trying to cover?
Gregg Erickson seems to be the only person of public stature and instate longevity confronting this honestly and openly.
Ten Who Predicted the Market Meltdown----
http://timesbusiness.typepad.com/money_w...
Ron Paul and many others----
http://www.stock-market-crash.net/
The last official acts of a despot is to loot the nation..
the election campaign was good cover for the biggest heist of all time..
http://www.google.com/search?um=1&hl...
Some economists are saying if the Obama stimulus does not work, you could see the stock market drop 4,000 points in one day. Early warning, the mattress is looking better and better. Hind sight is wonderful but does absolutely no good in the here and now.
You have a 50/50 chance of being right. Doesn't take a genius.
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