Ohio State Teachers Retirement System had massive investment in failed bank
Already under fire for high pay despite big investment losses, the pension system for Ohio’s retired teachers lost between $27 million and $40 million when Silicon Valley Bank failed last weekend. That appears to be by far the biggest investment by a public pension system in the United States.
The losses follow a nearly $10 million loss last year when cryptocurrency platform FTX failed, according to the Ohio Retired Teachers Association, a group that represents pension system members.
The exact losses aren’t immediately known because Anthony Randazzo, executive director of pension watchdog Equable, said they were $39.3 million in a tweet. But pension system spokesman Dan Minnich said in an email, “As of last Wednesday, STRS Ohio held shares of Silicon Valley Bank (SVB) worth $27.2 million.”
That was the stock value just before the collapse — and presumably much less than when the system purchased 171,000 shares in the bank. As of the close of business Wednesday, Minnich hadn’t answered what the system’s total losses were on its SVB investment.
Also losing money was the Ohio School Employees Retirement System, which had $7 million invested with the bank, according to Randazzo.
In response to the State Teachers Retirement System losses, the Retired Teachers Association continued its criticism of the management of the $90 billion pension system.
“STRS has lost nearly $40 million of teachers’ hard-earned dollars after Silicon Valley Bank imploded overnight,” Executive Director Robin Rayfield said in a statement.
He added, “Not only is STRS gambling away our hard-earned dollars through active investment management, but they’ve proven to be horrible gamblers. STRS also lost nearly $10 million when its investment in bankrupt cryptocurrency platform FTX cratered after its collapse in December 2022.”
In the case of Silicon Valley Bank, STRS investors had reason to suspect there was elevated risk.
CEO Greg Becker lobbied hard to exempt banks of Silicon Valley’s size from rules under the Dodd-Frank law intended to ensure that banks wouldn’t suddenly fail and create a panic. President Donald Trump signed such an exemption into law in 2018.
Silicon Valley Bank, or SVB, appears to have taken on much more risk as a consequence. While it had $45 billion in assets in 2016, that amount swelled to $200 billion by 2021, the New York Times reported Tuesday on its podcast, The Daily.
In what’s now regarded as poor risk management, SVB invested heavily in long-term bonds — essentially making a bet that interest rates would stay low well into the future. But factors such as the pandemic and the Russian invasion of Ukraine helped goose inflation and by last Wednesday SVB was so desperate that it suddenly sold off $21 billion in long-term bonds. That spooked depositors, who started lining up to pull their money out.
The regulations that Becker fought to get out of would have required “stress tests” that might of warned of the coming storm and a “living will” that would have planned to unwind the bank in an orderly fashion if the results of those tests turned bad.
Becker and other SVB executives are under fire for selling off $84 million in the bank’s stock over the past two years in the midst of the greater risk-taking. And, while he claimed a failure of banks his size wouldn’t cause a panic, federal authorities official declared there was a risk of a panic and announced they would guarantee deposits above the $250,000 maximum-insured level to prevent one.
Despite the measure, global markets were still jittery in the wake of the collapses of SVB and Signature Bank, in which STRS said it was not invested. The New York Times reported that stocks were down around the world and especially hard hit were the American regional banks like SVB for which Trump relaxed regulations.
If the figures posted by Radazzo, the pension watchdog, are correct, STRS’s was by far the biggest loss of any public pension system — almost 32% greater than the next highest, the California Public Employees Retirement Fund.
There are at least 26 public pension funds (managing money for ~80 pension plans) who directly held stock in SVB Financial Group (#SIVB), the parent of Silicon Valley Bank.
A short 🧵👇🤦🏻♂️ pic.twitter.com/677bw7mUBv
— Anthony Randazzo (@anthonyrandazzo) March 13, 2023
The most recent investment losses come to a retirement system that’s been under fire for lavish pay for what many retirees believe is sub-par performance.
At least 200 of the retirement system’s 500 employees make more than $100,000 a year. And, with bonuses, in the 2021-2022 fiscal year 33 of the system’s employees made more than $300,000. Nine made more than $500,000.
Those employees have invested heavily in high-fee, “alternative” investments that have underperformed the system’s traditional investments. Over the past decade, traditional investments provided a 14.8% return, while the system’s alternative investments have provided 11.84% once fees are subtracted, an STRS spokesman said last year.
Meanwhile, retirees last year got just a 3% cost-of-living increase — their first since 2017. An STRS spokesman has explained that the freeze was due to new rules set down by the legislature in 2012.
Retirees also were infuriated with the way the STRS board handled staff bonuses last year. In August, it awarded $10 million in bonuses even though it estimated that it would lose $3 billion in an environment that was brutal for investors.
Two months later, the actual numbers for alternative investments came in and losses were 77% higher than original estimates — $5.3 billion.
Questions about the management of the pension fund have grown loud enough that last month, Director Bill Neville couldn’t get a majority of the board to cast a vote expressing confidence in him. Instead, it deadlocked 5-5.
News of the latest losses has intensified criticism of Neville’s management.
“STRS fund mismanagement has resulted in years of no cost-of-living increases for Ohio retired teachers and current teachers are being forced to pay more and work longer for less benefits,” the Ohio Retired Teachers Association said in its statement. “Retired teachers were furious after STRS staff were awarded a record-breaking $10 million in performance bonuses last year despite losing $5.3 billion.”
For its part, STRS praised federal regulators for taking steps to protect depositors — even though those steps don’t affect the system’s investment losses.
“The collective actions taken by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation to insure and backstop deposits have helped to mitigate the situation facing the banking industry,” Minnich said. “STRS Ohio continues to monitor and assess the impact of these developments.”
This story was republished from the Ohio Capital Journal under a Creative Commons license.
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