A trillion dollar gap exists between states’ pension and health care promises to their current and future retirees and the funds on hand to pay for these liabilities.
Taxpayers have, for decades, been induced into believing that unfunded pension plan increases were painless methods of increasing employee pay, especially pay for unionized workers.  Deferring the pain has left state and local governments with a massive, unfunded liability, though, and could bankrupt many state governments.
The report published by the Pew Center on the States highlights the chasm between the promises made to government employees throughout the last three decades and the stark choices that will have to be made to pay for these benefits in the coming decades. These choices will exacerbate tensions between state government stakeholders, their citizens and employees.
The gap is roughly divided into two benefit components, pension costs and health care benefits. These benefits will increase steeply over the next few decades and will burden states and local governments with very difficult choices, namely, whether to dramatically raise new revenue by increasing the tax burden or slash services to their constituents, or a combination of both.
The Pew report starkly highlights these important facts:

The gap is likely to be much higher, as the measurement date for this study and the pension assets was June 2008, well before the financial implosion and collapse of the financial markets.
Accounting gimmickry called “smoothing” allows investment managers to report their gains and losses over time, easing the pain of any losses by deferring their recognition. This accounting gimmick allows funds to understate losses temporarily, but will accentuate those losses in later years if fund valuations or contributions fail to keep pace.
Up until 2000, states had combined surpluses of $56 billion in their retirement plans. From 2000-2008, “growth in pension liabilities had outstripped growth in assets by more than $500 billion.”  This fact is amazing, because the period of 2000-2008 roughly coincides with the most dramatic asset valuation bubble in history, leading to equally large pension asset bubbles. The deflation of asset valuations could collapse pension asset valuations and lead to significantly higher contributions or cuts in these programs,to the extent permitted by law.
Retiree health care and other non-pension benefits represent an even gloomier statistic: only $32 billion in assets fund a projected $587 billion liability. Only two states have more than 50 percent of the assets needed to meet their liabilities for retiree medical or non-pension benefits, Alaska and Arizona, meaning that the largest states are  significantly underfunded.
Unlike pensions, states “generally continue to fund retiree health and other non-pension benefits on a pay-as-you-go basis – paying health care costs or premiums as they are incurred by current retirees.” As “both medical costs and the numbers of retirees grow substantially each year, these costs will escalate far more quickly than average expenditures.”
As the number of retirees grows over time, “extremely underfunded systems confront an additional problem: their assets need to be kept more liquid to pay benefit As a result, investment opportunities that can prove advantageous to a large investor with a long horizon are closed off.”
Returns on pension plan assets are extremely volatile, with median annual losses approaching 26 percent in 2008.
Pension plans typically invested in conservative assets in the 1970’s, but have begun shifting their assets to equity investments. By 2007, “equity investments accounted for 70 percent of all state pension plan assets”, increasing plan volatility exponentially and placing the assets at risk.
States have given themselves “funding holidays” as favorable investment returns masked the deficits in actual contributions. Now that that the market has stumbled badly, the folly of these funding decisions has been revealed.
States have promised a slew of unfunded benefit increases in lieu of salary increases, which are extremely difficult to remove or rescind. These unfunded benefit increases include early retirement incentives, sharing of excess returns, and spiking of final salaries. In general, pension benefits are constitutionally protected and become a political time bomb for any politician attempting to retract them.

The pincer-like effect of severely depressed asset valuations, which will ultimately result in significantly decreased tax revenues, and lower pension asset valuations, will cripple local governments. This will necessitate increased pension contributions, which will severely test the ability of local and state governments to maintain balanced budgets. The true test will be whether these state and local governments can uphold the insane promises they made to their employees, over many decades, and raise taxes significantly, or whether they will be forced to abrogate those promises and services in favor of fiscal sanity and discipline.
Either way, the future looks increasingly bleak for these municipal entities, who made promises they knew they could not keep, and saddled future generations with these obligations. Beginning soon, local governments will either have to renege on the promises made to employees decades ago, tax current and future generations for benefits never received, or curtail services to their stakeholders and citizens. These choices are all poor, and will create significant pain for everyone.

Local governments and real estate trade groups acknowledge that they are extremely worried about the inevitable withdrawal of federal assistance from the US housing markets.
The New York Times, reports here, that cities hit hardest by the collapse of the real estate bubble face significantly more distress in the coming years, as the federal government gradually removes the massive subsidies that have prevented a complete collapse of the residential real estate market, and with it, the economy. To the extent that the real estate market is functioning at all, it “is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit.”
Notably, that aid has included the following:

The Federal Reserve has purchased over $ 1 trillion in mortgage securities to provide liquidity to the mortgage markets. These purchases have also forcibly and artificially pushed down mortgage rates. The scope of these purchases is unprecedented.
The Federal Housing Administration insures loans from buyers that have provided only minimal down payments. Studies note that buyers having little “skin” in the housing game are the first ones to walk away from their properties.
The first time buyer home tax credit, which is set to expire in the spring of 2010. This credit has merely cannibalized sales from one period to another, as buyers attempt to take advantage of the credit. The net effect of the expiration of this credit will be that future sales will dip by the same number of sales that were driven by the tax credit. Essentially, the tax credit has robbed sales from future periods to artificially inflate the current period. These are little more than timing differences.

