Elizabeth Warren on the Economy

In the view of recent expression of dissatisfaction by Geithner's actions...
Elizabeth Warren on the Economy, on PBS NOW Nov.12th. 09
Stocks are up, but so is unemployment. What's wrong with this economic picture and what's being done about it?

What exactly is going on with the economy? Stocks are up and big bonuses are back, but while they're throwing parties on Wall Street, there's pain on Main Street. One out of every six workers is unemployed or underemployed, according to government statistics - the highest figure since the Great Depression.
This week NOW gets answers and insight from Harvard professor Elizabeth Warren, who's been heading up the congressional panel overseeing how the bailout money is being spent. NOW Senior Correspondent Maria Hinojosa talks with Warren about how we got to this point, and where we go from here.
What will it take to put both bankers and American businesses on the same road to recovery?

Warren vs Geithner: It's called ACCOUNTABILITY!
April 21, 2009 Geithner vs. Elizabeth Warren (TARP COP)

Banks Are Recovering?

"We have a little problem with the first $350B of $700B TARP money", admitted Elizabeth Warren, Harvard Professor of Law. Bill Maher sat down with her at his HBO "Real Time" on May 15, because she chairs the Congressional Oversight Panel overseeing how the TARP money is spent. It turns out, that Hank Paulson gave this first $350B to banks with no strings attached. Consequently, the panel couldn't really track how the banks used the TARP money. And, now, interestingly, long-time republican FDIC Chairman Sheila Bair fights for tax payers interests against democrats Geithner and Summers.

And here, in retrospect, "If You Believe Banks Are Recovering …" asked by James Quinn on May 5 in Prudent Bear:

I believe I have uncovered the largest conspiracy in history. The government wants you to believe that banks are recovering, housing has bottomed, stimulus works, borrowing leads to prosperity and war leads to peace. President Obama and his cronies at Treasury and the Federal Reserve are trying to mislead the public regarding the health of our banking system. If you believe their spin on these issues, I have a structurally deficient bridge in Brooklyn I'd like to sell you.

The government has something up its sleeve this time. They are perpetrating the greatest fraud in the history of the world. The conspirators are Barack Obama, Timothy Geithner and the Treasury Department, Ben Bernanke and the Fed, Sheila Baer and the FDIC, and Barney Frank and the Democratic Congress.

They have colluded to commit taxpayer funds to enrich bankers that brought down the financial system, without getting congressional approval. They have delayed foreclosures and have tried to artificially prop up the housing market. They have poured billions of stimulus pork into the states praying for some of it not to be wasted. They have confiscated billions in taxpayer funds, bestowed them on reckless banks and forced them to lend it to anyone with a pulse, again.

The outrage from the public during the Trouble Asset Relief Program (TARP) confiscation made it crystal clear to courageous congressmen they didn't want to vote on something requiring fortitude and bravery again. They have outsourced their obligation to safeguard their citizen's tax dollars to unelected bureaucrats at Treasury and the Federal Reserve. They have already sacrificed their obligation to declare war to the Presidential branch. What is the point of having a Congress?

Nothing up their sleeve

Barack Obama and his henchmen in Treasury and the Fed have chosen to play for time, pretend the banking system is solvent, and hope that the average American doesn't care. As long as the ATM still spits out $20 bills, everything is OK. The International Monetary Fund has estimated total credit write-downs of $4.1 trillion, with $2.7 trillion in U.S. institutions. McKinsey has concluded that there are still $2 trillion of toxic assets sitting on the books of U.S. banks. Economist Nouriel Roubini, who has been correct from the beginning, estimates total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will reach $3.6 trillion ($1.6 trillion for loans and $2 trillion for securities). The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the U.S. and abroad. With $2 trillion of write-offs to go, how could Treasury Secretary Geithner make the following statement to a Congressional panel late last month, "Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators."? Is he lying or shading the truth? Does it matter?

Roubini's estimate of $1.8 trillion more losses for U.S. banks will cause a slight problem for the U.S. banking system. The entire U.S. banking system has only $1.4 trillion of capital. Therefore, the U.S. banking system is effectively insolvent. Mr. Geithner would contend that he was not lying. There are 8,500 banks in the United States. The top 19 banks control 45% of all the deposits in the country. These are the banks that are insolvent.

