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Permanent fund managers ponder wild week

Trustees, experts talk strategy at annual meeting in Juneau

Posted: Tuesday, September 23, 2008

The Alaska Permanent Fund made nearly $1 billion in Friday's big stock market bailout, said Mike Burns, the fund's executive director.

Brian Wallace / Juneau Empire
Brian Wallace / Juneau Empire

That came close to making up the losses earlier in the week, as financial markets underwent one of their wildest weeks ever, he said.

The Alaska Permanent Fund Corp.'s Board of Trustees began their 2008 annual meeting in Juneau on Monday, getting reports from the corporation's staff, money managers and outside experts.

That included a Monday panel discussion on the effects of sub-prime mortgage issues. The current market turmoil began last year as those loans began going bad, and Americans discovered how many of those loans were held by their mutual funds, pension funds, banks and other institutions.

Last winter, fund adviser Michael O'Leary of Callan Associates told the trustees that the difficulties in the market then were the wildest he'd seen in his many years following markets.

Now, he said, that "pales in comparison" to what happened last week.

At the start of last week, Lehman Brothers Holdings filed for bankruptcy, shaking the foundations of the stock market.

Soon thereafter, the big brokerage Merrill Lynch agreed to be bought out to stave off collapse, while the world's largest insurance company, American International Group, won an $85 billion government bailout.

Over the weekend, Goldman Sachs and Morgan Stanley, the two largest independent investment banks ran into their own problems. Both companies said they were going to convert to bank holding companies, indicating they were willing to accept bank regulation in exchange for access to federal borrowing.

"The pace of change is amazing to watch unfold," O'Leary said.

As crisis followed crisis during the week, fund staff tried to track its effect on the permanent fund.

"Last week was exhausting," said Jim Parise, bond manager for the fund.

During the week, Parise's team tried to find bonds to buy that were being sold at less than they were worth. At the same time, they were trying to figure out how much their own investments, such as in Lehman or AIG bonds, were worth.

Monday in Juneau, Goldman Sachs' Rachel Golder said Wall Street was certain to see new regulations aimed at stemming the type of risk taking that led to the current crisis.

"We're in a real regulatory cycle," she said.

Parise asked the panel about comments from Sen. Jim Bunning, R-Kentucky, that the U.S. Treasury Department action would "institute socialism" in the United States.

"The free market for all intents and purposes is dead in America," Bunning said in a statement after the bailout.

The permanent fund's panel disputed that.

"It's not socialism. It's the federal government doing their job to stabilize the system," said Elizabeth O'Connor of Capital Strategy Research.

"The goal of government is to protect innocent people," said John Phillips of AllianceBernstein Investments.

The bailouts will help the market overall, but many of those responsible for the problems are being punished, he said.

"It's pretty clear that shareholders have been punished, as well as management."

Fund adviser O'Leary supported the federal government's intervention efforts as well.

"In my opinion, they will be beneficial in the extent that they can restore calm," he said.

Because of uncertainty in markets, even good companies are having difficulty borrowing at reasonable rates, which could wind up hurting the real economy, not just the financial world, he said.

"If a business can't borrow money at a reasonable rate it is going to contract," O'Leary said.

While the stress on the stock markets and those in it was tremendous, Bill Mahar of LaSalle Investment Management said it could have been worse.

His company manages hundreds of millions of dollars in real estate holdings for the permanent fund, but he said those were mostly commercial real estate investments, and the residential real estate bubble burst before it began distorting the commercial market.

In the 1980s, a huge commercial real estate bubble resulted in the construction of more office space than the country needed and glutted the market for a decade.

"The good news is this whole process stopped bubble pricing from going further, which would have set the stage for five to 10 years of problems," he said. "This time we'll have one or two years of repricing."

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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