mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
J.P. Morgan Misleads Pensioners, Bails out Hedge Funds

Bloomberg reports that J.P. Morgan has been sued by the Louisiana Police Pension Plan for securities fraud, and this charge only scratches the surface of the company’s misconduct.

FoxBusiness reports that in a “strictly confidential” report issued last year, J.P. Morgan admitted that underfunded pension liabilities amount to nearly $4 trillion—far worse than most observers believed. Fixing the shortfall would require drastic, politically unpalatable service cuts or tax hikes. As Charles Gasparino notes in the New York Post, New Jersey would either need to raise taxes by 17.2 percent or cut spending by a breathtaking 30 percent to put its pensions on firm footing. Other states and cities are in a similar bind.

These figures could undermine the entire system of municipal credit, to say nothing of pensions themselves. Investors in municipal bonds desperately need to get a grip on these figures because they could impact the creditworthiness of states and cities with large hidden pension liabilities. So why did J.P. Morgan hide the report?

But people in senior management worried that the study’s stark analysis about the looming threat of unfunded pensions to state and local finances — and its recommendation on how to fix the problem — would offend the firm’s municipal bond clients, namely those cities and states that tap J.P. Morgan to underwrite their bonds.

With that, the firm decided that it would keep the study largely under wraps, according to people with direct knowledge of the matter. Only its best hedge fund clients and large institutional investors would receive the report. The cities and states at the heart of the analysis wouldn’t be informed, nor would most public investors. . . .

I got my hands on the report not from an disgruntled employee looking to even up the score with his old firm, but from someone who believed the reason JP Morgan kept it a secret stinks to high heaven: Bankers there are afraid of upsetting state and city officials who hand them large fees to underwrite municipal bonds.

So JP Morgan may have buried this bombshell because politicians in bad-credit states would retaliate by cutting it out of their business. J.P. Morgan is Wall Street’s largest underwriter of municipal bonds and is legally obligated to disclose any concerns it has about the viability of these bonds to its clients. Clearly, they did not do this—or at least not with all clients. The fact that they revealed the information to hedge fund managers and not regular investors is the icing on the cake: did the fat cats know something that ordinary investors didn’t? This news reinforces every negative stereotype about big finance, and it is difficult to imagine the public reacting to this story with anything other than widespread scorn.

Worst of all is the fact that the people who really needed to know this information—retirees and current workers in state and municipal government—aren’t getting the best available information that would tell them more about whether their pensions are secure.

Features Icon
show comments
  • Anthony

    As thibaud has said there is definitely a moral problem…. Considering fixing the shortfall via drastic, politically unpalatable service cuts or tax hikes just begins to reckon the damage done by political/economic instrumentalities – an outworn, patched politico-economic system is cracking and no serious (generally speaking) steps are being taken to ascertain the causes and remedies.

  • Charles R. Williams

    This is no secret. Everybody in the financial community knows that public pensions are discounted at the expected rate of return on pension assets and not the risk-free rate appropriate to certain liabilities. That takes the unfunded liabilities from $1T to $4T.

  • thibaud

    “politicians in _bad-credit states_”

    Like it. Thank you, WRM, for ditching the silly partisan (“blue”) sneering.

    Re finding info on pension solvency, Mr Mead should replace his researchers with my trusty research assistant, Mr. Google.

    Here’s a comprehensive, interactive online database that he dug up in about 36 seconds:,16::

    Also, some no-spin, nonpartisan sources:

    Hall of Shame as of 2010 (126 state pension systems sorted by lowest funding ratio):

    Kentucky ERS 40.31%

    Missouri DOT and Highway Patrol 42.22%

    Connecticut SERS 44.41%

    Illinois SERS 46.12%

    Indiana Teachers 46.18%

    Illinois Universities 46.37%

    West Virginia Teachers 46.53%

    Oklahoma Teachers 47.88%

  • Art Deco

    The last time I checked, the sum of assets in defined benefit pension plans was something along the lines of $2.4 tn. I would take reports that they are underfunded to the tune of $4 tn with a grain of salt.

  • thibaud
  • Jim.

    What this reinforces most thoroughly is the conservative assertion that the worst of all worlds occurs when Big Business and Big Government get together to lie to and fleece everyone else.

  • thibaud

    Re. #4 Art Deco – correct.

    Per the Public Plans Database, which claims to cover 90% of state plans, 20% of local plans, and overall, 85% of state and local plan assets and members, here are assets and liabilities for 126 public plans as of 2010:

    Market assets $2,361 b.
    Actuarial assets $2,659 b.
    Actuarial liabilities $3,454 b.
    Funded ratio 77.0%

  • Eurydice

    Just a clarification to those who were as confused as I when reading this article – the law suit filed by the Louisiana Police Pension Fund has nothing to do with J.P. Morgan’s “secret” report on the state of underfunded pension liabilities. The suit is about regaining losses on the fund’s ownership of J.P. Morgan common stock.