Mom & Pop Bank in Louisville, Ky., didn't create toxic loan instruments that infected the worldwide economic system. The vast majority of the 8,500 banks in the country are in good shape. Citigroup, Bank of America, Wells Fargo and the other "Too Big To Fail" banks destroyed the economic system. The Fed, Treasury, and FDIC are already backstopping or supplying 70% of the entire banking system balance sheet. It is time to allow the well-run banks to take the deposits of the horribly run banks. The $1.8 billion of future losses do not include the commercial real estate losses, credit card losses and losses from the next wave of mortgage resets in 2010 that will wash over these banks.

Of course we all know that the "Too Big To Fail" banks all reported profits better than expected in recent weeks. CNBC said so. Let's examine these tremendous profits at one of the banks, Bank of America. It reported profits of $4.2 billion. This included: $1.9 billion came from the gain on sale of CCB shares; $2.2 billion came from marking to market adjustments of Merrill Lynch notes; and non-performing assets that were $25.7 billion compared to $7.8 billion one year ago, a 329% increase in one year. Without these convenient accounting adjustments, Bank of America would have lost money.

Andrew Ross Sorkin pointed out in a recent New York Times article: "With Goldman Sachs, the disappearing month of December didn't quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JP Morgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that's sort of like saying you're richer because the value of your home has dropped); Citigroup pulled the same trick."

In other words, the first-quarter bank profits were faked. They were manufactured as a public relations effort to convince the country that the big banks are in fine shape.

If the banks are in such good shape, why has the government had to use taxpayer funds to rollout the two dozen rescue plans? And now we breathlessly await the results of the stress tests. The FSP (Financial Stability Plan for those not in the know) rolled out by Geithner was supposed to save our banking system. The plan was described by Treasury as:

Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.

Coordinated, Accurate, and Realistic Assessment: All relevant financial regulators — the Federal Reserve, FDIC, OCC, and OTS — will work together in a coordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions.

Forward Looking Assessment – Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive "stress test" that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.

It is fascinating that in the first paragraph they specifically state they don't want to be overly conservative. Which of the top 19 banks in the country have run their businesses in an overly conservative manner in the last 10 years? Has the Federal Reserve been overly conservative in the last 10 years? Have the SEC and FDIC been overly conservative in the last 10 years? Have consumers, homebuilders, credit card companies and retailers been overly conservative for the last ten years? If there was ever a time to be overly conservative, it is now.

It is also nice to know Treasury wants accuracy and better disclosure, but then twists the arm of the Financial Accounting Standards Board to relax mark-to-market rules, so banks can continue to lie about the value of "assets" on their books. They allow Goldman Sachs to bury the fact that they left December out of their financial results deep in their footnotes. Shockingly, Goldman lost $1.5 billion in December. They continue to allow banks to report one time gains as part of ongoing operations, but billions in losses that are recorded quarter after quarter are not from ongoing operations. The folks at CNBC report whatever the banks say, no questions asked.

Stress-Test Sham

This brings us to the stress tests for the 19 biggest banks in the land. The most stressful conditions are supposed to be 10% unemployment and a 20% further fall in home prices. That doesn't sound too stressful to me. Considering the government reported figures are a manipulated lie, we already have unemployment between 15% and 20% in the real world. A 20% further decline in home prices is a given. The Case Shiller futures index forecasts that the New York Metro area will fall by 31% by the end of 2010. The massive overhang of housing inventory, the coming onslaught of mortgage resets in 2010, and the millions of foreclosures in the pipeline guarantee at least 20% further downside in housing prices. I have a feeling these 19 banks are going to need to study a little harder for their test. Professor Geithner is giving them an open book take home exam and gave them the answers. They will still flunk.

William Black is a former senior bank regulator. He is currently an associate professor of economics and law at the University of Missouri. Mr. Black held a variety of senior regulatory positions during the S&L crisis. He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners. He calls the stress tests conducted on the 19 biggest banks in the country a complete sham. In his own words:

• "You can't conduct a meaningful stress test without reviewing (sampling) the underlying loan files and it seems likely that the purchasers of securitized instruments (not just mortgages) do not even have the loan file data. Moreover, loss ratios vary enormously depending on the issuer, so even a bank that originates (or has purchased a bank that originates) similar product cannot simply take its own loss rate and extrapolate it to the measure the risk on the value of securitized credit instruments.
• "It is vastly more difficult to examine a bank that is engaged in accounting control fraud. You can't rely on the bank's books and records. It doesn't simply take more, far more [employees]. It takes examiners with experience, care, courage, and investigative instincts and abilities. Very few folks earning $60,000 are willing to get in the face of the CEO and CFO making $25 million annually and tell them that they are running a fraudulent bank and they are liars. FYI, this is one of the reasons why having "resident examiners" never works.
• "Examiners certainly can't do the stress testing that Geithner describes or evaluate the reliability of a large bank's proprietary stress test. If they were serious about constructing reliable stress tests, which they aren't, you'd require their analytics to be made public. You'd have the industry fund independent investigations by rocket scientists chosen by a committee selected by the regulators of the soundness of the analytics. You'd also have the industry fund competitions to rip them apart (a bit like we hire legit hackers to test security by trying to defeat it) and show where they produce absurd results. The concept that there are 100 examiners with these skills, suddenly freed up from all other duties, assigned to CONDUCT stress tests is a lie."

