by Max Brantley
I still haven’t heard back from State Treasurer Martha Shoffner to talk about her office’s investment practices. (And some other questions about campaign finances.)
Though it won’t speak with me on the subject, the state Securities Department has written letters to brokers informing them that it intends to review the treasurer's trades, several sources say. No suggestion is made in these letters of wrongdoing on anyone's part.
Shoffner’s office has had some upheaval lately. Her chief deputy, Karla Shepard, departed recently. Neither has talked publicly about it, but it’s been apparent it wasn’t a congenial parting.
As I mentioned yesterday, the securities business is buzzing about Shoffner's division of state bond business (banking deposits are another, often controversial, political subject for the treasurer’s office). In the latest report it favored St. Bernard Financial Services, a small firm (about $30,000 capitalization) in Russellville represented by Steele Stephens, with more than a third of $1.5 billion in state bond investments, more than some bigger name competitors. Shoffner can give the business to whomever she wants, but competitors eagerly compete for an equal share and tend to be jealous when a favorite emerges.
I heard from both Steele Stephens (no relation to the Stephens Inc. family, but son of Steve Stephens, the former TV host who's also been a registered securities broker for decades)) and Robert Keenan of Russellville, who heads St. Bernard. They wanted to clarify a couple of points, among them their low-cost operation.
One, was my notice of of some bond trades that closed on the same day in October that showed $100 million in sales by St. Bernard in Federal National Mortgage Corp. bonds for a slightly lower yield than $25 million in Federal Home Loan bank bonds sold by Stephens Inc. Keenan and Stephens both noted that they were different securities and thus impossible to compare. It’s also possible, Stephens said, that the trades were made on different dates, but closed on the same date and the market might have moved in the interim. (State records don’t reflect trade and settlement dates.) Point made. I was only illustrating that there were comparable options in the market.
Stephens also said that, while Shoffner’s 2010 campaign finance reports showed him as one of three sponsors who contributed to expenses for a fund-raiser for her, there were 23 names (familiar financial leaders) on the party invitation as hosts.
They also wanted to re-emphasize, as my article mentioned, that virtually all the federal bonds bought by the state come with pre-set commissions. When bonds are called and reinvested, the commission is lower than on new issues, when the commission can range from $1 to $1.50 per bond. They noted St. Bernard had reinvested $25 million in called bonds recently and made only $7,500 in commission, at 30 cents per $1,000 bond. Other brokers comment, however, that having a large position in state bonds and the ability to roll over called bonds pays a continuing benefit in commissions, even if smaller.
Stephens insisted that the gap currently shown in how the money is divided isn’t unusual and a historic look would find others with similar advantages.
Said Keenan to me in an e-mail:
"One of the biggest reasons we are successful is that we don't have the overhead some of the major firms have. Stand outside our building and stand outside Stephens or Crews' building and you'll understand that difference.
"We are honored that the State does business with us and and very proud of the service we provide to them."
Stephens said many customers liked working with smaller brokers for easy accessibility. "I’m a straight shooter. I’ve had a clean record for 25 yeas. I don’t want anybody think there’s some kind of shady practice going on."
Stephens said he’d been assured by the Securities Department that he wasn’t being singled out and that the agency was undertaking a general review.
Keenan said, despite what others in the industry said, that he could provide a slim margin of competition in yields of even new issue government bonds, say a tenth of one percent on a Federal Home Loan Bank bond. On $100 million in trades, he said, that could be worth $100,000 to the state.
"We like to think we’re doing them a good job and that’s why were getting the business," Keenan said.