Wednesday, June 15, 2005

 

MDL memorandum confirms investment scheme

One of the questions that hasn't been fully addressed in the MDL/BWC scandal is exactly how MDL lost $225 million of the bureau's money.

Virtually alone (as compared to the Ohio newspapers and internet sources), we started in a June 10 post to layout what we strongly believed to be the mechanism and fundamental problems associated with this idiotic affair.

This much is apparently confirmed by everybody: MDL shifted its money from "long" investments in bonds to short selling of bonds based, gambling on Mark Lay's mistaken belief that long-term interest rates would rise.

But what we asserted - and what we believe is now substantiated by previously confidential documents - is that MDL created a startling complex, risky and exotic "short selling" scheme. In particular, we asserted that:
Unknown to us, at the same time we were writing our first post, AG Jim Petro confirmed one part of our theory when he revealed that MDL indeed had leverage the fund - to the tune
$3.5 billion - $7 billion!

We believe our theory has now been fully confirmed with the AG's release of the "Confidential Private Placement Memorandum" (.pdf document) from MDL that prospectively - and precisely - lays out Mark Lays plan exactly as we had tentatively sketched out.

A few highlights:
In addition, an Aug. 11, 2004 letter from MDL to BWC indicates that the Private Placement Memorandum must be amended to account for a surge in borrowing:
With respect to US Treasury Securities leveraging has been and will continue to be significantly higher than 150% [the limit in the original PPM - ed.]
The amendments added to the PPM nearly two pages of discussions and warnings about expanding the leverage of the fund.

So, there you have it folks. There's the confirmation we were looking for. Despite BWC and MDL having not experience in this type of investment structure, hand-in-hand they skip off with dreams of glory only to find that the whole thing blew up in their faces.

Many details need to be filled in and questions answered.
We expect much more to come out over the next few weeks.

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