Texas Teachers Retirement Fund speculates in subprime mortgage backed securities

Demonstrating poor judgment the Texas Teacher’s Retirement Fund announced it is planning to invest $250 million of retirement funds of Texas school teachers in a loan fund based on subprime mortgages and other low-grade home loans.

The story is reported in Foreclosure Buzz from a story originally written by Bob Elder in the Austin American Statesman.

By investing in these loans the Texas Teacher’s Retirement Fund places the retirement accounts of the teachers of Texas at risk while propping up a giant mortgage backed security fund whose assets are based on the type of loans that have caused massive home foreclosures across Texas and the nation.

According to Bob Elder’s story…

Britt Harris, the chief investment officer of the teacher fund, said the deal offers the potential for outsized returns because BlackRock [the money manger that bought the distressed loans from a Swiss bank] acquired the debt at such a deep discount. ,,,

“This is a remarkable opportunity,” Harris said Thursday. “These are the kinds of transaction we see in the market today. They are so attractive and unique.”

Not unique enough unfortunately. About 10,000 Texas families per month are losing their homes through foreclosure, mostly due to the subprime loans upon which this investment is based.

Surely a public employee retirement fund has some moral obligation to steer clear of investments in morally reprehensible investments.  But the Teacher’s Retirement Fund is just following the lead of the Texas Comptroller’s Office which has invested $59 million in ‘distressed opportunity’ private equity funds [a euphemism for subprime mortgage backed securities].

I know that some will argue that this is a legal investment and it’s wrong to place limits on the investment of public funds.  Shouldn’t public investments simply seek out the best rate of return regardless of the activity the public investment funds?

No.

Because:

1) public funds invested in subprime home mortgages backed by private investor securities sends a signal to investors and markets that these type of securities are acceptable, mainstream investments;

2) the underlying loan products which make up these investments are deceptive and unethical and many subprime loans are in fact predatory loans that state and federal governments are actively trying to combat; and

3) the same week that the Texas Teacher’s Retirement System admitted that it was investing in this subprime loan fund the Texas Legislature was holding a hearing on what actions and programs the State of Texas needs to undertake to stem the damage being done to the state by these subprime loans.