Idaho Treasurer Crane responds to state auditors: 'Hindsight is 20/20'

January 31, 2014 

State Treasurer Ron Crane responded Friday to a report from legislative auditors, who said Crane's office should strengthen measures designed to keep Idaho from losing money.

Auditors said the office made inappropriate transfers that cost taxpayers at least $10.2 million, though the hit to state funds could grow.

Here is Crane's response in full:

It is disappointing to me that the LSO auditor has decided to raise questions about transactions that occurred in 2008 and 2009 and then second guess our decisions by using "hindsight" which is always 20/20. It appears the auditor is using this platform for political purposes.

There are two categories to the finding submitted by the LSO Audit Division concerning my office. Both are related to assets we managed five and six years ago in the portfolios we oversee.

The first category addresses the moving of some securities from one portfolio to another at the suggestion of the S&P rating agency and with the encouragement of our securities lending agent. While we are of the opinion we did the right thing at the time, better accounting practices could have been employed by conducting an actual buy and sell transaction. Better oversight systems are now in place to prevent this from happening again and have been for some time.

The other aspect to this finding suggests that the Local Government Investment Pool benefited at the expense of the state’s Idle pool from the transfer of these assets. However, this occurred in 2008 and 2009, when we had every expectation that the securities in question would perform normally. At that time, we had no reason to believe there would be any losses in either portfolio, in fact, our research indicated otherwise.

During FY 2013, the State Treasurer’s Office determined that it was an opportune time to sell certain distressed mortgage backed securities out of the Securities Lending collateral portfolio, given that liquidity and demand had returned to the Alt-A mortgage backed security market. The market values on the Alt-A pools had improved to levels more representative of the underlying home loans in the pools, taking into account future losses that will eventually have to be recognized. With interest rates at historic lows and bond prices near all-time highs from the unprecedented stimulus from the Federal Reserve Board of Governors, the Treasurer’s Office was able to 'harvest' gains from investments in the IDLE pool to offset the recognized losses to reduce any future fiscal strain on the State of Idaho general fund.

The STO realized $10,100,464.99 in losses at the time of sale in FY2013; during the same time period the STO realized $10,222,586.41 in gains on the sale of assets which led to a net realized gain of $122,121.42.

There are currently $14,022,378.11 in unrealized losses present in the securities lending collateral portfolio, which has come down from $17,473,507.18 since the June 30th report cited by audit staff. The STO will continue to monitor the performance of the remaining two distressed assets and manage them accordingly.

Due to the unprecedented economic crises experienced 2007-2011, there have been numerous and considerable losses realized by investment portfolios nationwide. Investing has inherent risks and the placement of a committee or board members will not eliminate those risks. In fact, other agencies in Idaho have had similar experiences with distressed assets in securities lending portfolios while being governed by a board.

While it is convenient to use hindsight when evaluating investment decisions, the STO remains steadfast in our dedication to manage our portfolios in a manner consistent with our fiduciary duties. The STO manages each situation to the best of our ability based on information available to us at the time.

While there is a measure of truth to portions of the finding and to which we agree, there are also outright falsehoods and subtle implications of impropriety that simply don’t “hold water” and to which we vigorously object.

I re-emphasize that the portfolios we manage experienced more gains than losses, allowing us to mitigate the losses from non-performing assets.

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