Dear Reader,

You must be sick of hearing about the bailouts by now.

We are.

The $700 billion TARP… the $786 billion Obama ‘stimulus’…  the $750 billion placed on hold, just in case the banks need it.

But there’s another little-known bailout we’d like to talk to you about today.

Some even consider it one of the secret reasons that the U.S. bailed out GM and Chrysler.

Pensions…

GM pays out around $7 billion a year to its retired employees. And it’s set to do that for the next ten years.

A few years ago, GM had assets of over $100 billion – more than enough to cover the benefits.

But after the rout in stocks in 2008 and early 2009, it’s unlikely that GM has the money to cover its pension obligations.

If GM goes bankrupt, its pensions would be taken over by the Pension Benefit Guarantee Corp (PBGC). And if this happens, the U.S. would have to raise money to cover the funding gap in GMs pension.

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The real problem is GM’s and Chrysler’s pension problems are just a drop in the ocean.

A huge issue right now is the $900 billion black hole in public pensions.

This from Bloomberg:

Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion. With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.

This is bad.

But you wouldn’t believe all the dirty little tricks state accountants use to make their pension obligations look less than they really are.

Again, from Bloomberg:

They set unrealistically high expected rates of return to reduce governments’ annual contributions. And they use smoothing techniques to paper over investment reverses so they make losing years look like winners.

Accountants do that by averaging gains and losses, usually over a five-year period – sometimes for as long as 15 years of investment returns.

That means actual results of any one year aren’t used to calculate how much a state legislature contributes, which can delay governments catching up with losses for more than a decade.

So what happens if these funds all need a $1 trillion cash infusion?

Because these are government funds, they aren’t allowed to go bankrupt. State treasuries are required to put up money.

Oftentimes, the way the states decide to fund these pensions is bungled, to say the least.

This also from same Bloomberg article:

The government of Puerto Rico borrowed $2.9 billion through pension bonds in 2008, betting that it could reap annual returns of 8.5 percent investing the money, while paying its bondholders 6.5 percent.

“The risk is minimal,” says Jorge Irizarry, who was chairman of the Employees Retirement System of Puerto Rico from August 2007 through December 2008.

So far, Puerto Rico’s wager isn’t paying off. The 8.5 percent expected rate of return has instead been a loss of more than $200 million, according to a Dec. 12 presentation by fund administrators to legislators.

So pensions are running out of cash. And the way states are trying to fund them makes the problem even worse.

Considering how friendly Obama is with the states, it’s likely that we see a pension bailout of nearly $1 trillion by the time all is said and done.

This will wreak havoc on the U.S. budget. It will also reduce the future value of every dollar in your wallet.

(Don’t worry. Hidden Value will still be here to tell you exactly how to turn this situation to your advantage.)

In today’s picks Contrarian Profit’s Charles Delvalle says shares in Amazon.com (NASDAQ:AMZN) have been climbing thanks to strong sales figures released in January.

He reckons this pattern is set to continue. And AMZN could even get a further boost on the back of Kindle 2 sales.

Taipan Publishing’s Sandy Franks says the worst is over for stocks.

However, she recommends you invest selectively by putting your cash into companies such as AuthenTech (NASDAQ:AUTH) and ExxonMobil (NYSE:XOM).

The Daily Reckoning’s oil and commodities expert, Byron King, says there’s a massive “money migration” happening right now.

He says it’s like watching a herd of wildebeest trek across the African continent. You can feel the ground rumbling and it looks like a big dust storm is headed your way.

Where is the money heading? To gold and silver. And it’s not too late to invest.

Finally, Katherine Schildt of Investment U says that despite declining profits, some oil refiners are increasing margins by over 50%.

Improving margins means improved future profits.

And this should be exactly what Tesoro Corporation (NYSE:TSO) needs to see sharply higher shares next quarter.

Cheers,

Will Bonner

Publisher,

Hidden Value

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