This is an update of my Dec. 29 posting about the crashing short term investment fund run by Florida State for local governments.
It seems a lot of agencies didn't get out, and now they are being asked to take 90 cents of each dollar invested if they pull their funds out. Guess what - they now aren't so trusting of the State.
Just like my comments about California's Orange County's similar $2-billion loss, the Florida agencies will go through a whole long process of talks and negotiations just trying to get 100% of their fund balances back. Even the Wall Street Journal article below discusses the Orange County 1994 bankruptcy, and explains how the new sub-prime investments were risky, but qualified for higher investment ratings so government agencies could again buy them.
Below are some articles - this subject is now showing up as a major topic in the "business" section of Google news, and listed 53 articles on the subject.
Meanwhile, the Daily Commercial did a good job of calling most Lake County government agencies to see who still had money in the State Fund. The City of Tavares is one of them.
And, here are some juicy quotes from the article below:
Kevin SigRist, deputy executive director of the State Board of Administration, said the board can't promise to make pool participants whole, because of the pool's ``problematic'' securities. ``We have securities in the pool that clearly have credit risk associated with them,'' he said.
``We don't ever want to be in a situation here at the SBA where we are somehow issuing guarantees or suggestions that everyone will get dollar for dollar,'' said SigRist, who said executive director Coleman Stipanovich was tied up at the capitol and would join the call later.
I stand by my forecast that the remaining fund participants will take a bath on this, and will get maybe more or less than 80% of their funds back. There just won't be enough funds to pay everyone back 100% after they recognize (an accounting term meaning they post a profit or loss) the losses from the defaults in the bad sub-prime mortgage paper investments. The article below even says that the promised rate of return was 6.25% before the freezing of the fund, and now it is down to 2%.
vj
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Florida Says Unfreezing Fund Would Spark `Fire Sale' (Update1)
By David Evans
Enlarge Image/Details
Dec. 3 (Bloomberg) -- Florida schools and towns with money frozen in a state-run investment account are unlikely to get their cash back tomorrow, when officials meet to discuss a crisis prompted by withdrawals that drained almost half of the fund's $27 billion in assets, a policy officer said.
``If we reopen the window without limitations on Tuesday, and we see behavior like we've seen up to now, there's simply no way to meet that demand without having a fire sale on assets,'' said James Francis, senior policy officer for the State Board of Administration, manager of the Local Government Investment Pool.
Officials raised the possibility of paying less than 100 cents on the dollar to governments seeking cash in a conference call with participants Nov. 30, a day after freezing withdrawals. The board also hired BlackRock Inc., the largest U.S. publicly traded money manager, as an adviser.
Florida counties and schools pulled out $13 billion in assets last month after learning the pool, described by state officials as a money-market fund, held $1.5 billion of downgraded and defaulted debt tainted by the subprime mortgage market collapse. The crisis shows the far-ranging effects of the housing slump, as complex investments once sold as high-yielding havens are now backed by collateral investors don't want.
The Florida fund's daily yield plunged to 2.77 on the day withdrawals were banned from 6.25 percent on Nov. 16.
Money Back
A newly formed advisory panel of school and local governments still stuck in the Florida pool told officials on the Nov. 30 call they expected to get all of their money back. The panel rejected the board's plan to survey participants to see if they would accept as little as 90 cents on the dollar as the price for getting access to their money this month.
The two-and-a-half hour call ended with a decision to poll pool investors on how much cash they absolutely need to withdraw over the next 90 days, as well as how much they plan to deposit. Governments are accustomed to drawing on the fund for routine expenditures.
``The very fact that you're out here talking to us about taking less than 100 percent is in my mind unacceptable,'' said MaryEllen Elia, superintendent of Hillsborough County Public Schools, which has $573 million tied up in the pool, more than any other school district. ``You need to figure out how to make the taxpayers in Florida whole.''
Meeting Tomorrow
The State Board of Administration's three trustees, Republican Governor Charlie Crist, state Chief Financial Officer Alex Sink and Attorney General Bill McCollum, will meet tomorrow to discuss possible solutions to the crisis. The board also manages $37 billion of additional short-term investments and Florida's $138 billion pension fund.
``We do need our political leaders to muster up some intestinal fortitude,'' said Dave Gaylor, superintendent of Charlotte County Public Schools and a member of the new 16- member advisory panel of participants, on the Nov. 30 call. ``You have leadership from the soldiers, that's who we are. It's not going to help if the generals aren't providing us with some leadership.''
About 94 percent of the fund's remaining $14 billion is invested in corporate floating-rate notes, maturing in an average of nine months, board employees told the panel.
Kevin SigRist, deputy executive director of the State Board of Administration, said the board can't promise to make pool participants whole, because of the pool's ``problematic'' securities. ``We have securities in the pool that clearly have credit risk associated with them,'' he said.
``We don't ever want to be in a situation here at the SBA where we are somehow issuing guarantees or suggestions that everyone will get dollar for dollar,'' said SigRist, who said executive director Coleman Stipanovich was tied up at the capitol and would join the call later.
Pension-Fund Proposal
The same day they voted to freeze withdrawals, the trustees rejected a plan by Stipanovich to solve the problem internally, using pension-fund money.
``We're fiduciaries, we're investment professionals, we know what we're doing,'' Stipanovich said Nov. 29. ``The commercial paper defaulted, but the collateral is different,'' he said, describing it as AAA.
