West Virginia is considering suing investment firms at the center of the national financial crisis to recoup millions of dollars in losses to its multibillion-dollar portfolio. Governor Joe Manchin has asked his staff to research possible legal action following a briefing from the state’s Investment Management Board. The board manages the portfolio, the bulk of which reflects public employee pension funds. Its returns also fund retiree health benefits, workers’ compensation, insurance for cities and counties and prepaid tuition programs.

At least one public pension fund already filed such a lawsuit. The City of New Orleans Employees’ Retirement System sued AIG directors and key executives on September 17th in Delaware Chancery Court. The action came one day after the global insurance giant received the $85 billion loan from the U.S. government in exchange for a 79.9% equity stake. That lawsuit seeks to recover for AIG’s shareholders “its staggering losses from its exposure to and grossly imprudent risk-taking in the subprime lending market.”

West Virginia’s investment holdings include stocks and bonds in big Wall Street firms whose bankruptcies forced sales or government takeovers that punctuated the ongoing financial crisis. Those included AIG, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and Washington Mutual. The board bought those securities over time at a cost of $95.2 million. While those securities amount to a fraction of a percent of the portfolio’s $10.9 billion value, the losses incurred were significant. Their value dropped by nearly $23 million as of August 31st from the time they were purchased.

I agree with Governor Manchin who believes the firms should be held accountable if they breached their duties to shareholders. The state also may target executives from those financial firms who pocketed hefty exit packages. There are other problems for West Virginia. Besides investment losses, the economic turmoil has delayed the sale of bonds by the state for upcoming highway and college campus construction projects. The governor is assessing whether the government bailout measure, passed by Congress and signed by President Bush, will help that market. Lots of other governors and legislative leaders across the country are doing the same. Hopefully, there will be a turn-around in our economy and soon. But in the meanwhile, other states will likely follow the lead of West Virginia’s governor.

Source: Insurance Journal

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