Wading through the red tape: reporting on the Illinois TRS

Credit default swaps TRS is selling.
“Pension Roulette,” an investigation by Medill Reports’ Alexandra Harris, uncovers risky investments made by the Illinois TRS

I never intended to uncover a public pension fund’s risky use of OTC derivatives.

In April, I flew to San Francisco to cover the International Swaps and Derivatives Association’s general meeting because I was planning on writing a story about who was using derivatives in the wake of the financial crisis. But one sentence can abruptly change a story.

I was back in Chicago and ran a Google search to get an idea about who was still using OTC derivatives. I stumbled upon a Pensions & Investments article about an Illinois representative who was trying to ban pension funds in the state from using OTC derivatives as investment vehicles.

So I started looking at the public pension funds’ annual reports to find out if OTC derivatives were even an issue. That’s when I found the Illinois Teachers’ Retirement System.
While other pension funds were using foreign currency forwards, I was drawn to TRS because the language about its swaptions, credit default swaps, inflation-linked swaps and interest rate swaps was very casual. It was almost as though these investments were normal for a pension fund.
Then I started submitting Freedom of Information Act requests to pension funds across the state. The act of actually submitting the request is fairly straightforward but it’s almost expected that there will be red tape and bureaucrats on hand to obfuscate the process.
Within hours of submitting the request to TRS, however, I conferenced with its investment managers and FOIA officer about the specific information I wanted. I was surprised when they said they could have a spreadsheet to me within a few days.
Meanwhile, I connected with the lawmaker, Illinois Rep. Kevin Joyce, who had introduced the bill seeking to ban the use of derivatives by pension funds such as TRS. When you’re writing a story about a sensitive subject like teachers’ pension funds, sources are more than willing to talk to you. I had several conversations about the bill and found out it had essentially died in committee.
At this point, I was still waiting for the promised spreadsheet from my FOIA request. After a week-and-a-half went by and after contacting TRS, it turned out the fund sent it in the mail, and the U.S. Post Office wanted a signature. Because no one was home, my FOIA results went back to Springfield.
Deciding I couldn’t wait for it to come through the mail again, I drove the three-and-a-half hours to Springfield to pick up the disc.When I opened the request, I knew I had uncovered something unconventional. As I read it, TRS was selling these swaptions, CDSs and interest-rate swaps.
 Next, I sent it to a few traders and ex-bankers for their take. Soon I was getting responses like, “This is A.I.G. Lite,” and “They’re screwed and they don’t even know it.” However, because of their ties to the financial services industry, they wouldn’t go on the record.
So I started calling universities that had centers devoted to the study of financial markets. That’s when I found Dale Rosenthal, an associate finance professor, who also happened to be a former strategist at Long Term Capital Management, the hedge fund that collapsed in 1998.
 As Rosenthal and I talked about TRS’s positions, I managed to get other experts on the phone who also questioned TRS’s derivatives strategy.

As far as TRS was concerned, they cooperated, but would not make any internal investment managers or trustees available for an interview with me. In fact, any time I called any of the trustees directly, I received a call back from the TRS press office.

TRS would only respond to my questions if they were submitted in writing for approval. Sometimes that’s the way it’s going to be and while it’s not ideal, those answers revealed more about TRS’s investment managing style.

After further reporting, I examined the role of TRS’s board of trustees and what could happen if TRS squandered its pension money. OTC derivatives comprise a small part of TRS’s portfolio, but that doesn’t mean they couldn’t have a detrimental effect.

The process was condensed (our quarters at Medill are just 10 or 11 weeks long and it was several weeks into the quarter before I was even onto this story) and arduous and there were times I thought this story would never be done. But if people read my story and start questioning TRS’s decisions, then I’ve accomplished what I set out to do.

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