On Thursday, we will see how much transparency and disclosure the Treasury and Fed will provide regarding the not-so-stressful tests. Obama's minions have been hinting that six banks have failed. Sheila Baer stated that the $110 billion left in the TARP kitty should be enough to cover the capital shortfalls. This is a lie.

As we saw previously, the U.S. banking system will need close to $1 trillion more capital to stay viable. If the Fed was so keen on disclosure and transparency, why hasn't it released the names of the banks that have borrowed from them, and the collateral provided for the loans? Because the Fed has taken worthless toxic paper onto their books and loaned newly printed dollars against the worthless paper. The taxpayers are on the hook.

FDIC’s Insurance Commitments 34% Higher Than Reported

Conventional wisdom says that financial companies are having trouble borrowing because credit markets are broken. This is dangerously wrong. The credit market itself is fine. It’s balance sheets that are broken. They have so little equity relative to their assets, there’s no cushion to protect creditors from losses. With few good borrowers available and with the price of credit being capped by government, naturally creditors have little inclination to lend. Washington’s solution is to “guarantee” all manner of risky investments, to use the public’s balance sheet to absorb trillions of dollars worth of private sector losses. We’re told this will “restore confidence” in borrower balance sheets, leading to increased lending. But this policy is dangerously misguided and may very well lead to economic Armageddon.

In point of fact, our fractional reserve financial system is just a gigantic Ponzi scheme. It can only survive as long as it expands, which is to say, as long as new debt is flushed through the system to finance old debt. But like all Ponzi schemes, the larger it grows the more unstable it becomes. Eventually, it collapses of its own weight.

With this in mind, government should be concerned with paying down debt, not expanding it. Deficit-financed bailouts and stimulus only increase the size of the Ponzi. The bigger it grows, the harder it will crash.

My thoughts came back to this recently when I looked at FDIC’s 12/31/08 balance sheet. Note at the bottom of that link the estimate for total insured deposits: from Q3 to Q4 it increased only a smidge, to $4.8 trillion from $4.6 trillion.

Odd, no? Why such a small increase even though FDIC dialed up deposit insurance limits so significantly during Q4? FDIC Senior Banking Analyst Ross Waldrop told me during an interview last week that it’s because so-called “temporary” increases in deposit insurance are excluded. If included, these would boost total insured deposits from $4.8 trillion to $6.2 trillion.

If you include debt issued prior to the new year under FDIC’s “Temporary” Liquidity Guarantee Program, FDIC’s total commitments would increase an additional $224 billion to $6.4 trillion *

In early October, FDIC boosted deposit insurance limits for individual non-retirement accounts to $250k, which, according to Waldrop, added $713 bilion to total insured deposits. He also noted that new insurance on non-interest bearing transaction accounts added $684 billion to the total.

Waldrop wouldn’t comment on the validity of excluding temporarily insured amounts from the total.

It seems intellectually dubious, if only because there’s little chance FDIC will actually allow the temporary increases to expire. Doing so would risk sparking depositor panic, precisely what FDIC is trying to avoid.

What does this have to do with Ponzis? When Bernie Madoff’s scheme collapsed, he owed somewhere north of $50 billion to his investors but had only a tiny fraction left in the bank. FDIC’s potential liabilities as of Q4 were $6.35 trillion. It has but a tiny fraction of that amount—$19 billion—in the Deposit Insurance Fund. Readers might argue that comparing the two is unfair; FDIC has an open line of credit on the U.S. Treasury. So FDIC’s credit is as good as Uncle Sam’s.

But how good is his? Already, the federal government has committed $12.8 trillion to fight this financial fire (a figure that doesn’t include FDIC’s $6 trillion worth of insurance commitments). Then there’s the trillions of unfunded liabilities for private and public pension schemes that Uncle Sam may be forced to absorb. Also there’s Obama’s budget deficits, which will commit us to borrowing trillions more over the next decade. Finally and most importantly, our unfunded liabilities for Medicare and Social Security surpass $50 trillion.

