Families enrolled in the Bright Start college savings plan can breath a partial sigh of relief today. Following recent settlements in two other states, Attorney General Lisa Madigan and State Treasurer Alexi Giannoulias have finally reached a deal to recoup $77.25 million ...
Families enrolled in the Bright Start college savings plan can breath a partial sigh of relief today. Following recent settlements in two other states, Attorney General Lisa Madigan and State Treasurer Alexi Giannoulias have finally reached a deal to recoup $77.25 million from Oppenheimer Funds, the investment firm that exposed the Illinois' college savings program to a risky and poorly-managed mutual fund last year, resulting in a 38 percent drop in value. (You can read the full backstory here.)
Families can expect to receive their refunds sometime next spring, either as a deposit in their existing Bright Start account or in the form of a direct payment. In a statement, Madigan said that the settlement will protect families from the uncertainty of "lengthy and expensive litigation." Giannoulias, who has been dogged on the campaign trail with allegations that he fell asleep at the wheel overseeing Bright Start, expressed relief at the outcome, as the Sun-Times' Terry Savage reported:
"This landmark settlement holds Oppenheimer accountable for its actions," he said, "and provides a positive resolution for families who cannot wait to pay for college costs."
Both Savage and Crain's Greg Hinz are reporting that between January 2008 and January 25, 2009 -- the length of the original suit -- the state's lost $150 million in Core Bond fund, which is significantly higher than the $85 million previously reported. Early this morning, we asked the treasurer's office for clarification on the new numbers and have yet to hear back. (See update below.)
In detailing this story, most reporters -- along with the political opponents of Giannoulias -- have criticized the treasurer for failing to recognize that the fund's managers had invested heavily in risky mortgage-backed securities and derivatives. In a statement this morning, U.S. Senate candidate David Hoffman said that Giannoulias "knew these funds were invested in toxic, mortgage-backed securities, and had an obligation to police a fund he marketed to families as a safe savings plan and 'as one of the most conservative in the Bright Start family.' "
Lost in the coverage, however, was the centrality of leverage in the Bright Start controversy. Shortly after the fund tanked, a Morningstar analyst called it the "chief culprit" in the fund's poor performance and acknowledged that Oppenhemier made no disclosures in any legal documents about the degree of leverage they were employing. That's why it was good to see Madigan stress this point in her release:
Oppenheimer had marketed Core Plus as a conservative investment vehicle appropriate for beneficiaries who were at or near college age. Core Plus, however, contained risky investments and was highly leveraged by its Oppenheimer management team, which, in turn, resulted in excessive losses. The management team is no longer with Oppenheimer.
Giannoulias probably waited about two months too long before he stopped the flow of new money into the fund. But if the Oppenheimer management team was obscuring their risky investment strategy, it seems unreasonable to place all the blame on the treasurer's shoulders.
Since the negotiations began with Oppenheimer, Giannoulias has refused to tell his side of the story for fear of complicating the legal process. We look forward to hearing more details in the weeks to come. And it's great news that the hard-working families will get chunks of their money back.
UPDATE (2:45 p.m.): Here is an explanation (received via email) from the treasurer's office regarding the new $150 million figure:
The $85 million ... refers to the losses from April 1 thru Dec. 31. In negotiation discussions with the Attorney General’s office we decided to expand the class of investors in Core Plus to protect more accountholders. We included investors from 1/1/08 to 1/25/09. The losses during this period came to $150 million.
The Tribune has more on this particular angle.
UPDATE II (3:00 p.m.): The Hoffman statement cited above also includes this line:
While I again applaud Lisa Madigan for her efforts, it remains appalling that families across Illinois have lost half the money they entrusted to Mr. Giannoulias.
"Half the money"? The Giannoulias campaign responds to that assertion in a statement of their own:
David Hoffman is again engaging in false attacks. The fund in question, one of 21 funds that are part of a Bright Start College Savings Program which was ranked among the top 529 programs in the country this year by Consumer Reports and Money Magazine, lost less than 17 percent after the settlement is applied. The Chicago Tribune caught the Hoffman campaign making a false attack before, for which Hoffman was forced to admit and apologize. Now it looks like they owe Bright Start families an apology for trying to scare them with false claims of 50 percent losses.
UPDATE III (3:45 p.m.): Looks like this is going to become a campaign issue in the treasurer's race, where Justin Oberman is running againts Giannoulias chief of staff Robin Kelly. From an Oberman press release put out this afternoon:
“The State Treasurer and his Chief of Staff have shown a cavalier attitude toward their stewardship of the Bright Start funds. They did not perform the basic due diligence to safeguard the investments and they are now bragging about the recovery of only half the original loss. When I am Treasurer, the office will not operate this way. My office will conduct thorough research into every state investment that we make to insure minimum risk and maximum return,” said Oberman. “We will make sure that investments are made in appropriate funds and are managed carefully. I will be watching out for taxpayers, not gambling away their children’s futures."
Full Disclosure: The SEIU Illinois State Council, which sponsors this website, has endorsed Alexi Giannoulias in the Democratic primary for U.S. Senate.