I Owe U.: How a Texas College Mortgaged Its Future In Derivatives Debacle — Odessa’s Finance Chief Bet Ranch, Had 3 Big Years, Then Saw Disaster Strike — Student of Volatile Securities

ODESSA, Texas — Roger Coomer had what every trader dreams of — hot hands.

Juggling telephone calls from brokers while restlessly shifting his gaze between television and computer screens filled with financial information, Dr. Coomer made millions of dollars buying and selling some of the world’s most complicated financial instruments.

But he wasn’t working among the canyons of Wall Street. Rather, as vice president of finance at Odessa College, a public two-year school here in the flatlands of West Texas, Dr. Coomer operated from a dowdy office decorated with wildlife scenes on the second floor of the school’s administration building.

Dr. Coomer’s specialty was the most volatile types of mortgage-based derivatives, instruments that even many Wall Street professionals don’t fully understand. His confidence was so great that he audaciously invested virtually all of the college’s resources in them. The money included not only the college’s long-term investment funds but also the proceeds of bond sales, payments from the state, tax revenues, tuition payments, even funds belonging to the alumni booster club.

For three bountiful years Odessa College enjoyed the fruits of the aggressive investing by its finance chief, who has a doctorate in education. But this year, as rising interest rates pummeled the value of fixed-income securities, the college has been brutally punished. Officials say Odessa’s investment portfolio, purchased for $21.9 million, has lost almost half its value since January. The decline, according to administrators, has more than wiped out the previous years’ gains.

The college, unable to pay its bills, has been forced to borrow $10.5 million on an emergency basis, has increased tuition 20% and has raised real-estate taxes on local property owners 7.2%. At the same time, it has slashed its operating budget to $16 million from $18 million. Twenty-two senior professors have been given early retirement to save $850,000 in salaries, and Philip T. Speegle, Odessa’s president for 20 years, is forgoing his $122,500 salary. Faculty travel has been all but eliminated.

Even air conditioning — important in a place where temperatures passed 105 degrees for 16 straight days this July — has been curtailed. Thermostats now are set at 78 degrees, but given the age of the air-conditioning equipment, classroom temperatures frequently creep well into the 80s.

“It’s been a bombshell for the faculty,” says history professor Thomas J. Heiting, sitting in his sweltering office.

Dr. Coomer — a 48-year-old from Mendon, Mich., a farm town near the Indiana border — has fared even worse. Although no one accuses him of any impropriety, he apparently assumed that his contract wouldn’t be renewed and left the college in August. What’s more, having evidently invested his own funds in the same securities he bought for his employer, he declared bankruptcy on Aug. 31. His former colleagues say they have no idea where he is.

With fingers of blame pointing in every direction, the college joined the growing number of investors, large and small, who are suing purveyors of derivatives — investment instruments whose value derives from some other asset or factor. Odessa is charging that Gruntal & Co. failed to disclose the potential volatility of $2.8 million in derivatives it sold the college. In similar actions, Gibson Greetings Inc. recently filed a $73 million claim against Bankers Trust New York Corp., and in Minneapolis several individual investors have filed suit against Piper Jaffray Cos.

Many individual investors burned by derivatives claim they were innocent victims of slick salesmanship. But Odessa College’s experience suggests that not every losing derivatives investor is a victim. Attempts to reach Dr. Coomer through family members and his lawyer were unsuccessful, but interviews with Dr. Speegle, other administrators and college trustees indicate that most of them understood that they were playing a high-risk game and that their outsize returns came with outsize risks.

“We were willing to take more risks because they were performing so well,” says Gary S. Johnson, one of the trustees. Virginia Chisum, the college’s new financial chief, adds: “I don’t know if I’d call it greed, but if you have a good thing going, you don’t change in midstream.”

Gruntal’s assistant general counsel, Harry D. Frisch, says Odessa’s complaint is “devoid of merit.” Officials of several other firms that sold derivatives to the college say there is no doubt that Dr. Coomer was sophisticated enough to understand what he was buying.

