Despite the government bailout of Fannie Mae and Freddie Mac, many federal investors are worried that the troubles of the two mortgage giants will cut into their Thrift Savings Plan accounts. That’s a natural reaction.
With the often breathless 24/7 media coverage of the meltdowns of Fannie and Freddie many people were seeing images of the Great Depression and wondering where the nearest bread-line would be set up.
The short answer is that, thanks to taxpayers like you, the troubles of Freddie and Fannie will have a minimal impact on TSP investors in the C-fund, the F-fund and the target date L-funds.
The C-fund tracks the S & P 500 which is made up of the 500 largest publicly-traded U.S. companies. The F-fund is a bond index. The L-funds are made up of all the TSP funds which include the total U.S. stock market and much of the international market.
The big winners out of the Fannie, Freddie fiasco were current and former top officers who, over the past dozen years, awarded themselves big, as in “huge”, bonuses on top of their very, as in “very”, handsome salaries, limos and the like.
Why did they get big bonuses? Apparently it was for their ability to drive their operations into a brick wall at high speed without blinking. And then walking away from the wrecks.
The big losers are Fannie Mae employees (many of whom were recently nudged into taking early-retirement and buyouts) whose optional retirement money is in Fannie Mae stock. The value of their stock dropped from $7 a share to 7 cents a share in just a couple of days earlier this month.
For federal, postal and military investors in the TSP’s stock and bond funds, the impact of Fannie and Freddie’s not-so-excellent-adventure is minimal.
What follows is part of a letter to members of the Employee Thrift Advisory Council. It is a group of powerful outsiders, including federal union leaders, who oversee the TSP on behalf of their members and other investors. The Sept. 12 letter, from TSP Executive Director Gregory T. Long, goes like this:
…the stock, debt, and mortgage backed securities (MBS) issued by Fannie Mae and Freddie Mac have been part of the broad based TSP index and L-funds. More specifically, those stocks comprised LESS than 1 percent of the C-fund, while the bonds comprise 6 percent and MBS 35 percent of the F-fund.
The C-fund tracks the S&P 500 index which is made up of the 500 largest publicly-traded companies in the U.S. For more on that, click here and scroll down to “Your Risk Level”.
So what do the the problems of Lehman Brothers and AIG insurance mean to TSP investors? As of September 5, 2008 Lehman’s corporate bonds made up .27 percent of the Barclay Global Investors U.S. Debt index in which the TSP’s bond-indexed F-fund is invested.
Lehman is also one of the companies that make up the S&P 500 which the C-fund tracks. It made up 0.5 percent of the BGI Equity Index Fund which tracks the S&P 500 index. Because it has filed for bankruptcy, Lehman bonds will no longer be part of the index at the end of the month and it will be dropped from the companies that make up the S&P 500.
Bottom line: While the problems have a major impact on the overall stock market, federal investors in the TSP, because of the diverse quality of the funds it offers, had only a small exposure to Lehman and AIG investments.
In his letter to the TSP advisory council, Long also said that “while the Fannie and Freddie stocks have been in decline for some time, these losses (as well as recent losses by other financial sector and real estate related stocks) have been partially offset by the performance of stocks in other sectors. This recent experience again demonstrates the wisdom of the Congress in creating (and our joint efforts to maintain) the broad-based index approach for TSP investments. Indeed, against the backdrop of Fannie’s stock dropping 90 percent (from $7 to 7 cents per share between Friday, Sept. 5 and Monday, Sept. 8) the C-fund concurrently rose nearly 2 percent.”
Feds retired under the old CSRS system, military retirees and people who get Social Security benefits are on track for a 6.0 percent cost of living adjustment in January. That’s down from the 6.2 percent projection last month. Retirees won’t know the final amount of the 2009 COLA until Consumer Price Index data is compiled for this month. That information will be made public in mid-October.
Meantime, if you want to know how the COLA works, click here.