by Max Brantley
St. Bernard Financial Services, the small securities house that has drawn scrutiny for its leading role in state Treasurer Martha Shoffner's investment of state money, distributed a news release yesterday defending its work for the state.
It's worth posting in full, which I do at this link.
St. Bernard noted, as I have already, the unfairness of comparing yields on the treasurer's short-term, highly liquid assets with those of state retirement systems, which invest over longer term, need not have the same liquidity and have the ability to take larger risks. St. Bernard, too, objects to a finding of a $58,000 "loss" on 12 bond trades while overlooking the millions of decline in value of teacher retirement system assets.
St. Bernard makes some points worth considering about the difficulty of comparing performance on similar, but nonetheless different sorts of bonds offered by different dealers.
St. Bernard says, too, that estimates of state "loss" are based on assumptions of lost investment opportunity, not "actual" loss. It throws numbers around, too — $30 million earned for the state by bonds sold by St. Bernard.
I was particularly interested in finding St. Bernard had offered an explanation for a putative $800,000 loss by the state in 2010 that has been mentioned off-handedly in various news accounts without much explanation. St. Bernard says:
The “economic loss” projections contain assumptions that, although factual, are unrealistic. i.e. once a bond is called the funds are reinvested in another bond, not a money market fund as the economic loss projections show.
One trade as reported that causes us to question how it was reported is a $25 million bond purchased from someone else on July 30, 2008 for $25 million. We suggested that the Treasury sell it on Jan 22, 2010 for $26,775,000. This is a cash gain of $1,775,000 (plus $112,152.78 in interest earned). Let me repeat that — a cash gain of $1,775,000 plus $112,152.78 in interest. This trade is reported as an “economic loss”. It becomes a sizable “economic loss” only if the replacement bond is called early and the proceeds are re-invested in money market funds. This is how the “economic loss” numbers were created.
Although very possible, that is unrealistic. It is unrealistic because when a bond is called, the proceeds are re-invested in another bond that pays a higher interest rate than a money market fund. That type of calculation is almost like someone saying “There is an economic loss because you didn’t bet on Bodemeister to win in the Arkansas Derby at Oaklawn this year”. That too is factually accurate but not realistic.
Again, don't get me wrong. Shoffner has mishandled this matter politically for a dead certainty and perhaps in actual custodianship of state finances. Key current and former employees are NOT ready to defend her actions. Billowing smoke remains on her soliciting of campaign money from players in the securities business and how she reported and spent that money.
But ... that doesn't mean these transactions lend themsleves to instant easy analysis and Legislative Audit's analysis seemed to reach for the easy example. More study of a comprehensive nature would be useful. I hope the Securities Department, less a political agency than the Audit Committee, will ultimately have more to say. That will depend, as their cautionary letter to St. Bernard indicated, on better recordkeeping on the part of the securities dealer.