Illinois prepaid college tuition program loses big on ShoreBank investment

The state's prepaid college tuition program is caught in the downward spiral of ShoreBank.

The Illinois Student Assistance Commission, which manages $1 billion invested for the college educations of Illinois students, has written off all but $2 million of a $12.7-million investment it made in ShoreBank two years ago, just before the South Side community lender hit the skids. That stake, which made the prepaid tuition program ShoreBank's largest shareholder, was the agency's first and only direct investment in a privately held company.

The $10.7-million loss, though modest in the context of a $1-billion fund, could turn up the already considerable political heat on the monthslong effort to save ShoreBank from failure. Congressional Republicans have questioned whether the Obama administration pressured big Wall Street banks into rescuing the lender.

"This is just another of those examples of what appears to be the insider's world of Illinois politics," says Pat Brady, chair of the state's Republican Party. "The people who pay are the people who are trying to save money for college."

The $150-million bailout funded by the likes of Goldman Sachs Group Inc. and GE Capital Co. is hung up over concerns that it won't be enough to save ShoreBank, even with a pending infusion of $75 million from the Treasury Department. The White House has denied any involvement.

The Illinois Student Assistance Commission runs the program allowing parents of young children to make upfront payments that lock in current tuition rates at the state's public universities for when their kids reach college age. ISAC invests the funds with a goal of generating sufficient returns to cover the eventual tuition bills.

At the time of the ShoreBank investment, ISAC's portfolio consisted mostly of publicly traded stocks and bonds, which are considered safer investments than less-liquid shares of private companies.

Andrea Feirstein, a consultant to state college savings plans, says she doesn't know of another prepaid plan that has invested in a privately held bank. "I think the plans tend to invest conservatively," she says.

Andrew Davis, appointed in early 2007 by then-Gov. Rod Blagojevich as executive director of ISAC, says he contacted ShoreBank later that year after reading of the bank's plan to make rescue loans to local homeowners struggling to avoid foreclosure.

"I thought that was an interesting opportunity," Mr. Davis, 53, says, hastening to add, "We didn't make the investment because we were being Dudley Do-Rights. We made the investment because we thought we were going to make money."

The growth in mortgage lending at ShoreBank just as the economy teetered on the precipice caused a big share of the massive loan losses that threaten the bank's future.

ISAC isn't participating in the Wall Street recapitalization of ShoreBank, and Mr. Davis shrugs off the 84% loss on the shares. He notes ISAC's fund produced a 10.5% gain for the fiscal year ended June 30. Its loss for the previous fiscal year was 15.4%, a better performance than some similar funds saw during the financial crisis, Mr. Davis says. He doesn't rule out investing directly in private companies again but says "it'll be a while before we invest directly in another community bank."

'We didn't make the investment because we were being Dudley Do-Rights.'

— Andrew Davis, Illinois
Student Assistance Commission

If the ShoreBank rescue succeeds, Mr. Davis says he expects his fund's position to be diluted to its current $2-million level. If the bank fails, ISAC will lose the remainder of its investment.

Shortly after investing in ShoreBank, Mr. Davis asked the lender to finance the commission's pilot program providing loans to students at Illinois public universities who needed money to finish their degrees.

Citigroup Inc. had agreed to provide the initial financing for the so-called Capstone loan program, but the New York-based banking giant pulled out in fall 2008, when the credit crisis worsened. ShoreBank agreed in late 2008, months after the prepaid tuition plan's investment, to provide $7 million to keep Capstone going in 2009. Mr. Davis says Capstone now is "on hold."

He says he wouldn't deny a connection between ShoreBank's agreement to fund Capstone and the tuition plan's status as its largest shareholder. "There aren't that many bank CEOs whose numbers I have in my Rolodex," he says. But he says the bank's executives followed exhaustive standards for approving loans to insiders or shareholders.

In a statement, ShoreBank says "the loan helped provide the resources that made a quality, affordable education more accessible to more students in low- to moderate-income communities."

©2010 by Crain Communications Inc.

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