Back in February I looked at the suggestion that hedge funds have been deliberately exposing themselves to tail risk - ignoring the low-probability events at the tail of the bell curve in order to make above-average profits most of the time.
In this long and detailed analysis, James Hamilton looks at another class of investor which may have been following the same strategy - public-sector pension funds. He looks in detail at the San Diego City Employees' Retirement System, which seems to have been suffering from short-term politically-driven managers and incompetence; a nasty combination that has left it several billion dollars in the red.
The problem, briefly, was that the administrators thought: "Our investment policy assumes average return of 8%. Therefore, every year over 8%, we are actually getting free money, which we can spend on more generous benefits". This, of course, went horribly wrong.
San Diego isn't alone - he gives a few other examples.

Because of different political systems, this isn't a problem that's come up in the UK, but it could well be widespread in the US - there's even a link to the subprime mortgage collapse, which took $65 million from the New York teachers' pension fund with it when New Century hit trouble.
How many other funds have been making similar bets? I suppose we'll find out in the months to come.

And: to blame for the mortgage problem today - the regulators. At least according to the WSJ (via Mark Thoma).

...standards still declined and the volume of loans surged in the past two years.

One reason: Changes ... have moved large swaths of subprime lending from traditional banks to companies outside the jurisdiction of federal banking regulators...

Yet even where federal regulators have jurisdiction, they sometimes have been slow to grapple with the explosive growth in especially risky practices and quick to shield federally regulated banks... The underlying belief, shared by the Bush Administration, is that too much regulation would stifle credit for low-income families, and that capital markets and well-educated consumers are the best way to curb unscrupulous lending.