Yves Smith explains how the Employee Retirement Income Security Act of 1974 contributed to the housing crisis and may have rendered company pension funds a lot more secure than they might otherwise be:
Unfortunately, over-reliance on the power of diversification has led fund managers to be less attentive to the hazards of particular investments. Consider two examples: private-label mortgage securities, which are issued without government guarantees, and private-equity partnerships, which acquire public companies with the aim of restructuring them and selling at a profit.
Seduced by AAA ratings, fund managers often ignored the extraordinary complexity of mortgage securitizations, which typically involve hundreds of pages of documents defining the circumstances under which different investors get paid or suffer losses. As a result, they failed to notice some significant pitfalls.
For one, the contracts governing the securities gave an outsized, badly conflicted role to the mortgage servicer, responsible for interacting with borrowers and passing payments along to investors. Because the servicers were often the same banks that had made other loans to the borrowers, and because they could make more money by foreclosing than by fixing troubled loans, they had strong incentives to act against the investors’ (and the borrowers’) best interests.
The evidence is overwhelming that servicers abused their powers. They gave their own loans preference in making modifications and when counseling borrowers on what to pay first. They increased their profits by precipitating foreclosures and by forcing borrowers to buy insurance. They skimmed extra fees from money that they were supposed to pass on to investors.
Such abuses made the housing crash far worse than it should have been, and left badly burned investors wary of ever buying private-label securities again. As a result, nearly six years after the crisis, the mortgage market remains on government life support.
As the demographic bump of Baby Boomers passes through the U. S. python, pensions—whether public, private, socialized, or personal—will become a matter of national concern. Pension agreements whoever engage in them are statements of future behavior and, consequently, hedges against future circumstances. We aren’t as rich as we thought we were and it is increasingly looking as though we won’t be as prosperous in the coming decades as we thought we would be.