When you retired were you thinking of giving your savings and your pension fund to a relative who said he could take the money to Las Vegas and double it?
It might be tempting but since you are sixty and might live to ninety-six you need the income from your pension and your savings to keep you off welfare for thirty-six years.Finding a job when you are sixty is had. Collecting returnable bottles or cutting lawns doesn’t bring in much money.
You probably decided against giving your gambling relative your money and, instead, invested it with your bank’s financial advisor because banks are supposed to be safe places to put your savings. Your capital is what you were able to save after paying for your mortgage or rent, car payments, your groceries and clothes, your children’s braces and hockey equipment. Those saved dollars took a lot of effort and self-discipline.
You went to work every day. You put up with a lot of crap. It may have been a good job but there’s always a lot of crap in the workplace. Idiot bosses, grouchy co-workers.
You figured bankers were conservative, cautious. You figured they’d recommend you put your savings into bonds in some good, reliable company such as Transcanada or Fortis. It never occurred to you that a lot bankers are river boat gamblers just like your gambling addicted relative. River boat gamblers playing with someone else’s money. Your money. When they drew a winning hand, they took a huge piece of the pot. After all, it was their luck and skills that caused the poker chips to pile up in front of them–or so they say. They also used those winnings to pay the people on their team. There wasn’t much left to pay you for providing the money for the poker game.
When I used to play poker with my teenage friends, we often spent the evening playing “Dealer’s call.” Every game had a different set of rules. No stranger could have followed what was going on. These were our private games. That’s what the bond and stock traders have done. They’ve created ways to gamble that only they understand. The difference is that we were using our own money but they’re using your money.
Some of the games the fund managers play are simple. Take, for example, Greek bonds. The Greek government wanted to spend more money than it could raise from taxes. The solution was to borrow it. Governments can create bonds at any time. They say we’ve got these pieces of paper. You’ve got money. We’ll give you these pieces of paper and take your money. In return, we’ll pay you interest for s set period of time. They go to the people who specialize in selling bonds and give them a fee. The bonds are offered to other financial institutions, pension funds, banks, sometimes to individual buyers. To get people to buy the bonds, the government has to offer interest payments. That’s where risk comes in. You’ve got to believe that the Greek government can keep paying interest. But your financial advisor says, government debt is safe debt. How often does any government not be able to pay its bill?.
If you are retiring, you need an income stream to replace your salary. So, you look at Greek government bonds and decide that 5% for a ten year bond is pretty good. It’s certainly a lot better than half a percent on a savings account. You can’t pay the bills from half a percent interest.
You buy ten thousand dollars worth of bonds. Once a year, the Greek government sends you a cheque for five hundred dollars for the use of your money. It’s all good, except that you begin to hear news reports that the Greek government is having financial problems. You don’t want to lose your ten thousand dollars. You decide that you’ll sell the bonds but discover that they’re now only worth four thousand dollars. If you hold them to maturity, you’ll get your ten thousand back. However, they don’t mature for another eight years. You decide to buy insurance against the Greek government not being able give you back your ten thousand dollars. This, of course, would cut into your capital. Normally, the cost of the insurance would be quite small but everyone thinks that Greece will end up defaulting, that is, not paying you back. The insurer wants $5,600.00 up front and a thousand dollars a year to insure your ten thousand dollar bond. The cost is so high, you say forget it.
Then the European Union announces that in order to avoid the chaos that will be created by the Greeks throwing up their hands and saying they can’t pay back the people who bought their bonds, we want people who own the bonds to voluntarily agree to having the value of the bonds reduced by twenty-one percent. That is upsetting. At least, you think, you’ll get the interest payments and seven thousand nine hundred dollars back but, a little while later, the EU says, we want you to agree to having your bonds reduced by fifty percent.
Your ten thousand dollar bond is now only worth five thousand dollars–if you hold it to maturity. When you object, the person who sold you the bonds says, “If you don’t agree and Greece defaults, the very most you could expect to get back is about thirty-one hundred dollars.” That five percent that was supposed to help pay your retirement expenses doesn’t look so good anymore.
You say you don’t own any Greek bonds? Are you sure? There’s a good chance that your pension fund owns some. There’s an even better chance that your bank owns some. Both your pension fund and your bank used your money to buy Greek bonds. You check and both institutions say we don’t have any direct exposure to Greek debt. They’re being weasels. If you check further, you will likely discover that they’ve loaned money to banks in Europe and those banks have bought Greek bonds. Your bank and pension fund have lots of indirect exposure.
Imagine now if you’d bought a lot of Greek bonds. Your financial adviser thought they were a great investment. Say you’ve got a hundred thousand dollars worth and you are using them as collateral for a business loan for one of your kids. The bank calls you up and says those bonds are only worth fifty thousand dollars now, instead of a hundred thousand, we need another fifty thousand dollars collateral. What do you do? You’re retired. You don’t have a job and a steady income stream except for the interest and dividends on your investments. You can call you kid and say, sorry, but you need to find someone else to cosign your loan. If you still want to provide the collateral for the loan, you may need to put a mortgage on your house or take out a serious line of credit.
If your pension fund has a large amount of Greek, Spanish, Irish, Italian, French, Portugese bonds, it may not be getting those interest payments they need to pay your pension. They may send you a letter saying they have to cut pension payments by ten percent, twenty percent, who knows how much? They did lay off risk by buying default insurance but the situation is so serious that the EU has said we can’t have a default so accepting this devaluation of Greek bonds has to be voluntary. That means the default insurance isn’t worth the paper on which it is printed. Good thing you didn’t waste more money buying it.
Since you are on a small pension, the loss of your ten thousand really matters. Your kid’s business might go belly up.
And that’s just one of the poker games that the inside boys are playing right now. There are lots of others and all of them have one purpose: to let the one percent keep all the millions they’ve made and to shift the cost to you. That’s called privatizing profit and socializing debt. When companies make money, the hot shots get to take huge amounts of that profit but when they make mistakes, you pay the bill.
We used to be told that a free market was the foundation of the capitalist system? Really? The principle has now been replaced with “when we win, we keep the money, when we lose, you suckers pay the bill.”