The Next Shoe Drops

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Florida Acts to Bolster Investment Fund
By Stacy-Marie Ishmael in New York

Published: December 5 2007
Financial Times

Florida state officials yesterday took action to shore up its troubled $14bn investment fund, opting to isolate riskier assets and impose restrictions on withdrawals.

The state-run Local Government Investment Pool was hit by a wave of redemptions after investors discovered it held $1.5bn of subprime-related securities that had been downgraded to levels below investment guidelines.

In response, the State Board of Administration, which oversees the pool, last week halted withdrawals, preventing school districts and local governments from accessing money needed to pay wages and bills.

The board also hired BlackRock, the asset manager, to analyse the fund’s holdings and provide advice on how to reopen access to the pool, which was modelled on money market mutual funds and was supposed to be extremely safe and liquid.

Yesterday, the board approved BlackRock’s recommendation to split the pool into two, separating the subprime assets from the rest.

About 86 per cent - or $12bn - of the pool’s assets would be placed into one fund, which would continue to be run as a cash vehicle for investors. The remaining assets would be walled off into a second, non-drawable fund and held there until maturity.

BlackRock ruled out the possibility of selling the subprime assets to the state pension fund, which is also run by the SBA.

Assuming the proposal goes ahead as planned, investors would receive the majority of their funds in the next 12 months, according to BlackRock. The asset manager said the pool could be reopened on a restricted basis as early as tomorrow but there would be restrictions on withdrawals.

Investors will be allowed to make fee-free redemptions for up to 15 per cent of their holdings or $2m, whichever is larger. Redemptions in excess of those values would incur a fee.

Local officials who invested in the state pool said they would support the plan if they received guarantees they would not lose principal.

“The state should provide a guarantee of a 100 per cent return,” said Jeannie Gardner, director of financial services for the Florida League of Cities.

Charlie Crist, Florida’s governor, said: “What [BlackRock has presented] is prudent. It is logical. It restores confidence, and it’s done in a calm, smart way.”

Board trustees also voted to retain BlackRock as the interim manager of the fund, taking over the SBA for up to 90 days. They will seek an outside firm to run the pool.

Coleman Stipanovich, the SBA’s executive director of the state board, resigned just before the vote.

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Bloomberg’s take on the issue…

Florida Just First to Face National Run on the Bank: Joe Mysak

By Joe Mysak

Dec. 4 (Bloomberg) – Florida officials are going to meet today to talk about the crisis in the state’s Local Government Investment Pool. I don’t know what they are going to talk about, but I know what they had better decide.

The State Board of Administration runs the pool, and its three trustees, Governor Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum, had better decide that it’s in the best interest of the state to ensure that all of the pool participants get their money back.

The investment pool, which contained $27 billion this summer, now has $14 billion, the result of withdrawals by municipalities with keenly developed senses of self- preservation. On Nov. 29 the board told the remaining participants they couldn’t withdraw any more money from the pool.

The pool, which is where most of the state’s municipalities put their money when they are not using it, owns $1.5 billion in securities that have been downgraded or defaulted as a result of the subprime market collapse.

In freezing the pool, Coleman Stipanovich, executive director of the board, said, ``If we don’t do something quickly, we’re not going to have an investment pool.’’

The state stopped the clock.

The same clock is ticking for every state in the country where school districts and cities and towns put their faith in someone else, usually at the county or state level, to manage their money.

What’s It Worth?

This means, I think, most of them.

Of course, that’s the problem with Muniland in general: Nobody ever really knows precisely what’s going on when a crisis like this hits. There might be as many as 100 pools like this across the nation, with assets of something like $200 billion.

They are supposed to offer daily liquidity for the public sector in much the same way that money-market funds do for the private sector. They are supposed to invest their clients’ money in the safest possible securities, good old boring things like U.S. Treasuries, top-rated commercial paper and certificates of deposit.

It seems, however, that some of the commercial paper investments the Florida pool, and others like it across the country, purchased were backed by subprime mortgages and other things that have declined precipitously in value.

The people who manage the funds find themselves in the position of not being able to figure out exactly what the assets are worth, because they don’t trade, or don’t trade much, and no one seems to know what the stuff is.

Cents on the Dollar

Got that? Neither do I. Let me try this again. These state and county-sponsored pools invested in highly rated short-term securities that were subsequently downgraded really fast or even went into default because of the subprime disaster.

When word somehow gets out that the pools own this stuff, either because the pools themselves 'fess up or because some enterprising reporter drags the information out of them with open-records requests, pool participants withdraw their money.

If enough participants withdraw, the pools will have to sell some of that stuff that nobody can figure out what it’s worth. You can bet that Wall Street, which packaged and sold the stuff in the first place, isn’t going to offer 100 cents on the dollar for it.

This means that not everyone will get all their money back. On Nov. 30, an advisory panel of local governments in the Florida pool held a conference call with members of the State Board of Administration.

The SBA put out a Preferences Survey'' for discussion, and Question No. 1 wasWhat percent of your current holding would you withdraw in December 2007, if it meant you would receive 99 cents on the dollar?’’ The next three questions were exactly the same, except with 98 cents on the dollar, 95 cents on the dollar and 90 cents on the dollar.

Eyes on Florida

The municipal officials on the call would have none of it. They want 100 cents on the dollar. Anything less, they said, would be unacceptable.

They were a pretty conciliatory and reasonable bunch. They kept saying that what was needed was to restore confidence and trust in the fund. Most said they did not have immediate needs - -such as covering payroll or making debt-service payments – and that they thought some provision should be made for the smaller municipalities among them who did.

The key word here, of course, is trust, and that is in very short supply at the moment. The state might make a real statement today, and assure municipalities that the great subprime meltdown of 2007 won’t swallow them up.

Or it can let them all dangle. I have a feeling other municipalities across the nation will be watching, ready to reach for the telephone and bring their own deposits home.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: December 4, 2007 00:02 EST