Broker defends work for Treasurer Shoffner | Arkansas Blog

Tuesday, September 18, 2012

Broker defends work for Treasurer Shoffner

Posted By on Tue, Sep 18, 2012 at 6:03 AM

ST. BERNARD: Big state bond dealer makes base in small office in Russellville.
  • MAJOR DEALER: St. Bernard Financial Services, a big player in state bond purchases, makes base in small office in Russellville.

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.

Example:

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.

Tags: , , ,

From the ArkTimes store

Favorite

Comments (3)

Showing 1-3 of 3

Add a comment

 
Subscribe to this thread:
Showing 1-3 of 3

Add a comment

More by Max Brantley

Readers also liked…

  • Federal judge wants John Goodson to explain class action maneuvering

    A show-cause order filed Monday by federal Judge P.K. Holmes of Fort Smith indicates class action attorney John Goodson has some explaining to do about the move of a class action complaint against an insurance company from federal to state court with an instant pre-packaged settlement that has been criticized as a windfall for Goodson.
    • Dec 22, 2015
  • Arkansan on Obama's latest commutation list

    President Obama today announced commutations of the sentences of 111 federal prisoners, including one from Arkansas.
    • Aug 30, 2016
  • Al Gore remembers Dale Bumpers

    Former Vice President Al Gore, a former U.S. Senate colleague of Dale Bumpers, sent a statement on Bumpers' death Friday:
    • Jan 3, 2016

Most Shared

  • Football for UA Little Rock

    Andrew Rogerson, the new chancellor at UA Little Rock, has decided to study the cost of starting a major college football team on campus (plus a marching band). Technically, it would be a revival of football, dropped more than 60 years ago when the school was a junior college.
  • Turn to baseball

    When the world threatens to get you down, there is always baseball — an absorbing refuge, an alternate reality entirely unto itself.

Most Viewed

Most Recent Comments

Blogroll

 

© 2017 Arkansas Times | 201 East Markham, Suite 200, Little Rock, AR 72201
Powered by Foundation