[lmm]

I read Levine's take but I'm not convinced. The accounting rules are like that because they reflect the real liabilities that the pension (eventually) has. Lower interest rates for a pension that needs to pay out a fixed amount in the future aren't just a "paper loss", they're a genuine asset deficiency.

This kind of swap wasn't just about protecting against the downside (otherwise they could've bought an option), it was about doing it as cheaply as possible by selling off the upside. They took on extra liabilities in order to pay as little as possible for their protection - or, equivalently, to boost their returns - and they missed, or failed to properly cover, an edge case in the liability they were taking on.

You can certainly make a case that it's well and good for pension providers to try to make as large a return as possible. But the "greed" shoe fits.

[runeks]

> [...] and they missed, or failed to properly cover, an edge case in the liability they were taking on.

What was this edge case? Rates rising quickly?

[lmm]

That and forgetting that even if their assets and liabilities balance in the long run, they can still get blown out on margin calls in the meantime.