For the most part, government and business are perceived as being in direct conflict with one another. Yet both generally have the same goal – maximizing their revenue. If you\’re a business, this is known as \”greed.\” If you\’re a government looking to pad salaries and benefits of your employees, it is known as \”compassion.\”
The connection between government and business runs much deeper than their mutual desire to vacuum out the contents of your wallet. Regular citizens often don\’t recognize the extent to which government is often dependent on business to swell their employees\’ nest eggs. In fact, governments heavily invest in private businesses, trying to make enough investment income to run more and more programs and fund increased post-employment benefits for their retired workers.
For example, the State of Wisconsin currently holds roughly $80 billion in the Wisconsin Retirement System, which funds health care and pension benefits for retirees. That\’s more than six times the amount the state collects in general fund (income, sales, business) taxes in any given year. And most of it is invested in the stock market, managed by the State of Wisconsin Investment Board. (Perhaps we should turn management of the portfolio over to State Senator Rob Cowles, who could double our state\’s earnings in a year by investing heavily in booty-related mutual funds.)
The State Investment Board is closely watched, and invests carefully – given the immense amount of resources at their disposal. In recent years, their investments have performed admirably.
But for other governments, things haven\’t gone so well. According to several Milwaukee Journal Sentinel reports, five school districts in Southeastern Wisconsin have seen the value of some of their recent investments drop by over $100 million. They claim they weren\’t fully briefed of the amount of risk they were taking on when they made the purchases, so they plan on filing a lawsuit to recoup their investment. Of course, it will be taxpayers who pay for the army of attorneys necessary to litigate such a lawsuit.
But as pointed out by the Journal Sentinel\’s initial watchdog report, none of these school districts hired an adviser before making investments in these risky funds (known as CDOs). One analyst from MorningStar, Inc. called the governments\’ investments \”reckless:\”
\”They require deep and skilled analysis to understand, and unless the municipality employs its own specialist with specific analytical capabilities, it should otherwise only hold such things if purchased for them by a professional asset manager,\” Eric Jacobson, a bond analyst for Morningstar Inc. in Chicago, said after reviewing the CDO prospectus. \”To buy an instrument of this type . . . without any special knowledge or ability, at the recommendation of a broker, is a very poor and arguably reckless decision.\”
In other words, school districts might have gotten a better deal by answering an e-mail offering a once in a lifetime Nigerian investment opportunity.
So here we have school districts making risky investments in, among other things, subprime mortgages, who now think they should be bailed out via lawsuit. And the only reason they can continue on with their legal action is because they have taxpayer money to fund the teams of attorneys needed to litigate the case. In effect, they can afford to spend good money to chase after the bad.
Of course, for the \”greedy\” investors such as yourselves, who may put aside a small amount every month to invest in a mutual fund in the hopes of one day making some money, this option is not available when your investments go bad. In fact, when these school districts spend more of your money to cover their assets, you will undoubtedly have less money to invest. Your higher taxes will be paying for the school district\’s spin to convince you that they didn\’t realize investments could actually lose value.
Let\’s hope none of these school districts teach investment strategy.
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