Will pension funds suffer the next financial implosion?

If you are troubled by the loss in value in your 401(k) or other retirement account, you have plenty of company. Even professionally managed pensions suffered an average 26 percent loss in 2008, marking the worst recorded year for defined benefit funds, according to Northern Trust Investment Risk and Analytical Services.

Despite the grim results, two radically different retirement profiles have emerged. One is workers with defined benefit plans. These employees are guaranteed monthly payments at retirement based on a set percentage of their last paycheck.

Some 80 percent of public-sector employees and 20 percent of private-­sector employers participate in defined benefit programs. The Center for Retirement Research (CRR) at Boston College estimates that 20 million active participants and millions of retirees are enrolled in these retirement programs.

The other group includes workers with 401(k) and other defined contribution accounts. These employees are exposed to market downturns with no set retirement benefits. Last year, many of them were too heavily committed to the stock market, suffering losses between 30 and 40 percent.

"While a bad year for every investor, 2008 was particularly bruising for 401(k) members forced to navigate sophisticated, complex market environments largely on their own, exposed to individual portfolio risks far greater than the pooled risk of professionally managed benefit programs," says Keith Brainard, research director for the National Association of State Retirement Administrators, whose members oversee pension benefits of most state and local government employees.

Employees with 401(k) plans who are five to 10 years from retirement are now faced with the possibility of delaying retirement or drastically reducing their lifestyle when they do.

For younger workers with 10 or more years of potential employment, the hope is that investment markets will rebound in 2009 and that 8 to 10 percent returns will once again prevail.

For employees with defined benefit plans, however, personal retirement plans remain largely on course.

But there are problems here, too. Corporate pension plans are underfunded by $409 billion, according to consulting firm Mercer. The CRR estimates that private firms need to increase contributions by about $90 billion this year, as required by the 2006 Pension Protection Act. The law stipulates that firms must eliminate unfunded pension obligations within a seven-year period. But those restrictions were relaxed in December due to the current economic slump.

In an effort to meet funding requirements, some private companies have already announced layoffs or pension freezes. Others have gone bankrupt. As a result, the CRR estimates employees over 50 years of age who work for companies that have taken these actions will face severely reduced benefits at retirement as they are unlikely to have saved independently of their pension plan.

Public-sector entities are not under the same requirements to supplement their unfunded obligations, and no reliable estimate exists of what additional contributions are required.

"It will take longer than expected for the total cost effect to become clear in public funds," Mr. Brainard says, "as actuarial updates lag market realities and public funds utilize smoothing formulas that extend market losses over extended numbers of years."

Unless the markets suddenly recover and reverse lost profits, defined benefit plans will require dramatic increases in funding by their sponsors. Taxpayers will face footing the bill to finance public-sector retirement programs and shareholders of companies will need to allocate limited dollars from the balance sheets to fund corporate plans.

Neither group is likely to be generous when their own retirement funding is not secure. Redefining a retirement system for all Americans that achieves retirement security may become the next politically explosive issue. Alicia Munnell, director at CRR, has proposed a third tier of mandated retirement savings to augment 401(k) savings and Social Security benefits.

To better understand defined benefit plans, consider these actions:

•Those fortunate to have this type of pension can check its funded status by requesting Form 5500 from your plan administrator or by visiting FreeERISA.com. If there is a shortfall, discuss with your employer what actions it will take to remedy the situation.

•Understand the effect of unfunded pension liabilities on taxpayers. To identify your state's exposure, visit publicfundsurvey.org and review the 2007 Public Fund Survey.

•To see if your plan is covered by government-funded Pension Benefit Guaranty Corporation in the event your employer goes bankrupt, visit pbgc.gov.

Fraud Case Shakes a Billionaire’s Caribbean Realm

When Robert Allen Stanford arrived here in the early 1990s, few locals had ever heard of the Texas financier. Today, he dominates so many aspects of life on this sun-drenched Caribbean island that some have taken to calling it “Stanford Land.”