Given the unprecedented scope of federal assistance, many analysts argue that federal support cannot be withdrawn for at least 5 years. Indeed, if housing sales are currently anemic given the massive subsidies being provided, what will happen when those subsidies are withdrawn? If sales can only be sustained through artificial “priming” of the real estate marketplace, what is the outcome when federal assistance is removed? Will sales collapse and another massive dip occur, and roll-back price points to 1996, 1997 or 1998 levels? It is important to remember what occurred to the automative industry. Once the artificial effects of the asset consumption bubble were removed, sales plummeted over 40% to barely 10 million cars per year, from a high of nearly 17 million at the their peak. Why would the housing market be immune from the same collapse?
The obvious answer is that it’s not, and the federal government will be forced to keep these programs in place for years, possibly even a decade. The distortions created by these programs will not, by themselves, re-inflate the asset bubbles, but they will prevent prices from dropping to the point where housing becomes affordable for America’s middle class. Until this occurs, until underlying income strictly correlates with housing prices, no significant improvement in the residential real estate market will occur.
Interestingly, the federal government may be fueling the next housing collapse, as low-income and middle class buyers, the principal target’s of the tax credit and FHA’s efforts, could abandon their homes in droves should the economy fail to gain momentum or housing values continue to stagnate. Given the impending wave of resets on option-ARM loans totaling nearly half a trillion in the next 2-3 years, and the commercial loan refinancing crisis, estimated at nearly $1 trillion over a 3-5 year period, the government will face grave difficulties preventing an outright collapse.
Which evil is ultimately worse, continue printing money,  insuring bad loans to marginal buyers and eventually fueling runaway inflation, or ending subsidies and allowing the housing and commercial markets to correct to sustainable levels? The answer is obvious.

Scott Rothstein’s mess appears to deepen, as the largest Ponzi scheme ever attributed to a US lawyer increasingly appears to involve the law firm partners.
The wreckage of the law firm appears to have ensnared many of the partners, as the Miami Herald reports, here. The lawyers for the bankruptcy trustee, Charles Lichtman and Paul Singerman, allege that many transactions involving the partners were fraudulent and seek to recoup those amounts on behalf of the creditors and the bankruptcy estate.
Examples of alleged fraudulent activity by the partners include:

The movement of firm funds over the past four years through “the systematic trading of checks with the law firm and payment of third parties with law firm funds”.
$475,000 in loans to partner Russell Adler, who purchased a New York apartment with his wife, just two months before the collapse of the Ponzi scheme.
Partner Stuart Rosenfeldt charged $1 million of jewelry to his firm-issued American Express card to pay for 72 pieces of jewelry for his wife, including home furnishings, clothes, vacations, restaurant meals, exotic reptiles, etc.
Rosenfeldt also transferred at least $690,000 in purported loans or salary payments to his wife on 30 separate occasions.
Many of the partners received hundreds of thousands of dollars in bonuses in 2008, and immediately contributed the funds to the GOP presidential nominees John McCain and Sarah Palin.
Rosenfeltd and partner Steven Lippman “typically deposited their [law firm] loan checks and then quickly turned around and disbursed the money back to the firm”.
Rosenfeldt also used some of his “$9 million in loans to write a check for $61,500 to Kendall Sports Bar”, in which Rothstein had in interest with club owner Stephen Caputi.
The law firm loaned Lippman almost $9 million, who wrote checks to third parties, including Kendall Sports Bar, directly to Rothstein, to Banyon, the largest Rothstein investor, and to Albert Peter, a business partner of Rothstein’s.

