Florida Weighs Steps Needed To Lift Freeze on State Fund - WSJ.com

Florida Weighs Steps Needed To Lift Freeze on State Fund - WSJ.com

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."