Dennis Leone speaks out re: STRS stock market losses

From Dennis Leone, October 16, 2008
Subject: Total STRS Assets

For the record, the market value assets at STRS peaked on October 31, 2007 at $80 billion. As of yesterday, October 15, 2008, we stood at $55 billion. This drop occurred over just 12 months and represents 31.25% of the total assets at STRS. Before lunch at STRS today, I did my best to emphasize three points:

1. I continue to believe that STRS needs to develop a mechanism with our passive stock portfolio that will permit a deviation from our investment philosophy in the event of abnormal external factors (like fraud) that suddenly drives a particular stock south significantly. We bought 92,000 shares of Fannie Mae stock on 6-27-08 after the stock dropped from $70 per share to $20 per share. A few weeks later, it dropped to $1.00 per share. Our total losses at Fannie/Freddie were about $160 million, which I feel could have been avoided. Our passive stock portfolio philosophy triggered the purchase of the stock when it dropped in value.

2. I want STRS to be more aggressive telling companies that we send millions to – through the purchase of their stock -- (like Fannie Mae, AIG, Merrill Lynch, etc.) that it is unacceptable to STRS when they waste millions on pleasure retreats in California, hunting trips to Texas, $23 million base salaries for their CEOs, and $15 million severance cash for departing executives. When they do these stupid things, public confidence in them is adversely affected, and this translates to a drop in value in the stocks we purchased. In other words, we lose money due to their entitlement insanity.

3. I do not agree with the fact that the board voted in March of 2008 (I voted no) – four months before the end of the fiscal year – to approve a bonus compensation package for the STRS investment staff for fiscal year 2009. The total assets at STRS dropped an additional $2 billion between February 28, 2008 and June 30, 2008, yet the board went ahead and approved new bonuses in March without having this information (because it hadn’t happened yet). It is not right in my eyes for the board to vote on such a thing until we know where our assets stand at the end of the fiscal year – or near the end of the fiscal year……perhaps mid-June.

Dennis Leone