Several brokers point out that Dr. Coomer wrote his doctoral thesis on investing money for educational institutions. The thesis, accepted by Texas Tech University in December 1992, was titled “The Development of Financial Strategies to Fund Capital Projects for Texas Community Colleges.”

Government Securities Corp., a Houston firm that sold derivatives to Dr. Coomer, was so impressed by his expertise that it asked him to speak at a seminar it held for institutional investors at a Houston hotel last October. “He held himself out as an expert, and even in that forum he held his own,” says Frank Klaus, an executive vice president at the firm. (Government Securities is being sued by an Ohio county that claims the firm failed to fully disclose the risks of derivatives the county bought; the firm is seeking a judgment to clear its name.)

Brokers say Dr. Coomer was so knowledgeable that he identified the specific securities he wanted rather than asking for broker recommendations. “Unlike many customers, he would tell us exactly what he wanted, down to the Cusip number,” the securities’ identification number, Mr. Klaus says.

Dr. Coomer also shopped. “When he saw something he liked, he would call broker A,” Mr. Klaus says, “but he would also call brokers B, C, and D to get their prices. He let you know that he was checking you out.”

When Odessa College was founded in 1946 as an extension of the local high school, there was so little confidence in its future that its first building was designed so that it could function as an elementary school if the college failed. The building’s hallways are lined with the kind of lockers that are typical of primary schools.

But the college survived and even thrived, particularly after it was discovered that Odessa sits at the geographic center of the nation’s largest concentration of non-coastal oil and gas. Today it has 4,500 credit-earning students and about 15,000 continuing-education students.

For most of its history, the college was extremely conservative in its investments, putting the bulk of its funds into bank-issued certificates of deposit and maintaining enough cash to cover several months of operating costs. But in 1990, it departed from this caution, partly because of a decline in its other revenue sources but mostly because of a wish to renovate its 110-acre campus. Its 30 buildings, nondescript brick structures, were becoming costly to maintain. Officials, particularly Dr. Coomer, were eager to build up funds for improvements. Dr. Coomer, who joined the college administration in 1982, used an aerial photo in his office to show visitors which old buildings would be renovated and where new ones would rise.

The college gets its funds from a variety of sources. Under state law, Texas community colleges have the right to actually levy local real-estate taxes. But since the oil industry’s decline over the past decade has sharply reduced property values, tax revenues have dropped. The state also makes direct payments to the college, but these have fallen, too. All this, plus declining yields on CD’s, created pressure for better investment returns.

“We were trying to do everything we could to maintain the same level” of investment income in spite of declining interest rates, Dr. Speegle says.

The region’s frontier mentality, which continues to exist in the form of a heavy emphasis on self-reliance, may have also played a role. “This is an area where people don’t like outside aid,” says David L. Paterno, the college’s dean of administrative affairs. “People want to do things on their own.”

Some members of the faculty also contend that the college’s trustees and administrators wanted to impress Odessa’s civic elite. “Not only was Roger greedy but he was associated with board members who were also greedy,” says Clyde F. Smith, a biology professor, who complains that the investment fiasco means that he cannot replace an aging collection of microscopes. “They wanted to brag about their investment success at the Rotary Club.”

But even Dr. Coomer’s critics acknowledge that his investment strategy worked beautifully until this year. In the fiscal year ended in August 1991, the college’s investments earned $1.5 million in capital gains and interest, for an 11% return. In fiscal 1992, they earned $3 million, a 17% return. And in fiscal 1993, the return hit $4.1 million, a sizzling 23%.

In addition to adding to the college’s nest egg, the extra profits helped Odessa buy an impressive array of computer equipment and, it says, win more national athletic championships than any other community college in the country. Says Sue A. Blair, a faculty member who recently joined the administration: “There were a lot of corners we didn’t have to cut.”