At one point or another, he has owned an airline that many locals and visitors fly on. A local newspaper that covers their goings-on. A vast residential complex where many live. Two restaurants where they eat. And the national stadium where they go to watch cricket, the island’s favorite sport.

But the crown jewel of his domain has long been Stanford International Bank, an offshore institution that attracted billions of dollars of cash from clients around the world — and especially from Latin America — seeking a haven for their wealth.

All the while, he cultivated a comfortable relationship with Antiguan officials. The bank made loans to the Antiguan government, which often used the money to award his companies lucrative construction contracts. To clean up the nation’s image as a dodgy tax haven, the authorities installed him on a new regulatory authority to oversee its banks — including his own.

To some, it felt too cozy.

“There seemed to be a complete breakdown of the normal barriers between the regulator and the regulated,” said Jonathan Winer, who was, at the time, a deputy assistant secretary of state for the United States State Department. “The relationship between the government of Antigua’s political leaders and Stanford seemed weirdly intimate.”

Despite raised eyebrows and occasional investigations of Mr. Stanford — or Sir Allen, as he is called here since he was knighted by the Antiguan government in 2006 — his sway continued to grow. That is, until this week, when the Securities and Exchange Commission accused Stanford International of orchestrating a huge fraud that may have bilked investors of some $8 billion that regulators say cannot be accounted for. The company is referring all calls to the S.E.C.

Mr. Stanford, 58, who has not been charged with any criminal wrongdoing, could not be reached. On Friday, his troubles mounted, as officials here took over his Antiguan bank, following seizures of his operations elsewhere in the world.

Stanford International claims it had about $8 billion in assets, but the Securities and Exchange Commission has only said it has not been able to account for that money. Most of the key players, including Mr. Stanford, failed to appear to testify after the S.E.C. issued a subpeona.

Seeking Answers

The collapse of Mr. Stanford’s empire has left many questions unresolved. What happened to investors’ money, which supposedly was put into high-quality assets? To what extent did his efforts to curry favors with politicians here — and in the United States, where he made contributions to many congressmen — help him elude serious scrutiny despite suspicions raised about his activities in the past? And what was the nature of the fraud that is being alleged — a plain-vanilla securities fraud, as the S.E.C. has charged; a Ponzi scheme; or, given the history of some offshore Caribbean banks, was money laundering also involved?

It may take months to figure out the answers. Few documents have emerged to shed light on Mr. Stanford’s business dealings, which involved high-yielding certificates of deposits sold to investors and housed in the Antigua bank — or even its exact size.

In numerous interviews with former Stanford employees, former American regulators and agency officials, and individuals who had direct dealings with Mr. Stanford over the years, a picture emerges of a man who had visions of grandeur for himself and his company and who knew the key to his success was aligning himself with politically powerful individuals.

At the same time, much of Mr. Stanford’s true background appears elusive.

Born in Mexia, Tex., a rural town of 6,600 about 85 miles southeast of Dallas, he claims to have based his company, Stanford Financial Group, on an insurance firm started by his grandfather Lodis Stanford during the Depression.

Mr. Stanford’s first foray into business, however, was far from finance. He started with a chain of body-building gyms in Waco, Tex. He later claimed to make much of his fortune in the 1980s buying distressed properties in Houston.

A former Stanford employee said that while some properties, such as ones Mr. Stanford picked up in the chic River Oaks area of Houston, made money, many others ended up as busts.

So when Mr. Stanford decided to start his first offshore bank, Guardian International Bank, on the Caribbean island of Montserrat in 1996, he turned to his father, James Stanford, for about $2 million to $4 million in seed money, according to the employee, who declined to be named because he did not want to be drawn into ongoing investigations.

Guardian International sought out wealthy individuals and companies in Mexico, Venezuela and Central America, where people were eager to move money offshore because of onerous regulatory and political regimes.

As Mr. Stanford’s small operation grew, so did his ambitions.

“He talked about wanting to build the largest financial company in the world,” the employee said.

Mr. Stanford, who showed at times a charming demeanor as well as a fiery temper (a former employee said he once threw a glass ash tray against the wall in a fit of anger), began to see himself in more grandiose ways. He came up with a shiny new logo for his company, a Golden Eagle, which he described as a knight’s shield and required all employees to wear.

