June 28, 2005
On the Ohio breadline
The Ohio Bureau of Workers’ Compensation—famous for its Coingate “investment” in non-existent rare coins, vintage comic books and Beanies—apparently holds almost $1 billion in, uh, “non-traditional assets.” The Toledo Blade reports:
Risky investments by the Ohio Bureau of Workers’ Compensation didn’t end with rare coins and a Bermuda hedge fund. Add bagels to the list.
Bureau officials have more than $346 million in venture capital funds, which typically provide start-up financing or loans to firms that have had trouble borrowing from conventional sources. The list of firms in which the bureau has an interest includes the Colorado parent of the Einstein Brothers bagel chain, which is struggling to emerge from years of red ink.
The venture capital funds are among $951 million in nontraditional investments that the bureau holds, according to a June 7 report. Representing 7 percent of a $14.3 billion portfolio, they include the rare coins that have made the bureau the object of nationwide ridicule and sparked investigations into missing coins and political cronyism.
This is an astonishingly risky investment strategy for a state-funded insurer whose assets are supposed to produce a predictable return to meet the medical and living expenses of injured workers. Moreover, the percentage of its portfolio invested in non-traditional assets is about double that of most insurers:
“What the state fund in Ohio has done is highly unusual and would be viewed as far out of the norm for a private insurer,” said Robert Hartwig, chief economist for the Insurance Information Institute, a trade group representing the nation’s $400-billion-a-year insurance industry. Little, if any, of the portfolios of private insurers are in hedge funds and venture capital funds, he added.
Unsurprising, then, that the bureau has so far lost about 15% of its $951 million, particularly as in some cases it didn’t even know what it was investing in. According to the Blade, the bureau’s $550m investment in two funds managed by American Express Asset Management were misclassified as private equity funds, when in reality they were hedge funds. Nor did the bureau seem sure about how those investments were doing: in recent weeks the agency has said that one of the hedge funds was both losing $8.5 million and gaining $3.2 million.
In theory, the Democrats should be able to turn this Republican debacle into gubernatorial gold in 2006. The approval rating of outgoing governor Bob Taft has already slumped below 20%, and numerous Ohio Republicans have been touched by the scandal—most of them via the fundraising largesse of Tom Noe, the coin-dealer now under investigation both for Coingate and for laundering contributions to President Bush’s election campaign.
Some observers think the Dems have been here before:
Pete Giangreco, a Democratic political consultant who’s worked in both Illinois and Ohio, says there’s good precedent: In 2002 Illinois Dems swept to power, capturing the governor’s mansion for the first time in twenty-six years in the wake of a licenses-for-bribes scandal swirling around then-Governor George Ryan. “I was in Columbus yesterday and was talking about how similar Ohio in ’06 is to Illinois in ’02. It’s déjà vu all over again,” Giangreco says. “Two things did it in Illinois, and it looks like the same dynamic: Pretty serious economic problems brought on by a GOP administration and a huge scandal and corruption in completely Republican-dominated state government.”
In other words, this is one for liberals to lose.
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