Institutional Investor's Alpha Magazine - March 2008 - (Page 5) Longs Big Sky Blues D ave Lewis isn’t happy with how the Big Sky State is running its investments. The state senator is peeved in particular by the Montana Board of Investments’ decision in 2007 to sink hundreds of millions of dollars into structured investment vehicles, two of which have gone south because of the credit crisis. “I want to know who looked at this and said, ‘This is a great idea — let’s buy it,’” says Lewis, who also happens to be a former executive director of the investment board. “We’re talking professionals, here. Don’t tell me you put $500 million into this stuff just relying on a triple-A rating.” The lenders could eventually be made whole when the SIVs are unwound, but Lewis is among those who remain doubtful. Other states, such as Connecticut, Florida and Maine, also invested in SIVs that later went bad. The Montana board put $470 million of its $12 billion in assets in a series of triple-A-rated SIVs, a couple of which were eventually downgraded to D, for “default.” In October, Standard & Poor’s began a series of downgrades on one of the SIVs, Axon Financial, run by New York–based TPG-Axon Capital (one of many hedge fund fi rms tied to the SIV debacle). A second SIV in the Montana portfolio, Orion Finance, was downgraded soon thereafter. Both went into liquidation in November. All told, Montana had $135 million in the two SIVs. By definition, SIVs issue short-term commercial paper or medium-term notes and use the cash to buy higheryielding assets like bank debt and securities backed by U.S. mortgages. Montana’s SIV money came from a short-term investment pool that included cash from county and municipal governments and school districts, though the state must ultimately foot the bill for the losses. Max Lenington, the Yellowstone County treasurer who in November withdrew $72 million from the state investment pool, doesn’t blame the investment board. “They were just trying to get good returns,” he says. Carroll South, who was named executive director of the state investment board in 1992 after Lewis left to become state budget director, lays most of the blame at the doorsteps of rating agencies like S&P and Moody’s Investors Service for being “somewhat asleep at the switch.” But South concedes that the state faltered as well. “We should have kicked the tires more,” he says. Few specific reforms have been put forward in Montana, but Lewis suggests that some are on the horizon: “The legislature is going to want to take a long, hard look Illustration by Joshua Gorchov for Alpha & Shorts Montana State Senator Dave Lewis: Taxpayers are left holding the bag. at how this money is being managed,” he says, though he notes that it does not reconvene until 2009. — Imogen Rose-Smith Gray Lady Down I n their proxy battle with the New York Times Co., activist managers at hedge funds Firebrand Partners and Harbinger Capital Partners have promoted themselves as diplomats. “What they’re trying to do is say, ‘Look, there’s nothMARCH 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 5
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