    The rest is such a garbled mess, it’s hard to pick out what the actual issues are. J.P. Morgan has certain obligations to its clients and shareholders, but not to the general population. That’s what rating agencies and regulators are for (I know, we can all share a hearty laugh at this).

  • Walter Sobchak

    This article is very confusing. The Louisiana Pension complaint is a very conventional complaint about the sharp drop in JPM stock that occurred after it disclosed the loss on the “London Whale” trade. It has nothing to do with the rest of the article.

    Gasparino’s claim is a lot more esoteric. I don’t think anybody thinks that the funding problems of municipal pensions are a secret. The JPM study is one of dozens that have been done in the last couple of years.

    All of the studies are based on assumptions about things like future salaries and investment returns. In short they are opinions, and like trash cans, most folks have them and most of them stink.

    Nor does JPM have the same responsibilities for disclosure in a municipal offering as it does in a corporate offering.

    Basically, I think Charlie has not come up with anything very interesting.

  • Eurydice

    @Walter #9 – I’m relieved to see that I wasn’t the only one confused. I don’t see why this particular report by JPM should be considered some kind of Divine Truth that trumps all others, especially considering JPM’s recent trading and management missteps.

  • Lorenz Gude

    If they can send Martha Stewart to jail for conspiracy over an investment involving $50K, perhaps we should string up a few of these guys ‘pour encourager les autres’.

  • Luke Lea

    Just one more example of our irresponsible banking elites. Truly, they are enemies of the people and betrayers of the West.

  • Luke Lea

    As a first step toward reform of our plutocratic overclass we should shut down all tax havens and register all bank and brokerage accounts. No more shell corporations or secret stashes.

  • Luke Lea

    Establishing transparency in the international banking system is key to the future of civilization.

  • Jason

    News flash to all the stupid cops beating up protestors at bank protests. The same bankSTERS [profanity removed] the citizens that you are beating up are going to take your pensions too MORONS! WAKE UP!

    JJ The Fed (I work for the Empire)

  • thibaud

    One more nail in the coffin of the moronic conceit that pension management is a partisan issue – here are the best-funded public plans in the nation as of 2010, those with assets at 100% or more of liabilities – New York figures prominently in the Hall of Fame, as do WA and DC:

    Washington LEOFF Plan 121.17% funding ratio

    North Carolina Local Government 101.48%

    DC Police & Fire 100.00%

    DC Teachers 100.00%

    NY State & Local ERS 100.00%

    NY State & Local Police & Fire 100.00%

    New York City Teachers 100.00%

    New York State Teachers 100.00%

    Washington PERS 2/3 100.00%

    Washington Teachers Plan 100.00%

    Wisconsin Retirement System 99.64%

  • Charles R. Williams


    You are right that Washington and NY are relatively better funded. DC doesn’t count. But the issue is twofold. First the true size of the pension liabilities is grossly understated. Academic economists are nearly unanimous on this point. NY is 100% funded based on a faulty accounting method. The issue is the size of the true unfunded liability compared to the ability of a state or municipality to manage the shortfall.

    Now suppose NY pensions are 65% funded based on sound economics. NY is a high tax state with a large number of highly paid state workers and is in relative economic decline. The power of the unions is relevant to the difficulty of making reforms and the absolute size of the problem. Then maintaining this spurious 100% funding level will require large and frequent supplemental payments out of state budgets – essentially in any year when financial assets return less than projected. Budgets get eaten up by pensions as the tax base in a declining economy shrinks.

    This is a partisan issue because public sector unions are an important constituency of the Democratic Party and solving the problem of underfunded pensions puts state and local governments in direct conflict with the Democrat power base.

  • Art Deco

    But the issue is twofold. First the true size of the pension liabilities is grossly understated. Academic economists are nearly unanimous on this point.

    If you say so, Charles R. Williams. My local library does not subscribe to an indexing service to literature in actuarial science or in accounting, but they do have databases which cover economic literature and general business literature. I have scanned hundreds of titles and abstracts of academic study of the funding of public-sector pensions. Most abstracts merely give an account of the issues under discussion, but about 90 or so articles published over the last 30-odd years merited a 2d look.

    I find about 20 academic articles published in the literature of business and economics which advance a thesis that there is a problem with the accounting of assets and liabilities of public sector pensions. (And not necessarily the particular problem to which you refer). The thing is, I found 12 articles which advance some sort of contrary thesis.

    That does not sound ‘unanimous’ to me. (While we are at it, it is actuaries and accountants, not academic economists, whose expertise is most salient here).

  • thibaud

    # 17 Charles – you make some fair points re the unions and the Democratic Party’s power base, and yes, different approaches yield different estimates of the unfunded liability.

    But neither of these amounts to what WRM used to sneer at, using a hifalutin but ignorant phrase, as a “blue social model.” It’s just bad governance of a uniquely American variety.

    It has nothing whatsoever to do with the merits of an interventionist “social model” of the sort that well-governed polities, in Scandinavia, Holland, and Canada for ex, have managed to achieve.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service