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A Review of the Article The Dangers of Relying on a Legal List: A Case Study of the West Virginia Consolidated Investment Fund - Book Report/Review Example

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A Review of the Article “The Dangers of Relying on a Legal List: A Case Study of the West Virginia Consolidated Investment Fund” by Vernon Hayes The primary objective of the article “The Dangers of Relying on a Legal List: A Case Study of the West Virginia Consolidated Investment Fund” by Vernon Hayes is to use the example and cautionary tale of the West Virginia Consolidated Investment Fund and the financial and political scandal that it had undergone to demonstrate the pitfalls of relying on a “Legal List” of permissible investment instruments, rather than operating under the “Prudent Person Rule”…
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A Review of the Article The Dangers of Relying on a Legal List: A Case Study of the West Virginia Consolidated Investment Fund
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Download file to see previous pages The story began in 1978, when local governments were encouraged to pool in their investment money with the West Virginia State in the Consolidated Investment Fund, managed by the West Virginia Investment Management Board. At first, the local governments were reaping massive returns. In 1984, James Manchin became State Treasurer. The guidelines imposed on the Consolidated Investment Fund were at first very strict: only investments with a maturity date of no longer than ninety days can be entered into by the Fund to protect against market fluctuations. However, because Manchin and his deputy, Margolin wanted to make more aggressive investment strategies, the maturity was extended to ten years. The investment strategy became bolder and the fund engaged in heavy-volume, short-term treasury securities trading (ibid at 52). There was also heavy reliance on futures contracts. This was a strategy that paid off in the beginning, but only a year later, because of an embargo imposed by then President Ronald Reagan on Japan (ibid, at 53) the bond market fell down sharply and continued on a steady decline for months. A series of stopgap measures only heightened the problem – entering the reverse repurchase agreement market only exacerbated the losses. Paying the local governments interests when the fund was no longer making profits but was operating on a loss cost the fund several millions of dollars. Manchin allegedly tried to conceal the losses at first but the hiring of an independent auditor revealed a $160 million imbalance in the account books. There was great public outcry surrounding the revelations of the auditors, exacerbated by Manchin’s apparent ignorance of basic accounting and financial procedures. Manchin was then impeached by the House of Delegates, with a finding that he knew about the hemorrhage since 1987 but did not do anything to stop it. He then resigned to avert any more political scandal and save the future political careers of his relatives. The central argument posed by Hayes in this article is that the “legal list” may have contributed to the losses incurred by the State of West Virginia. To quote the author himself, “By limiting the investment instruments available to Manchin's office, the state forced him to invest in riskier investments within the list, rather than allowing for investment in instruments that might have presented less of a risk to the state.” (ibid, at 58). His conclusion therefore is that the state of West Virginia might have been better served by an application of the “Prudent Person Rule” rather than by the “legal list” rule. Credit must indeed be given to the author for giving us an opportunity to revisit one of the examples of State investment strategies gone bad and the political fall-out arising from it. The author’s contribution lies in a thorough and compelling analysis of the chain of events that has led to the collapse of the Consolidated Investment Fund in West Virginia, and the ...Download file to see next pagesRead More
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