Permanent Fund ignored warnings

The Permanent Fund was repeatedly warned over the last three years to avoid stocks and bonds tied to the real estate market.

Along with the warning, officials overseeing the fund were warned how deflation in real estate would affect stocks owned by the fund — such as AIG, Fannie Mae, Country Wide Credit, Lehman and numerous others companies. The warning also said the failure of these business could cause the entire stock and corporate market to crumple.

The Permanent Fund chose to believe that real estate could only go up in value and not only kept its position, actually increased the fund’s holdings in commercial real estate after it was apparent real estate was heading down.

The fund is now in a crisis position and the likely outcome will affect all Alaskans for the next generation, meaning dividends will be smaller — a lot smaller — for years. This past week’s collapse of Lehman Brothers, and subsequent announcement of a plan for a huge government bailout, brought these warnings full-circle.

The proposal I put forth to the Permanent Fund was that it should buy U.S. Treasury issues, in that it guarantees its dividend and would be only safe trade if deflation occurred. The consequences of the failure of the bonds and stocks tied to a deflation will be long term and the effects will now have a devastating result on Alaska.

The worst-case scenario is that the housing deflation may spread to commodities, like the price of oil, and the state of Alaska could go from surplus to deficit along with losing 30 percent of Alaska Permanent Fund. This will haunt the state for generations to come.

Ignoring the numerous warnings pertaining to deflation was a serious mistake and the state, along with the Permanent Fund, must now come to realize that before a single dime is invested, the impact of deflation on that asset must be considered.

Lastly, Alaska’s Permanent Fund could have profited by recognizing deflation and buying Treasury Bills and all of us would be sleeping better at nights. More on this story later.

Bob Andres is a Mat-Su Valley resident and financial advisor who warned the Permanent Fund in 2005 what could happen should the real estate market cause a collapse of large American banks.