Looters afoot: now its state-run investment pools


Richard Moore

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Florida Halts Withdrawals From Local Investment Fund (Update3)
By David Evans

Nov. 29 (Bloomberg) -- Florida officials voted to suspend withdrawals from an 
investment fund for schools and local governments after redemptions sparked by 
downgrades of debt held in the portfolio reduced assets by 44 percent.

The Local Government Investment Pool had $3.5 billion of withdrawals today 
alone, putting assets at $15 billion, said Coleman Stipanovich, executive 
director of the State Board of Administration, at a special meeting held to 
address the crisis. The board manages the fund along with other short-term 
investments and the state's $137 billion pension fund.

``If we don't do something quickly, we're not going to have an investment 
pool,'' Stipanovich said at the meeting, held at the state capitol in 
Tallahassee. The fund was the largest of its kind, managing $27 billion before 
this month's withdrawals.

Local governments including Orange County and Pompano Beach that use the pool 
like a money-market fund asked for their money back after the State Board of 
Administration disclosed in a report earlier this month that holdings in the 
fund were lowered to below investment grade. The disclosures followed a month of
inquiries by Bloomberg News to Florida officials.

``The people who withdrew were right to withdraw,'' said Joseph Mason, finance 
professor at Drexel University in Philadelphia and a former economist at the 
U.S. Treasury Department. ``The people who trusted in the good faith of the 
pool's management were burned. This is a severe blow if not a death knell to the
concept of state-run investment pools.''

Stemming the Flood

The board met today to consider ways to shore up the fund, including obtaining 
credit protection for $1.5 billion of downgraded and defaulted holdings hurt by 
the subprime market collapse. In voting for the suspensions, officials sought to
stem the increasing flood of money leaving the pool and avoid losses on forced 
sales of assets.

``We need to protect what is there in the interim,'' said Governor Charlie 
Crist, a Republican and one of three trustees of the State Board of 
Administration along with Florida Chief Financial Officer Alex Sink and Attorney
General Bill McCollum.

The fund has invested $2 billion in structured investment vehicles and other 
subprime-tainted debt, state records show. About 20 percent of the pool is in 
asset-backed commercial paper, Stipanovich said at the meeting today.

``There is no liquidity out there, there are no bids'' for those securities, he 

Pension Proposal

Stipanovich raised the possibility of having the state pension fund shoulder the
risk of some of the troubled securities with a credit-default swap, through 
which the retirement fund would guarantee the debt in exchange for an insurance 

``It will be a wonderful diversifier,'' Stipanovich said.
Sink immediately rejected the executive director's plan.

``We would, in effect, be bailing out one fund, to which we have no legal 
obligation, with the star fund of Florida, our pension fund,'' she said. ``I 
think we have to be very careful about transferring this risk into our pension 

The board also considered adopting a more conservative investment policy and 
taking steps to qualify for a top credit rating for the pool from Standard & 

The trustees discussed an exemption to the suspension in withdrawals that would 
allow cities and schools to take money from the pool to pay employees; it was 

``It's not set up to pay payroll,'' Crist said.
Risk Management

It wasn't decided how long the suspension would last. The trustees meet again on
Dec. 4.

``We're getting a lot of calls,'' said Mike McCauley, the spokesman for the 
State Board of Administration.

The Florida pool crisis is a sign of poor risk management by state officials, 
said Harvey Pitt, former chairman of the Securities and Exchange Commission.

``In the longer-term, it's unlikely that those whose funds have been frozen will
leave their money in the investment fund once the freeze lifts,'' Pitt said. 
``All of this could, and should, have been avoided by careful due diligence, 
constant reassessment of risk, and paying close attention to market trends.''

Paychecks Threatened

Hal Wilson, chief financial officer for the school district in Jefferson County,
located 30 miles (42 kilometers) east of Tallahassee, said he had decided not to
pull the district's $2.7 million from the fund. He said he relied on assurances 
from the state board that the money would be secure for his 1,559-student school
system, with 220 employees.

``I might not be able to pay our employees tomorrow,'' he said, referring to his
$850,000 payroll. ``I am sure that those money managers who withdrew all their 
funds are feeling really smug right now, thinking they did the right thing. But 
it left the rest of us holding the bag.''

The investment pool's debt holdings that were downgraded below its minimum 
standards amount to about 10 percent of the pool.

The fund's $900 million of asset-backed commercial paper that was downgraded to 
default amounts to 6 percent of its assets. Another $650 million, or 4 percent, 
is invested in certificates of deposit at Countrywide Bank FSB, a unit of 
Countrywide Financial Corp. The bank's rating was cut to Baa1, three levels 
above junk, by Moody's on Aug. 16.

KKR Trusts

The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D, or 
default, from B by Fitch Ratings on Oct. 8. It also has $356 million issued by 
KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch 
said the cut to default on the debt reflected non-payment under the original 
terms. The debt was restructured to extend the maturities to February and March,
and interest payments are continuing.

Florida's pool has $180 million of paper from Ottimo Funding, cut to D from C by
S&P on Nov. 9. S&P said an auction of Ottimo's collateral ``did not generate 
cash proceeds'' to repay the asset-backed commercial paper.

The pool also holds $175 million of short-term debt issued by Axon Financial 
Funding, an SIV. It was cut to D from C by S&P this week. S&P said Axon failed 
to pay liabilities maturing Nov. 26, causing an ``automatic liquidation event.''

The pool was created in 1982 to provide higher short-term returns for local 
schools and governments than were available at banks. Today, Crist suggested the
pool's time may have passed.

``It's a nice thing for us to be able to do if it's prudent,'' Crist told 
Stipanovich. ``I'm wondering if it's a good idea today.''

To contact the reporter on this story: David Evans in Los Angeles at 
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