At the end of the day, after borrowing and money printing have been maxed out, the federal government’s credit is limited by the taxes it can collect from the American people. No way no how can Americans pay for all of the above. It would cost every one of us hundreds of thousands of dollars today. Yet society still feeds the collective delusion that government liabilities are “risk-free” because it has a printing press. But printing is just default by another name: inflation. And the more we come to rely on government guarantees, the more unstable they become…

With this in mind, it is foolish for government to promote debt expansion, but that is precisely what government “guarantees” are designed to do. They are designed to boost lending.

Fannie and Freddie were just the most obvious examples of how terribly this can backfire. Perhaps trillions of dollars flowed through Fan/Fred into the mortgage market as a result of the government’s implicit (now explicit) guarantee of their debt. This helped inflate a bubble that is now bursting spectacularly.

FDIC deposit insurance is an even more insidious guarantee, the “crack cocaine of American finance” as Martin Mayer put it in his definitive book on the S&L crisis. He showed how deposit insurance was to blame for that episode as risky bankers leveraged FDIC insurance to attract funding to finance ill-conceived investments.

Depositors didn’t care how much risk bankers took with their money. It was federally-insured. Might as well go with the bank offering the highest interest rate. One of my favorite contemporary examples is the ad I see for GMAC’s above-market CD rates in WSJ’s A section every week. GMAC is insolvent. It’s asinine for depositors to keep funding them.

The government is encouraging precisely that with $5 billion of TARP bailout money and the protective wrap of FDIC deposit insurance. GMAC now operates courtesy of the government’s promise to insure its creditors. This is true of the entire banking system at this point…

The dirty little secret, as noted above, is that the government has no reserves with which to fund its guarantees. As they become payable, its only recourse is to borrow.

This guarantee shell game continues only because Uncle Sam has borrowing capacity to keep it going. That capacity derives not from balance sheet strength (again, no reserves) but from the dearth of investors’ options. Everyone worldwide knows Uncle Sam is broke. But government-insured accounts remain the last refuge for their accumulated paper wealth, which—in a fractional reserve banking system—is largely an illusion to begin with. In such a system, paper wealth exists only to the degree that debts are serviced. And debts are serviced only to the degree that credit continues to expand. Remember, it’s just one giant Ponzi scheme.

This is not hard to grasp, actually.

The vast majority of the economy’s wealth exists only on pieces of paper that record the accumulated funds stored in financial accounts. Contemplate your own bank statement for a moment: what does the balance figure at the bottom represent? Money that you previously gave the bank that it has since shoveled out the door to borrowers. In other words, your paper wealth only “exists” to the extent that bank borrowers pay back their debts. Money and debt are mirror images of each other: your money is someone else’s debt.

Here we have arrived at the cause of the present crisis. Credit expanded so spectacularly during the recent asset bubble that paper wealth itself expanded spectacularly. But this wealth was an illusion of course. As debtors default, paper wealth disappears. The Ponzi unravels.

Ponzi schemes aren’t “solved” through continued expansion. This delays the day of reckoning, sure. But only at the cost of magnifying losses fantastically. No one would have suggested extending Madoff investors a government guarantee. Why then are we offering guarantees for customers of Chase, Citi, BofA and Wells Fargo, far larger Ponzi financiers all of them?

The answer, of course, is they are “too big to fail.” Had Madoff been sporting a trillion-dollar balance sheet, you can bet the government would have offered bailout funding to prevent a disorderly collapse.

But there’s a fine line between too-big-to-fail and too-big-to-rescue. Ask the folks in Iceland, Ireland, and most of Eastern Europe. The Ponzis at work in their financial systems grew so large there is simply no orderly way to unwind them. We risk the same fate here in the U.S. by offering open-ended guarantees to bank customers.

The fact is, a bank run can be a healthy thing as it discourages investors and depositors from allocating too much cash to unstable institutions. Unfortunately, by removing all discipline that the possibility of failure provides, we have permitted our financial institutions to grow totally unchecked. The just desserts of moral hazard you might say.

A counter-argument here is that government guarantees have actually prevented capital flight. Without all these new guarantees, the system would have crashed back in October as investors and depositors raced to cash out simultaneously. But the guarantees we’ve extended haven’t prevented that, they’ve merely delayed it.

