Fischer and his long time friend Jack Treynor had a unique view of the world in which they lived. As a result of this view they saw a problem developing in American industry. This observation centered on the idea that companies had begun to promise retirement benefits to people, but took no thought for how they were going to make the payments. Fischer had the perfect solution to this problem. He suggested that a company borrow the money it needed to pay out at some future date, and then invest it in a low-risk, or risk-free, fund whose cash flows would exactly equal the payments that needed to be made as people reached retirement. As an added bonus, the company would receive tax benefits from the loan they had taken out with zero default risk, and people would receive tax benefits from investing in a tax free retirement account as they grew older. Unfortunately, Fischer had a hard time convincing anyone to listen to him. Many pension managers felt the low-risk option Fischer was suggesting would not provide enough revenue to ensure the pension plan could meet their needs.
A for Skylar.
ReplyDeleteAstute readers will recognize this as a hedge portfolio, as covered in class after spring break.
Also note that in the early 1980's Treynor was asserting that firms ought to recognize promised pension payments as liabilities. We are still fighting to get firms to do this, and of course, not recognizing these liabilities has a huge amount to do with the financial problems of firms today.
Mehrling also say, in interpretation of Treynor that "... pension beneficiaries should be able to force reorganization and recapitalization ...". In a sense, this is precisely what the Obama administration forced upon GM and Chrysler in their "takeover".