Let's talk some econ/finance ****

[ColdWizard]

I thought I saw a Drogue too...

[Dinner]

My GOD... a MtG sighting...

Yeah, I just saw that and had to do a double take to make sure it wasn't an old post.

[KrazyHorse]

See, the first seems wrong to me, because it would imply that identically pension plans would cost more for 'better' institutions which can borrow at lower rates.

Errr...duh. That institution is more likely to be around to pay out, so they SHOULD cost more.

[KrazyHorse]

Note that there is some issue here with the fact that governments insure some amount of pension liabilities, while they don't insure senior unsecured debt. This is essentially a different recovery rate, breaking the assumption that the two debts are pari passu.

[KrazyHorse]

Errr...duh. That institution is more likely to be around to pay out, so they SHOULD cost more.

Kuci, a pension obligation is just like any other liability. If you have better credit you can sell it for more. It's no different than bonds.

[Kuciwalker]

Errr...duh. That institution is more likely to be around to pay out, so they SHOULD cost more.

Okay, that makes sense. Equity in a company with a higher default risk is inflated more by the censoring of bankruptcy, so taking on more liabilities is cheaper.

[Kuciwalker]

Note that there is some issue here with the fact that governments insure some amount of pension liabilities, while they don't insure senior unsecured debt. This is essentially a different recovery rate, breaking the assumption that the two debts are pari passu.

I'm not sure how that affects it; the insurance premiums are only loosely related to the actual default risk. The distribution of future payments by the corporation is unchanged.

To elaborate: during bankruptcy, the pension plan itself (as an entity distinct from the corporation) would have a senior claim on the corporation's assets, up to the actuarial liability of the plan (as computed with some discount rate - I'm not sure which rate is used in this case, but I believe that it's different from the rate mandated for funding purposes). The PBGC then partially insures the plan's liability to its participants (in a very complicated way that was designed by Congress to be 'fair').

[KrazyHorse]

I have no idea how you think it doesn't affect it.

1) Is the claim of the pension plan senior to the claim of unsecured senior debtholders? If so, then pari passu is already broken
2) Even if the "corporation" (the one defaulting in our scenario) still pays out pari passu with senior debt, the existence of partial insurance on the remainder means that the customer will value his pension at a different price than the corporation does. The difference in values is the fair market price of the insurance. Because the government likely does not charge a fair market price for its insurance, there will be disagreement about the market price.

[Kuciwalker]

1) Is the claim of the pension plan senior to the claim of unsecured senior debtholders? If so, then pari passu is already broken

I don't know, but for the purposes of the question I meant that it was of equal seniority. Note, however, that the liability is secured by plan assets, which breaks it.

At this point it seems to me we really need two liabilities: the liability to the plan for future benefits payments (secured by plan assets, and insured by PBGC at no direct cost to the plan*), and the liability to the corporation for future plan contributions (and PBGC premiums). It seems like those liabilities would need to be discounted at different rates.

*my understanding is that if the corporation goes bankrupt then the plan would continue to be insured by the PBGC but would not continue to pay a premium, but I may be wrong - in which case the liability for premiums is obviously moved from the corporation to the plan.

[Drogue]

Speaking of econ/finance stuff, does anyone have a view on banker bonuses and what to do about them?

I thought I saw a Drogue too...

[Kuciwalker]

Let banks pick their own compensation schemes and stop having the government try to micromanage them. Shareholders don't need protection, if they don't like the way a corporation is run they can just sell their shares.

[Jon Miller]

Liking making money and liking how a corporation are run are two different things.

As far as that goes, thinking that the decisions that the corporation makes is going to make me money now versus making sense in the long run are also different things.

JM

[Drogue]

Let banks pick their own compensation schemes and stop having the government try to micromanage them. Shareholders don't need protection, if they don't like the way a corporation is run they can just sell their shares.

But bondholders do, as do governments that are the lender of last resort. There's a clear externality of bank risk - upside to shareholders, downside to bondholders, governments and wider society - so with shareholders setting remuneration, they have an incentive to reward risk taking by employees. Having said that, arbitrarily capping them seems pretty silly, as size isn't the issue, incentives are.

[Jon Miller]

For example, a corporation could be entirely racist and sexist and be great at making money.

A lot of people would invest in it, because they want to make money and if they don't, someone else will.

But many of those same people would vote for law makers who would make sexist and racist practices of the company illegal.

There is nothing wrong with this.

Liking how a company is run and liking how they make money are two (very) separate things.

JM

[KrazyHorse]

But bondholders do, as do governments that are the lender of last resort. There's a clear externality of bank risk - upside to shareholders, downside to bondholders

Do you not know what an externality is? Bondholders are bondholders by choice.