In the early 1990s, the government of Montserrat cracked down on a number of offshore banks. Guardian was out.

Quickly, Mr. Stanford set his sights on territory he would soon call home, Antigua. His presence on the tiny island, population 85,000, began taking shape when Lester Bird, then the prime minister, saw him as a can-do American with ample cash who could help solve Antigua’s myriad problems. When the local, Bank of Antigua ran into difficulties, for example, Mr. Stanford stepped in in 1990 to take it over.

And when the United States began pressuring the Bird government in the late 1990s to take a firmer hand on alleged money laundering, Prime Minister Bird again asked Mr. Stanford to help.

The government formed a banking advisory board and put Mr. Stanford on it, a move that alarmed American authorities scrutinizing Antigua, who saw an inherent conflict of interest since the board also oversaw Mr. Stanford’s bank. The project was paid for by the Antiguan government by money either lent or granted by Mr. Stanford.

Various United States regulators and agencies were already uneasy about Mr. Stanford. Around 1998, he sent a letter to Jeanette Hyde, then the United States ambassador to Antigua, in which he said he had been investigated by numerous agencies over the years. None of them had turned up anything, he claimed, a vindication he said showed he was a law-abiding citizen.

If anything, the concerns about Antigua and Mr. Stanford’s presence there grew. In 1999, he gave the Drug Enforcement Agency a $3.1 million cashier’s check from Stanford Financial in Antigua after the bank found that a former Mexican drug lord had hid or laundered money there. The same year, however, the American Treasury Department placed Antigua on its money-laundering watch list.

Around the same time, Mr. Stanford and his Houston-based company, Stanford Financial Group, burst onto the scene as players in federal politics. The White House was pushing legislation to make banks crack down on money laundering, so Stanford Financial hired a Washington lobbying firm and began donating hundreds of thousands of dollars to Republicans and Democrats alike.

Suspicions Grow

The sudden rush of money drew the attention of Public Citizen, which singled out Stanford as a case study of the influence of campaign donations in shaping legislation. Public Citizen concluded that it was “clear” that the Stanford contributions “were aimed at killing the bills,” although broader help turned out to be unnecessary because Texas Republicans simply blocked it from receiving a vote in both chambers. (After the 2001 terrorist attacks, Congress revived and passed the money-laundering proposals. Antigua’s government, meanwhile, had recreated the reform panel and rewrote its banking regulations to Washington’s satisfaction, allowing its name to be stricken from the watch list that same year.)

Still, Mr. Stanford kept his outreach to Washington going. From 1999 to 2008, Stanford Financial dispensed some $4.8 million on lobbying activities — spending $2.2 million of that in 2008 alone — and its employees and its political action committee have given $2.4 million to federal candidates since 2000, according to the Center for Responsive Politics.

Mr. Stanford also wooed lawmakers and their staff with plane rides and “fact-finding” trips to vacation destinations. Many were paid for by the Inter-American Economic Council, a nonprofit organization that he supported.

In recent days, some lawmakers have sought to distance themselves from Mr. Stanford. Among them is Senator Bill Nelson, Democrat of Florida, who received more money from Mr. Stanford and his employees than any other lawmaker: $45,900, according to the Center for Responsive Politics. Mr. Nelson’s office said he was donating the money to charity.

Another lawmaker, Representative Pete Sessions, Republican of Texas, received $41,375 in such donations. He also went on two council trips, totaling more than $10,000 in expenses, according to Legistorm, a group that tracks lawmaker travel disclosure forms.

Mr. Sessions’s spokeswoman, Emily Davis, told Bloomberg News this week that Mr. Sessions did not know Mr. Stanford personally. But that account was called into question when the Web site Talking Points Memo published a photograph showing the two men talking during a trip to Antigua. (Ms. Davis declined to comment on Friday.)

But Mr. Stanford’s ties to key lawmakers did not completely shield him from the wary eyes of regulators. A routine S.E.C. examination of Stanford’s broker-dealer operations in Houston revealed a major problem — the firm was in violation of net capital requirements, resulting in the company paying a fine of $20,000 in 2007.