Dr. Coomer’s superiors were obviously satisfied with his performance: His salary went from $65,818 in 1992 to $80,336 in 1993, according to his bankruptcy filing. And, encouraged by his success, Dr. Coomer kept increasing the amount of his derivatives investments. “Over a period of time we were doing very well, so we kept going,” Dr. Speegle says. “We just kept adding a bit more and a little bit more.”

Not only did Dr. Coomer have an unusually risky portfolio but he managed it with the approach of a short-term trader. During 1993, he bought $90 million in derivatives, much of which he sold before the year was out, according to Ms. Chisum, the new finance chief.

“He was buying to trade, not for the long term,” says Mr. Klaus of Government Securities Corp. Indeed, Dr. Coomer occasionally sold securities before he had even completed his purchase of them.

By last year, even some of the brokers who were profiting from selling derivatives to Dr. Coomer were concerned that he had too many of them. “Both our broker and members of senior management expressed the concern to him that his assets were too concentrated,” Mr. Klaus says. “He gave us the general message that he knew what he was doing.”

Another Houston firm, Coastal Securities Ltd., required Dr. Coomer and Dr. Speegle to sign a document certifying that they understood the extreme volatility of the kind of derivatives they were buying. “We felt like he was sophisticated enough, but it is our policy to ask each customer to sign that kind of document,” says David J. Master, Coastal’s chairman and CEO.

By July of 1993, several trustees had become concerned enough that they, with Dr. Coomer’s agreement, decided that it was time to reduce the college’s exposure. He sold a large number of derivatives the next month.

But the reduced exposure was short-lived. Between Sept. 30 and Dec. 30 of 1993, Dr. Coomer added $12.7 million of derivatives to the college’s portfolio.

“He jumped right back in,” says James H. Gilliland, one of the trustees. “He thought he was invincible.”

Thus as 1993 drew to a close, Odessa College was making an extraordinarily large bet that interest rates would fall. Looking over the college’s holdings at the request of this newspaper, Daniel C. Dektar, a mortgage-derivatives portfolio manager for Smith Breeden Associates Inc., based in Chapel Hill, N.C., says, “It is an extremely high-risk portfolio. There is nothing defensive in it.” He says that about a third of the portfolio is “structured principal-only strips” and the remainder are “inverse floaters.”

Mortgage derivatives are bonds backed by pools of homeowner mortgages, whose interest and principal payments have been repackaged into new, highly idiosyncratic securities. Principal-only strips are created by stripping out principal payments. Inverse floaters are designed so that their coupons move in the opposite direction of interest rates, making them many times more sensitive than other bonds to changing rates. Mr. Dektar calculates that the value of the portfolio would change by 20% to 40% for every one-percentage-point change in interest rates.

Unfortunately, rates began rising soon after Dr. Coomer went on his final buying spree. The plunging value of his portfolio seemed reflected in his demeanor. A gregarious man, Dr. Coomer had enjoyed playing tennis with his colleagues and maintained an ongoing chess game with one of them; but as his portfolio sank, Dr. Coomer became increasingly uncommunicative. Eventually, he even lost interest in following the market.

“He went from wanting to know everything to not wanting to know anything,” says Jay Box, a faculty member who worked closely with him. “That was a sign.”

On March 21, Dr. Coomer walked to Dr. Speegle’s office, one door down from his own, to tell him that the situation was critical. “He told me the bond market had gone bad and that we really had a problem,” Dr. Speegle recalls. On March 29, Dr. Coomer sold $6.3 million in derivatives for a $2.7 million loss. And within a couple of weeks, the president learned that not only had the remaining investments lost much of their value, they were becoming increasingly difficult to sell at any price.

“We now have $10 million in additional debt,” Dr. Speegle says, “and we still have the derivatives.”

Dr. Coomer never really explained why he dove back into the market after he agreed to pull out. But when he spoke before the faculty senate last May, he seemed to attribute it to his earlier success.

Says Sue Blair, the faculty president at the time: “He said that everything he touched had turned to gold.”