Following the 2008 Credit Crisis, and even after passage of the Dodd-Frank Wall Street Reform Act, the Western financial systems have fought hard to ensure that their assets never have to be valued at mark to market. Instead they are recognized as ‘mark to maturity’ or ‘mark to model’, making it seem as though these institutions are solvent when liquidation of their assets would cause them to actually be bankrupt.
But an interesting microcosm of this financial scheme is showing itself in the Dallas Police pension fund, where auditors forced the fund to value their assets at mark to market, causing the fund to decline in real value by 32%.
The Dallas Police & Fire Pension (DPFP), which covers nearly 10,000 police and firefighters, is on the verge of collapse as its board and the City of Dallas struggle to pitch benefit cuts to save the plan from complete failure. According the the National Real Estate Investor, DPFP was once applauded for it’s “diverse investment portfolio” but turns out it may have all been a fraud as the pension’s former real estate investment manager, CDK Realy Advisors, was raided by the FBI in April 2016 and the fund was subsequently forced to mark down their entire real estate book by 32%. Guess it’s pretty easy to generate good returns if you manage a book of illiquid assets that can be marked at your “discretion”. - Zerohedge
Sadly, nearly all municipal, state, public, and private pension funds are extremely underfunded, and that is before their held assets would be valued at mark to market. And besides the circus’s that are the states of California and Illinois, the country’s two largest public and private funds are already well on their way towards insolvency, or at the very least necessitating vast cuts in pension holder benefits just to survive.
Thanks to Zirp, Nirp, QE, and the myriad of stimulus packages created by the Fed since 2008, very few assets fall outside the categories of either artificially inflated, or intentionally overvalued. And just like the way the banks lied about the default rates of their mortgage backed securities in 2007 until the invisible hand of the market itself forced them to finally price these securities at their true value, the eventual explosion of defaults and insolvencies coming will be much greater the next time since virtually all assets held by financial institutions do not reflect their actual current market price.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com,Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.