In 2006, the agency opened an investigation, but halted it abruptly at the behest of another unnamed agency. The inquiry was reopened late last year, after the alleged $50 billion Ponzi scheme involving Bernard L. Madoff came to light. It is unclear why these and other investigations, including by various law enforcement agencies, appeared to have stalled over the years.

Meanwhile, relatively unfettered, Mr. Stanford and his companies continued to attract money to their Antigua-based bank, particularly from Venezuela and other Latin American countries. Venezuelan regulators estimate investors there may have put $2.5 billion into C.D.’s issued by the Antigua-based bank.

Mr. Stanford was quick to offer flights to prospective investors to Antigua on his private jets and maybe a breezy trip through Antigua’s quiet bays on his yacht.

The richest prospective investors would be put up for a few days at Jumby Bay, a 300-acre secluded private island with cottage guest rooms and a nature preserve.

“He’s an ‘everything is big in Texas’ kind of man,” said Winston Derrick, a radio show host and publisher of The Antigua Observer newspaper, the competitor of Mr. Stanford’s own newspaper. “Everything he does is first class.”

Now, Antigua is reeling. Senior government officials declined to comment on their relationships with Mr. Stanford. Many met behind closed doors Friday with executives of several local Stanford companies to gauge how far the Stanford empire would be impacted. “What we are concerned about is the fallout,” said Attorney General Justin Simon. “Although it is only one bank, we need to ensure that the local assets are protected for depositors.”

Madoff's Investors Face Dim Prospects in Court

The securities laws may be your worst enemy if you lost money in the Madoff scam. Investors are suing the feeder funds that channeled their money to Bernard Madoff, accusing the feeders of fraud, negligence or breach of fiduciary duty. On the surface, the cases sound like slam dunks.

They're not. Congress and the courts have spent more than a decade writing and affirming laws that protect companies from irate investors. Those laws may turn out to be feeder fund protection acts.

For investors who lost money, the problems begin with the federal Private Securities Litigation Reform Act (PSLRA), passed in 1995. It was designed to reduce the number of "frivolous" securities lawsuits filed in federal courts. In essence, it says that investors can't proceed with a case unless they already have facts in hand that strongly suggest a deliberate fraud.

By this standard, it's not enough to claim that the feeders failed to investigate Madoff or issued financial statements later found to be false.

You have to show that the feeder probably knew about the fraudulent scheme, or recklessly disregarded evidence of it, or that the fund violated a written commitment -- say, by investing all of your money with a single manager when it specifically promised not to. You need evidence showing that your claim is strong.

The feeders will argue that they didn't know what Madoff was up to, that they vetted him along with other managers and that everyone was fooled. They have a good chance of getting your case dismissed. "Stupid" isn't a triable offense.

Before the PSLRA, you could have started your case with minimal evidence and used pre-trial discovery to search for more. The feeder would have had to turn over e-mails and other documents that might show it had doubts about the Madoff accounts. Today, however, you need such evidence just to begin, and it's tough to get.

You also can't argue that the feeders are liable because their actions made the fraud possible. In 1994, the Supreme Court ruled that investors can't sue advisers -- investment banks, lawyers, accountants -- that aid and abet a securities fraud (the case was Central Bank of Denver v. First Interstate Bank of Denver). Abettors have get-out-of-jail-free cards.

You might get a break if Madoff made secret kickbacks to one or more feeder funds to bring in more cash. No one knows whether that happened. If it did and Madoff confesses to it, that could be enough evidence of fraud to get you into court, said John C. Coffee, a professor of law at Columbia University.

Most securities fraud cases have to be brought in federal court, but there's potentially a second road to justice. Instead of claiming fraud, investors can claim that the feeders breached their fiduciary duty -- a charge that's tried in state courts. It doesn't require proof of fraudulent intent.

"Getting these cases into state courts is crucial for the litigation because success will depend heavily on getting access to the feeder funds' records," said James Cox, professor of law at Duke University.