The longer the government leaves its various guarantees in place, the more capital will flow to guaranteed investments, much as it did to Fannie and Freddie. The Ponzi will continue to expand until confidence in Uncle Sam’s balance sheet is itself destroyed. At that point, the unwind will be far uglier that if we had paid down the national debt while executing a proper bank recapitalization, i.e. wiping out shareholders and forcing losses onto creditors.

What was true for Madoff is true for the U.S. financial system: In order to contain collateral damage, it’s best to unwind Ponzis as soon as possible.

(from RGE Monitor, Rolfe Winkler | May 4, 2009)

Stiglitz Interview on U.S. Banks: TARP as a Strange Partnership and Hidden Subsidy

Nobel-prize winning economist Joseph Stiglitz talks with Bloomberg's Kathleen Hays about the U.S. government's Troubled Asset Relief Program for banks. Stiglitz, former chief economist at the World Bank and a professor of economics at Columbia University, also discusses the government's stress tests for banks and the Obama administration's strategy to bolster banks’ balance sheets to spearhead a recovery in an economy facing its longest recession in at least a quarter century.

Watch Stiglitz Interview

Why Joseph Stiglitz doesn't like the TARP

What strikes me about the TARP is that the banks choose which assets to dump. Therefore, the taxpayers will hold the worthless assets.

The Obama administration’s bank-rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.

“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database.

Financial shares have rallied in the past month as Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. all reported better-than-expected earnings in the first quarter. The Standard & Poor’s 500 Financials Index has soared 91 percent from its low of 78.45 on March 6.

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he said.

“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had “zero expected cost” from the program.

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”

Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.

Stiglitz was also critical of Obama’s other economic rescue programs.

He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”

“It’s really a peculiar policy, I think,” he said.

The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.

Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long-run solution. It’s a solution that says let’s kick the can down the road a little bit.”

While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”

Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why even with all of the programs the Fed and the administration have opened, lending is still very limited, Stiglitz said.

“They haven’t thought enough about the determinants of the flow of credit and lending.”

(from Bloomberg, April 17, 2009)

Calpers Seeks to Buy TARP Holdings

The California Public Employees’ Retirement System said it’s seeking opportunities to buy assets of Citigroup Inc. and other financial companies tied to the U.S. government’s $700 billion Troubled Asset Relief Program.

Calpers, as the largest U.S. public pension manager is known, said today it’s setting aside “billions of dollars” amid the credit crunch and is ready to deploy capital. It added that there’s a “glimmer of hope” in the stock market.

The pension fund is seeking to buy “some of the assets of these financial companies such as Citi and the others, assets that they’re trying to get off their balance sheets,” Henry Jones, a Calpers board of administration member, said in an interview after a speech in Seoul.

Calpers’s cost of managing its investments declined to the lowest level since 2004 after the value of fund holdings fell 27 percent this fiscal year, and it projects its investment costs will fall to $817 million in the 12 months that begin July 1, down from $1.04 billion last year, according to a report that will be presented to the fund’s governing board. That is the lowest since the fund spent $523 million in the fiscal year that ended June 30, 2004.

Calpers has broadened its asset allocation ranges to ensure more flexibility and plans to hold its investment review in May, about 18 months ahead of schedule, Jones said in the speech.

“The assumptions that we used 18 months ago no longer fit the present market,” he said. “There’s still a tremendous ocean of toxic debt out there. Even if we didn’t buy it, it’s done enough damage to our banks to affect all of us on Wall Street.”

The pension fund lost more than a quarter of its value in the first seven months of its current fiscal year, led down by stocks, real estate and commodities, according to its most recent investment activity report.

The MSCI World Index jumped 12 percent in the past one month as governments around the world stepped up efforts to stimulate their economies. The gauge has pared losses this year to 6.6 percent after last year’s 42 percent slump when the global economy sank into recession.

Calpers, with $175 billion in assets as of April 13, reached a record high of $260 billion in October 2007. The fund provides pension and health benefits to 1.6 million government workers, retirees and their families.

“Credit is still tight in the markets, but we’re able to raise enough cash to still make good deals and position ourselves for an eventual market turnaround,” Jones added.

The Sacramento, California-based fund invests 7.6 percent of its funds in cash, a category that calls for no allocation under targets established in December 2007, according to its Web site. The fund’s bond investments represent 24.8 percent of the total, more than the 19 percent target. It’s underinvested in equities, with 53.5 percent allocated there compared with a target of 66 percent.

Calpers has $500 million invested in South Korea, including a $100 million investment with Lazard Asset Management Plc last year, Jones said.

(from Bloomberg, April 15, 2009)