The scope and size of these transactions should be clear badges of fraud and point to money laundering, but really suggest that the partners knew that a criminal enterprise was being conducted by Rothstein. Merely receiving millions in loans from the law firm should have tipped-off the partners that firm revenues alone could not have supported these outlays, but the disbursement of funds to Rothstein controlled entities or affiliations should have raised significant red-flags and warnings.
These warnings were more than mere badges of fraud, or red flags. They screamed fraud at every turn, and indicated that an ongoing, criminal enterprise was being hatched in their midst. The partners chose to ignore these sirens at their own peril, and should have understood that doing so would ultimately tie them to this mess, likely forever. Either way, they will likely face the wrath of federal investigators, the Florida Bar, and innocent investors, who will collectively seek vengeance and retribution from anyone associated with Rothstein in an effort to deflect attention from their own failure to perform even minimal due diligence and review of Rothstein’s operations.
Again, had they performed even minimal due diligence, and performed even basic reverse-engineering of firm revenues purportedly being generated by Rothstein, firm partners would have concluded that the firm revenue-stream was a fabrication. Mere ignorance of these facts does not exonerate firm members.  How these firm partners could have allowed this scheme to remain undetected or undisturbed is scandalous. The badges of fraud were screaming “fraud” at every turn, yet no one thought to ask obvious questions or inquire as to the source of the suspicious revenue stream.
If lawyers are incapable of making these simple yet important judgments, then perhaps they should not be entrusted with complex business decisions, critical analysis, or due-diligence.  The skills required to detect this fraud are basic and require little more than basic mathematical prowess. The Rothstein fraud was simplistic, unorganized, unsophisticated and obvious.
This fraud, along with the Marc Drier fraud, is a turning-point for the legal profession, and serves notice that it’s ignorance of crucial business processes is unacceptable. Lawyers are trusted counselors and advisors, and must have the sophistication to detect and report these frauds. What value does this profession add if it is unable to detect even the obvious?

Housing has been in a death spiral for a few years, and the latest evidence suggests that government support is the only thing keeping the housing market from complete collapse.
Facts are facts, and the fact that housing has been on government sponsored life-support for a few years has been under-reported and ignored. The housing marketplace has not improved, and is being kept alive only through massive government intervention and systemic support. As this support is gradually withdrawn, the housing market will continue to weaken. The pincer-like effects of continuing unemployment and increased foreclosure activity will multiply the effects of the gradual withdrawal of government aid.
The New York Times, reports here, that the nationalization of Fannie Mae and Freddie Mac fifteen months ago has resulted in massive government subsidies to these organizations. Fannie and Freddie, as they are commonly known, are stockholder-owned corporations chartered by Congress as government-sponsored enterprises (GSE’s). In September 2007, these GSE’s were placed into conservatorship of the Federal Housing Finance Agency. As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about one-third to one-half of the U.S.’s $12 trillion mortgage market.
The controversy over Fannie and Freddie is fueled by the fact that the government has conveniently omitted their massive liabilities, estimated at nearly $5-8 trillion in debt and guarantees, from the Federal government’s financial statements. Recording their liabilities on government financial statements would dramatically increase gross federal liabilities and further weaken the US dollar, as sovereign investment funds would lose faith in the U.S.’s ability to repay these massive debts.
How to reorganize Freddie and Fannie have been highly controversial topics, as no one has yet determined how to replace the massive liquidity that these organizations inject into the housing market. The Federal Reserve has nearly exhausted its stated buying cap of $1.25 trillion in mortgage backed securities from Fannie and Freddie. The Federal Reserve has created, in the last year, nearly all the liquidity in the housing markets. Without these injections, housing’s death spiral would be nearly complete and Fannie and Freddy would collapse.
In a stealth maneuver that was not anticipated, the Treasury decided on Christmas Eve 2009 to eliminate the caps on how much bailout money the failed mortgage giants would receive to stay in business. Now, taxpayers will be on the hook for an “unlimited” amount for at least the next 3 years. The 3 year cap maximum is noteworthy, because it represents the likely range of mortgage resets (and mortgage failures), now estimated to last through 2012.
Assistance to homeowners in distress has been virtually nil, with government loan modification programs permanently modifying only 67,000 loans of nearly 4,000,000 foreclosure filings in 2009. The number of modified loans is a statistical blip and aberration.
Practically, foreclosure filings will continue to increase in 2010 and 2011, as mortgage resets peak. The government and banks will be unable to stem the hemorrhaging, which will cause an increasing tide of bank failures and FDIC takeovers, already estimated at nearly 1,000 banks. Keep in mind that only approximately 200 banks have been placed into receivership by the FDIC, to-date. 800 banks remain takeover targets, discounting the effects of the impending commercial real estate crisis.
Coupled with an impending crisis at the Federal Housing Administration, which insures nearly $1 trillion in mortgages, this crisis is approaching a critical phase. Mortgage delinquencies at Fannie and Freddie are increasing steeply, the Federal tax credit on home purchases is due to expire soon, and the Federal Reserve is quickly approaching the terminal phase of its support to Fannie and Freddie. Can the Federal government continue to nationalize the housing market?
No one has come up with a new model for liquifying the national mortgage markets, yet continued Federal support will result in substantially higher inflation, higher gold prices, higher interest rates, and a substantially weakened US dollar. The US government cannot continue to print dollars indefinitely without significant and substantial negative impacts to our economy, yet it remains the only support for the housing market. This ends badly.