There's a hitch. Class actions involving the securities laws and covering more than 50 people can easily be moved by the defendant to the inhospitable federal courts. A case can also be moved for other reasons -- for example, if it was filed in a state other than the one where the feeder has its main office.

More Customers Give Up the Cellphone Contract

Maybe Tony Soprano was onto something. As the lead mobster in the HBO series “The Sopranos,” he and his crew often turned to prepaid cellphones, presumably to avoid wiretaps.

But now these pay-as-you-go phones are winning over fans for different reasons — recession-battered consumers are buying them as a way to cut costs and avoid the lengthy contracts and occasional billing surprises that come with traditional cellphone plans.

“Frugal is the new chic,” said Joy Miller, 33, a piano teacher in Aubrey, Tex. After almost a decade on contract plans with Verizon Wireless, Mrs. Miller and her husband decided this month to test-drive a few prepaid plans, including MetroPCS. “In today’s economy, it’s not cool to pay $120 a month for a phone. It’s a waste of money.”

Although prepaid phones remain a fraction of the overall mobile phone market, sales of the category grew 13 percent in North America last year, nearly three times faster than traditional cellphone plans, according to Pali Research, an investment advisory firm. For the first time in its history, T-Mobile has been signing up more new prepaid customers than traditional ones. And Sprint Nextel is betting that a new flat-rate prepaid plan will help it wring more value from its struggling Nextel unit.

Any stigma attached to the phones — they are a common prop in any show or movie about gangs and spies — is falling away as prices drop and the quality of the phones rises. Prepaid carriers like MetroPCS, Virgin Mobile and Sprint’s Boost Mobile division now offer sleeker handsets, better coverage and more options, from 10-cent-a-minute calling cards that customers refill as needed to $50-a-month, flat-rate plans for chatterboxes who want unlimited calling, Web browsing and text messaging.

The savings can be considerable. An AT&T customer with an Apple iPhone on a traditional plan pays at least $130 a month, excluding taxes and fees, for unlimited calls and Web use. Compared with the $50-a-month, all-inclusive prepaid plans, the iPhone owner pays nearly $1,000 more over the course of a year.

Prepaid customers typically have to buy their phones without the subsidies offered with a contract. When Jerry Cruz, a manager at a tanning salon in Manhattan, switched to T-Mobile’s prepaid service, he paid more than $300 apiece for Sidekicks, which feature keyboards and cameras, for himself and his daughter. But, he said, he saves at least $40 a month compared with his previous contract with Sprint. “Every dollar I save goes towards something else.”

MetroPCS, a carrier based in Dallas that sells only prepaid plans and just added New York and Boston to its network, said it has seen a lot of interest from people who are “cutting the cord,” or abandoning their landlines to use only a mobile phone.

“Over 80 percent of our users use our phone as their primary phone,” said Tom Keys, the company’s chief operating officer. MetroPCS added 520,000 subscribers in the fourth quarter, the biggest quarterly gain in its six-year history. MetroPCS finished 2008 with more than five million subscribers, a 35 percent increase over 2007.

Charlie Bournis, owner of Champion Wireless in Brooklyn, said his prepaid business doubled in the last year while sales of traditional contract plans plunged.

“In 2001, we would sell upwards of 100 contracts per month,” he said. “Now, maybe we do 10.” The store sells 100 prepaid refill cards each week, he said.

Boost Mobile’s $50 unlimited-everything prepaid plan, introduced last month, has helped stoke demand, said Mr. Bournis.

“Over the holidays, all of our Boost Mobile handsets were just collecting dirt,” he added. “After they announced the $50 plan, they sold out within a week. It doesn’t make any sense to get a contract anymore.”

Prepaid plans are generally offered in two flavors. Customers can buy pay-as-you-go cards, with $20 providing 60 to 200 minutes of calling time that must be used within a specified period. Some prepaid companies also offer flat-rate monthly plans that resemble traditional plans except that customers pay upfront and have no continuing commitment. Customers can even switch back and forth between the types of prepaid plans depending on their needs.

