Not Ready for Primetime

I hate being lied to, don't you?

I hate it even more when candidates who frame themselves as reformers lie to us. Aren't we supposed to be different?

So why would Justin Oberman be lying to us?

I understand. The Oberman campaign did their oppo and found that going after the losses in Bright Start was the best wedge a 35-year old wannabe politician who is campaigning behind his father's legacy could have with an accomplished reformer and leader in Illinois who has been able to bridge all the various strata of Illinois politics. I get it.

But, frankly, it's disgusting. Oberman's ad quotes Robin (who I'd like to think of as a friend, and whose campaign has specifically asked me not to blog about these issues) saying, "We lost no money" after the ad mentions that Bright Start lost $150 Million.

But that's not what she said. Robin Kelly -- and her boss Alexi Giannoulias and the entire Treasurer's staff -- is proud of the fact that the Treasurer's office has MADE MONEY from the money that the taxpayers entrust in that office (which is different than the money that it holds for taxpayers for things like education). The State Treasurer reached out to Justin Oberman to explain the apparent confusion that Oberman had -- or, at least, was evidenced on the campaign trail. But Oberman refused to take the meeting.

I suppose that it would be harder to continue to make the charges under those circumstances. As if that would preserve some kind of political integrity.

NOT!

The facts are these, as explained in detail by the terrific political blog, Progress Illinois:

Back in January, we learned that risky financial maneuvers by the Wall Street managers of Illinois' college savings program had led to a swift $85 million loss. The Prairie State wasn't alone in this situation -- Oregon, Texas, Maine, and New Mexico also included Oppenheimer's "Core Bond Fund" as an investment option for families saving for college and suffered steep losses as a result. Illinois State Treasurer Alexi Giannoulias, who oversees the program, was the first state official to accuse Oppenheimer of investing outside of the fund guidelines and pursue legal action against them. Others have since followed suit.

In the months since he entered litigation to recoup the $85 million...

Here's what we know (bear with us on this one):

By the time Giannoulias took office in 2007, the Bright Start college savings plan had amassed 180,000 portfolios and nearly $2 billion in assets. It had also been long-criticized for its high costs and limited investment options. Intent on lowering those administrative costs, Giannoulias selected Oppenheimer to manage the portfolio through a competitive bid process that year. The investment bank suggested Illinois invest in a series of their mutual funds, including the Core Bond Fund, which was billed as one of the company's most conservative investment strategies. The treasurer's office contributed $200 million to this fund and immediately saw its fortunes rise. By April of last year, Chicago-based investment rating group Morningstar had named Bright Start one of the top five college savings plans in the nation.

Unfortunately, things took a turn for the worse later in the year. It turned out that Oppenheimer's then-Senior Vice President of Fixed Income Angelo Manioudakis had decided to roll the dice with the fund. He not only invested it in risky mortgage-backed securities, but -- worse yet -- heavily leveraged the fund.

Once the housing market seized up and Giannoulias's office realized what Manioudakis had done, they immediately transferred all Bright Start monies allocated to Core Bond to short-term U.S. treasury debt. But that wasn't before investors lost 36 percent of the $200 million originally committed to the fund. The following month, the state served subpoenas on Oppenheimer under the Consumer Fraud Act. “Core Plus’ performance is unacceptable," Giannoulias wrote in a statement earlier this year, "and even more staggering when you consider that families thought they were investing in relatively conservative portfolios as their children neared college age." Speaking on WLS’ Don Wade and Roma earlier this week, the treasurer said he is "optimistic" that the state will ultimately recoup the families' money.

The lingering question is whether the extreme risks being taken by Oppenheimer were visible to Giannoulias -- as well as the broader community of investors and analysts -- and whether the treasurer should have been expected to act faster to protect Bright Start investors from the exposure...

