Early Steps By Caprio To Protect RI Pension Fund Are Paying Off As Subprime Crisis Starts To Hit Investment Funds In Other States
Treasurer moved $1 billion fund of asset backed securities to safe Treasury bonds last March, avoiding significant subprime losses hitting Florida, Montana, other states
PROVIDENCE, RI – December 4, 2007 – Months before the subprime mortgage crisis began to take a toll on banks, financial services companies and even public pension funds, General Treasurer Frank Caprio began taking steps to reduce risk in Rhode Island’s pension portfolio by minimizing exposure to asset backed securities. From his first days in office, Caprio and his investment management team launched a comprehensive assessment of the state pension portfolio and the state’s short-term investments with a specific focus on their exposure to collateralized debt obligations (CDOs), structured investment vehicles (SIVs), and other asset-backed securities.
As part of that effort, Caprio pro-actively moved $1 billion from so-called Quality D money market funds (with loose terms which could have allowed for investment in CDOs and SIVs) into Quality A institutional money market funds which are only invested in government back bonds last March, well before the scope of subprime losses began to rock financial markets. At the same time, Caprio moved approximately $150 million in high-yield investments into safe Treasury bonds, before the high yield market began to decline. Those moves are already paying major dividends as several states are facing financial crises related to defaults and downgrades on subprime-related investments.
In Florida, a state-run investment pool saw what officials are likening to “a run on the bank” last month, as participating communities and school districts withdrew nearly $8 billion in response to revelations that the fund had as much as $900 million of defaulted subprime debt. After state officials voted to freeze withdrawals last week, a number of Florida school districts were facing concerns about not being able to make payroll. And Bloomberg News reported Tuesday that the Florida pension fund owns more than $1 billion of that same defaulted and downgraded subprime debt.
In Montana, the state saw some $247 million in withdrawals from their $2.5 billion Short Term Investment Pool after concerns were raised about the pool’s subprime-related investments being downgraded. And Bloomberg News reported on Monday that Connecticut’s Short-Term Investment Fund is “holding $300 million in debt issued by SIVs that may be downgraded by Moody’s” in addition to $100 million in previously defaulted SIVs.
“As a candidate for General Treasurer, I talked about the importance of making the activities of the office transparent and part of that philosophy extends to getting the same transparency from the money managers we partner with,” said Caprio. “We continue to ask detailed questions to fully understand the risk associated with all components of our investment vehicles. As is evident now, many pension funds and government entities did not comprehend the risks.”
Since the initial review, Caprio and his team have turned their attention to the fund’s money market investments, working to move out of any vehicles with questionable holdings and transferring those funds to US Treasury-backed portfolios. Caprio said that his pro-active approach to assessing and managing risk has helped ensure that the public funds managed by his office avoid the investment losses now plaguing other states.
“Very early on, we started asking the institutions we work with specific questions and received detailed written information in response because we had research which indicated the risks were growing in the high yield arena,” said Caprio. “I am committed to maintaining our focus and doing the extra work necessary to get the best possible return for the taxpayers of Rhode Island.”