Wireless carriers are ambivalent about the growing popularity of prepaid services. They would prefer to sign up customers with good credit to long-term contracts. But as the overall mobile phone market becomes more saturated, they are looking for growth wherever they can.

Sprint and T-Mobile, the No. 3 and No. 4 carriers in the country, are particularly aggressive about courting prepaid customers. In the fourth quarter, 355,000 of the 621,000 customers that T-Mobile added were prepaid users.

Prepaid phones are not for everyone, said Peter Pham, chief executive of BillShrink, which offers free analysis of consumers’ cellphone bills and recommends cheaper plans that match their calling patterns. Some carriers, like MetroPCS or Leap Wireless International’s Cricket, have limited networks or charge extra for roaming outside regional zones.

The trick, he said, is for consumers to figure out their calling needs and pick the plan that make sense. “Saving $15 to $20 a month is a big deal these days,” Mr. Pham said.

E.U. Leaders Turn to I.M.F. Amid Financial Crisis

The leaders of Germany, Britain, France and other European nations called Sunday for the resources of the International Monetary Fund to double, to $500 billion, to help head off new problems in countries already hit hard by the global economic and financial crisis.

Eyeing a contagion that is rapidly spreading to eastern Europe and even countries that use the euro, the leaders highlighted the crisis-prevention role of the I.M.F., an institution whose relevance to the current global economy seemed in doubt only a few years ago.

In Germany, a growing unease that the crisis is about to strike close to home has contributed to a shift in the country’s reluctance to bankroll efforts to ease the financial crisis — whether in the form of bank bailouts or stimulus packages — for fear of paying for other countries’ mistakes.

German officials appear to have concluded that their own economy, underpinned until recently by booming exports, cannot stay afloat if its neighbors crash. Also, international officials from the I.M.F. and the World Bank have argued strongly in private to German officials that Berlin was underestimating the extent to which the crisis was tearing at the hard-fought economic integration of Europe.

In eastern Europe, currencies have tumbled sharply against the euro as financial markets bid up the odds of an all-out collapse along the lines of Asian countries in the late 1990s. Already, Hungary and Latvia, both European Union members that do not use the euro, have gotten rescue packages from the I.M.F. and the European Union.

And among the countries that use the euro, particularly Greece and Spain, financial chaos has meant that government borrowing costs have grown in relation to stalwarts like Germany.

The French president, Nicholas Sarkozy, endorsed support for fellow European countries on Sunday, while warning that those in need of help will have to revamp policies.

“If someone needs solidarity they can count on their partners,” Mr. Sarkozy said at the conclusion of the economic summit meeting here. “Their partners also need to count on them to follow certain basic rules.”

Last week Peer Steinbrück, the German finance minister, suggested that Germany would help finance rescues if necessary, despite European treaties designed to promote fiscal self-reliance.

Those developments foreshadow difficulties this year for countries that must borrow on international capital markets to refinance old debt and raise fresh cash.

Between expressions of solidarity and a newfound emphasis on the I.M.F., the European leaders appeared to be corralling the resources, both political and financial, that would allow bailouts of additional European countries if needed. Economists believe the presence of a credible rescue framework would convince financial markets to ease pressure on the countries, eliminating the need for emergency action.

Daniel Gros, director of the Center for European Policy Studies in Brussels, said the shift in Berlin and Europe more generally “opens the door to German dominance” of politics in the 27-nation European Union since its financial heft is likely to become vital for weaker neighbors as the crisis drags on.

“The Germans are now in the position to say ‘I’ll rescue you, but you better follow the rules,’ ” Mr. Gros said. “We are at the beginning of a new game.”

European leaders in Berlin also directed their finance ministers to study the creation of a common bond issue among the 16 countries that use the euro, a move that would partially extend Germany’s sterling credit rating to its shakier neighbors.

The meeting, which also included leaders from Italy, Spain, the Netherlands and the Czech Republic, the current holder of the European Union’s rotating presidency, was intended to hammer out a common European position ahead of the April meeting of the G-20, the group of industrialized economies and developing countries, in London.