Saturday, June 11, 2005


MDL borrowed $7 billion?!?!?! More heads to roll

Today's news seems to provide further evidence to support our theory that in the Mark Lay/Terry Gasper (MDL and BWC CFO, respectively) investment scheme, the only way to account for the size of the loss they incurred with their hedge ($215 million) was if they created a "pyramid" of short bond positions.

In yesterday's post, we offered the following scenario:
As reported in the Dispatch and elsewhere, in a Friday newser, AG Jim Petro revealed more about the borrowing:
But in 2003, former bureau Chief Financial Officer Terrence Gasper signed what the bureau has called an unauthorized contract at MDL's request to engage in riskier borrowing and bond-selling as a "hedge" against rising interest rates.

Petro said the MDL Active Duration Fund far exceeded its borrowing limit — which the bureau's financial consultant has said accounted for 85 percent of the losses — then "lied about it to the bureau."
But we think the Dispatch and others buried the lede, because you have to get half way through the story to get to the revelation that:
James McLean, the bureau’s chief investment officer, has said MDL was authorized to borrow up to $150 million but actually borrowed between $3.5 billion and $7 billion before the investment was ended last fall.
Holy shit! $3.5 billion to $7 billion??? How is the possible?

That fact that some two-bit (in the world of finance) fund manager could expose the State of Ohio to a multi-billion dollar liability for a loan is unfathomable and probably illegal. With this turn of events, the resignation of Conrad and the handful of others is going to turn into a parade of pols and political hacks that should (and will) be forced out of office and likely put behind bars.

The admission that they borrowed at least $3.5 billion suggests that they may have 10 or more layers to their pyramid.

Questions for reporters:
Could BWC have known of the scope of the losses and done anything to lessen them as MDL's investment scheme started to blow up? Could this kind of economic catastrophe happen at the state's other funds, such as one of the five public worker pension funds? The answer is yes, yes, and yes, but we will leave the details of the explanation for tomorrow.

For eager beavers - try googling "Value At Risk."


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