Permanent fund continues lending out stocks, bonds

The risk for Alaska portfolio is negligible, fund director says

Posted: Wednesday, September 24, 2008

The Alaska Permanent Fund will continue to lend out its stocks and bonds for a profit, despite a potential decline in the program caused by ongoing market turmoil.

Permanent fund staff say their securities lending program is structured differently than similar programs. Other entities have ended the practice, citing potential risks.

As recently as 2006, the $35 billion fund would lend out as much as $7 billion of its securities, though as of June 30 of this year only $2.2 billion was being lent out.

The fund's custodian, Bank of New York-Mellon, splits a tiny fee on the lending with the fund. Last year, Alaska made about $18 million by lending out securities from its portfolio.

Mike Burns, executive director of the Alaska Permanent Fund Corp., said the risk to Alaska from such lending is negligible. Those borrowing from Alaska have to put up collateral worth more than what's being borrowed.

At the same time, Bank of New York-Mellon guarantees that Alaska will be made whole if something goes wrong in the transaction, Burns said.

"We have an absolutely unique relationship where we're completely indemnified by the bank," he said.

Other parties want to use securities owned by Alaska for activities such as short selling, an increasingly controversial practice that has been blamed for driving down stock prices recently.

Short selling is a practice where an investor who thinks a stock or bond will decline in value borrows a stock and sells it, hoping to buy it back later at a lower price to return.

New federal regulations limiting some short sales might also limit the profitability of that business, said Bill Claxton, vice-president with the bank's asset servicing operation.

Claxton visited Juneau this week for the annual meeting of the corporation's board of trustees, which heard a report on securities lending.

While Claxton said the bank doesn't know how much of the securities lending it facilitates is for short selling, the new restrictions may well hurt it.

"It may throttle it back some, but I don't see it crippling that business," he said.

The Alaska Retirement Management Board earlier this year decided to suspend securities lending from its $14 billion pension accounts.

Department of Revenue Chief Investment Officer Gary Bader told the ARM Board in February that "while it looks like free money, there is an outside chance that there could be a significant loss in the securities lending program."

The ARM Board voted unanimously to accept the recommendation of the investment staff and suspend the program.

Burns said he was unfamiliar with the ARM Board's action, but that the permanent fund's program is structured so that any risk is very low.

In addition to the collateral the bank holds when the securities are lent out, the bank itself guarantees there will be no loss, Burns said.

"We feel very good about it," he said.

The permanent fund shares an advisor with the ARM Board, Michael O'Leary of Callan Associates. O'Leary was involved when the ARM Board made its decision, but said the permanent fund appeared to be well protected.

In other business, the board re-elected Steve Frank of Fairbanks and Bill Moran of Ketchikan as chairman and vice chairman for another year.

• Contact reporter Pat Forgey at 523-2250 or e-mail

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