Instead, the trustees decided seek advice from an independent financial adviser, hiring New York-based BlackRock on Nov. 30.
The state board said it chose BlackRock over firms including JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Bank PLC and will pay the firm $125,000 in fees. Brian Beades, a spokesman for BlackRock, declined to comment.
Short-Term Funds
The fund had invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the subprime mortgage collapse, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding such investments as part of $200 billion assets in more than 100 similar pools across the U.S.
The Florida pool was the largest of its kind in the U.S. at $27 billion before the withdrawals.
Its mission statement, as described in the state board's 2005-2006 annual report, was ``to help local governments maximize earnings on invested surplus funds, thereby reducing the need to impose additional taxes'' by investing in ``short- term, high-quality money-market instruments.''
It promoted itself as a place for governments to park cash, ``where liquidity and preservation of capital are the primary importance.''
To contact the reporter on this story: David Evans in Los Angeles at [email protected] .
Last Updated: December 3, 2007 13:10 EST
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This is from the Wall Street Journal
Florida Weighs Steps Needed
To Lift Freeze on State Fund
By CRAIG KARMIN and ALISTAIR BARR
December 1, 2007; Page B3
A day after Florida froze withdrawals from its government investment fund, an advisory committee to the state board met with some of the fund's investors late Friday to determine how it can lift the moratorium without sparking a run on the $15 billion fund.
The two-hour meeting ended without reaching a resolution as to how to re-open the fund. Many options were considered, even the liquidation of the fund, though it isn't clear how seriously that was taken. No agreement was reached, according to a spokesman for Florida's State Board of Administration.
Florida's State Board imposed the freeze on withdrawals from its Local Government Investment Pool Thursday after the fund's investors, nervous local governments and school districts, yanked $10 billion out over two weeks on concerns that money was invested in risky mortgage-related securities.
"We knew there was trouble," said Sharon Bock, clerk and comptroller for Palm Beach County, who had $60 million in the investment pool in September but withdrew the last of it Wednesday. "We saw that several investments were backed by mortgage-backed securities."
Florida isn't the only fund to be hit. Standard & Poor's in October put a fund in King County, Wash., on watch for downgrade because of the $4.1 billion county fund's investments in three so-called structured investment vehicles, or SIVs. These are commonly bank affiliates that raise money by selling short-term debt and using it to buy higher-yielding long-term securities.
In Montana, the Board of Investments has been hit with $247 million in withdrawals this week from a $2.5 billion fund called the Short Term Investment Pool following reports about Florida's problems.
The spread of subprime's influence into the state-run world shows the mortgage crisis is hitting investors once thought to be removed from the damage. While these funds aren't believed to have bought any of the riskiest paper scooped up by hedge funds and banks, they have nonetheless suffered collateral damage as even the highest-rated mortgage-backed securities have become illiquid, putting short-term funds in a bind they never saw coming. "People believed they were doing things prudently, but some tried to get a little more yield and thought why not?" Richard Larkin, a municipal bond expert at JB Hanauer & Co. said. "Everyone believed A1-rated commercial paper was safe. They're realizing that isn't enough."
The Florida investment pool, one of around 100 or so nationwide, is like a money-market fund that was supposed to provide a safe, liquid vehicle for investors to park cash used temporarily. The money in the funds is generally used for payroll and other government regular operations. Moody's Investors Service has begun surveying all state investment pools to see whether they have exposure to these instruments and if there have been any withdrawals similar to Florida, according to Bob Kurtter, managing director in public finance at the rating agency. "The financial markets are complex and rapidly developing," he said. "Sometimes new instruments are developed that fall within the bounds of existing investment guidelines, but may pose risks that weren't anticipated at the time."
Moody's knows of problems in Florida and similar but smaller issues in Montana. The rating agency has also been talking with a county on the East Coast that recently took a loss from an investment its cash pool made in a SIV, Mr. Kurtter said. The information is confidential, he added. "We have been reassured that problem is under control and manageable," he said. "They are seeking some recourse against whoever sold it to them.
As word spread of Florida's mass withdrawals and then the suspension, other investment pools around the country took steps to reassure their investors.
"The purpose of this letter is to assure you that Georgia Fund 1 is not invested in, nor has ever been invested in, the types of subprime-backed investments that are generating such losses," W. Daniel Ebersole, director of Georgia's Office of Treasury and Fiscal Services, wrote to investors on Wednesday.
Mr. Ebersole said he drafted the letter after a "couple of enquiries" from Georgia investors who had been spooked after hearing about the Florida news.
Florida's predicament is the latest example of investors stretching in search of higher yields without realizing the full risks they were taking on, public finance experts said
One high-profile example of this was Orange County, Calif., in 1994, which, like Florida, ran a short-term investment pool for local governments and school boards in the area.
After Orange County went bankrupt, many states and counties tightened guidelines to ensure investments were short term and had top ratings from a leading agency, Mr. Larkin said.
But investment vehicles, like SIVs, were then developed that had top ratings, but had riskier underlying assets. That allowed state and county investment pools to stay within their stricter guidelines, but invest in higher yielding assets, Mr. Larkin and others say.
"There's a pattern here," he added. "This seems to happen every five to ten years."
Write to Craig Karmin at [email protected] and Alistair Barr at [email protected]