While Oppenheimer might have disclosed the fact that it was investing in these particular types of instruments, even the Morningstar analysts in charge of keeping tabs on this fund weren't aware of the degree of leverage being employed... [Friday April 24th, 2009, 9:07am]

For those just getting caught up, six states, whose 529 college-savings programs were exposed to Oppenheimer Funds' Core Bond fund, experienced heavy losses last year when the bond sank 38 percent in the fourth quarter. Billed as a one of the Wall Street company's most conservative investment strategies, Oppenheimer's then-Senior Vice President of Fixed Income Angelo Manioudakis decided to invest a chunk of the bonds in risky mortgage-backed securities. Worse yet, he heavily leveraged the fund, a move that analysts in charge of keeping tabs on Core Bond did not even notice. A few months after the housing market seized up and the value of the fund plummeted, State Treasurer Alexi Giannoulias transferred all Bright Start monies allocated to Core Bond to short-term U.S. treasury debt and began negotiating with Oppenheimer to retrieve some of the cash. In February, the state also served Oppenheimer with subpoenas under the Consumer Fraud Act. And while Giannoulias reached a "handshake deal" in June that would return $77 million to the affected Bright Start accounts, there remained one large obstacle: the state of Oregon. [Monday November 23rd, 2009, 10:17am]

Lost in the coverage, however, was the centrality of leverage in the Bright Start controversy. Shortly after the fund tanked, a Morningstar analyst called it the "chief culprit" in the fund's poor performance and acknowledged that Oppenhemier made no disclosures in any legal documents about the degree of leverage they were employing. That's why it was good to see Madigan stress this point in her release:

Oppenheimer had marketed Core Plus as a conservative investment vehicle appropriate for beneficiaries who were at or near college age. Core Plus, however, contained risky investments and was highly leveraged by its Oppenheimer management team, which, in turn, resulted in excessive losses. The management team is no longer with Oppenheimer.

While Oppenheimer did disclose its investments in mortgage-backed securities, the Morningstar analysts in charge of keeping tabs on Core Bond expressed surprise at the degree of leverage being employed, largely through $1.4 billion worth of "swaps." A Morningstar article from April explains more about Oppenheimer's use of these instruments:

At the end of March 2008, the Core portfolio carried around $400 million in securities exceeding its then $2.2 billion in net assets via transactions that were effectively akin to margin borrowing. It also had roughly $800 million in long exposure to corporate credit via default swaps -- including American International Group AIG, Lehman Brothers, Wachovia WB, Washington Mutual, and Bear Stearns. It had around $600 million in total return swap exposure to a volatile slice of Barclays' AAA rated CMBS index. By normal reporting convention, all of these positions were not included on the fund's balance sheet and, thus, not in its net assets.

By the end of September, when the market sailed off into uncharted territory, Core Bond's credit exposure to those markets totaled more than 180% of net assets on a dollar basis. In other words, for every dollar of shareholder capital in the fund, it was exposed to the credit-driven movement of more than $1.80 worth of securities.

The message here isn't that derivatives are bad, though they can be dangerous if not well understood. Rather, it is that investors had little way of knowing that the funds were piling high extra layers of market exposure. Because most of this additional market exposure came from off-balance-sheet derivatives, the funds' portfolios didn't look highly leveraged. In a conventional accounting sense of leverage -- borrowing money against net assets and investing it -- they might have looked slightly leveraged. But in a economic sense, and as a mutual funds go, they were heavily leveraged.

In a sense, Justin Oberman is caught in a huge political dilemma. If he exploits this tactical advantage, then it appears that he either does not understand Big Finance or he's lying. Oberman claims that if he's the state Treasurer, "My office will conduct thorough research into every state investment that we make to insure minimum risk and maximum return." But Oberman's comments -- and the ad he's airing at the moment -- proves just the opposite. He didn't conduct thorough research into the Bright Start issue, and he refused to meet with the state Treasurer, who would have been happy to explain it to him.

Why would we trust him to do that if he can't do it now?

Oberman claims the reformer mantle that his father held. But then he goes on TV with a politically potent, but clearly false, accusation against a real reformer, a real progressive that has been building up impressive credentials ever since Justin Oberman was born.

I don't know about you, but I'm kind of tired of the Daley brand of political slugfest (even if I appear good at it). Robin Kelly doesn't deserve this kind of treatment, and, quite frankly, Justin Oberman ought to be ashamed of himself. These kinds of fabrications on the part of politicians are more typical of machine pols than reformers. Oberman damages the reformer brand with this kind of stunt. It's just disgusting...



Alan Cottrell has provided professional services to the Kelly campaign in the past, but is not currently connected professionally to the campaign...