Allfirst spawns reform bill

Delegate would limit currency trades by Md. pension board

Bank's huge loss is motive

February 21, 2002|By Michael Dresser | Michael Dresser,SUN STAFF

Del. Elizabeth Bobo wonders why the state employees' pension fund is putting money into the same type of foreign currency investments that brought enormous losses to Allfirst Financial Inc.

Prompted by the $691 million loss at the Baltimore bank, the Howard County lawmaker has introduced legislation that would forbid the pension board to make such investments.

Peter Vaughn, executive director of the pension system, estimated that about 1 percent to 2 percent of the $28 billion fund's assets are tied up in currency hedging investments.

Bobo said she does not want to create alarm among the pension fund's members and beneficiaries, but the Democratic delegate called for a public debate on whether such strategies are appropriate for the retirement system.

"I always thought that pension funds followed a conservative investment policy," she said. "Maybe I was wrong."

Bobo's call for a public airing of the practice has received the support of House Speaker Casper R. Taylor Jr.

"It's a good cautionary exercise," Taylor said. "Maybe we're going to find out that it should become law."

Passage of the law would be a departure from the Assembly's usual practice of leaving investment policy to the pension board. But Bobo said the Allfirst losses revived her concerns about foreign currency investments.

Earlier this month, Allfirst and its Irish parent company disclosed that it had suffered a heavy loss - revised yesterday to $691 million - as a result of losing trades by currency trader John M. Rusnak. The bank alleges that the 37-year-old Mount Washington man concealed his losses using phony paperwork.

The staggering loss has reverberated on both sides of the Atlantic, prompting Allied Irish Banks PLC to take over its troubled subsidiary's treasury unit and putting the jobs of several high-level Baltimore executives at risk. The trading losses are being investigated by Allied Irish, the FBI, the U.S. attorney and federal and state regulators.

Bobo's concerns about investments in foreign currency contracts dates back as far as 1997, when she wrote to pension fund director Vaughn questioning the practice.

Vaughn then replied with a defense of the system's investment strategy, saying the board allows its international managers to hedge against exposure to currency fluctuations.

The pension fund's 2001 annual report shows that the system bought and sold hundreds of millions of dollars in forward contracts - essentially a bet on the direction of the market -in euros, yen, U.S. and Canadian dollars and other currency. Such contracts make up only a small part of the system's portfolio, but they are enough to worry Bobo.

The legislation she has proposed would prohibit the system from investments in either foreign currency or any forward contracts, options or futures tied to the currency market.

Vaughn said the pension board has not taken a position on the legislation, which he had not seen as of yesterday. He said the board generally opposes legislative efforts to restrict its investment choices, however.

He said the trustees operate under what is known as the "prudent person" rule, which requires, among other things, that they diversify the system's assets.

"Under the prudent person rule, you should be able to invest with as few restrictions as possible," he said.

Vaughn said the system holds about $5 billion in international stock, much of it invested through money managers. He said some of its international equity managers employ hedging strategies, while others do not.

"There's a body of opinion that says hedging can add value over time," he said. "Then there are those who say that over time it's a zero-sum game."

Vaughn said the system does not make direct investments in foreign currency, though the board has discussed the idea as recently as last fall. He said all of the fund's international stock managers have been meeting the benchmarks set by the pension board to judge their performance.

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