Recycles dryer sheets
Join Date: Oct 2007
Money market funds not always safe
Florida money market pool blows up offi... --
don't be " left holding the bag "
Florida Halts Withdrawals From Local Investment Fund (Update2)
2007-11-29 16:40 (New York)
(Adds comment from executive director in the 10th
paragraph; impact on schools in the 16th-20th paragraphs;
downgraded securities in the 21st-23rd paragraphs.)
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, which 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 in 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 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 said.
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
``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 fund.''
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 & Poor's.
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 rejected.
``It's not set up to pay payroll,'' Crist said.
Because the trustees' decision to freeze withdrawals was an
oral vote, not based on approving a written document, it is
possible exceptions will be made to allow municipalities to meet
their payrolls, said State Board of Administration spokesman
``We're getting a lot of calls,'' McCauley said.
It wasn't decided how long the suspension would last. The
trustees meet again on Dec. 4.
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
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.
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
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.''