When Wall Street Offers Free Money, Watch Out

Couldn’t have said it better: “It’s sold as a magic bean,” said Todd Ely, a professor at the University of Colorado at Denver who has studied pension bonds. “But when it goes bad it’s not free. Then it isn’t really magic. If it could be counted on to work as often as it’s supposed to, then everyone would be doing it.”

Justice League

Bankers and new accounting rules are emboldening governments to borrow-and-bet their way out of pension problems, a strategy that’s backfired in the past.

This story was co-published with the Washington Post.

If there were ever a time not to bet the moon on the stock and bond markets, it’s now, with U.S. stocks at near-record highs and interest rates on quality bonds at near-record lows. But Wall Street is urging state and local governments to do just that — and they’re listening.

Despite the risks, governments are lining up to issue billions of dollars in new debt to replenish their depleted pension funds and, as a bonus, take some pressure off strapped budgets. In some cases, the borrowing makes their balance sheets look vastly better.

Bankers, who make fat fees for raising the money, are encouraging this borrow-and-bet trend. Their sales pitch is that borrowing at today’s low interest…

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