Panic Groups Florida Government Investment Pool

Another outcome of the mortgage crisis is that supposedly “safe” money market accounts such as the one in Florida for local government entities and school districts invested in SIVs that were recently downgraded. Now the state of Florida has been forced to freeze the assets of the money market account until it figure out how to handle withdrawals. I can hear the investment officers saying right now, “We never thought that would happen.” Text in bold is my emphasis. From CNNMoney:

Florida officials suspended withdrawals from a state-operated investment pool Thursday, abruptly halting a run by local governments spooked over the downgrade of its mortgage-related holdings.

The State Board of Administration, chaired by Gov. Charlie Crist, acted during an emergency meeting after local governments had taken out nearly $10 billion, or 40 percent of the pool's assets, in the past two weeks. That included $3.5 billion Thursday morning.

The investment pool is similar to a private money-market fund. Cities, counties, school districts and other local entities invest money on a short-term basis in the fund and withdraw cash when needed to make payrolls and pay other operating costs.

The suspension will remain in effect at least until Tuesday, when the board will meet again to consider proposals for shoring up and restoring confidence in the pool.

The pool had nearly $25 billion in assets when the run began after about $900 million in asset-backed commercial paper had been downgraded below purchase credit rating guidelines.

"Participants are scared to death," said Coleman Stipanovich, the board's executive director. "If we don't do something quickly, we're not going to have an investment pool."

Stipanovich blamed the run on a news report that characterized the downgrading as a default, which he disputed. At least one local government - Leon County - withdrew its money before the article was published after learning about the downgrade.

"No matter what's motivating it, whether it's factual or not factual, it's almost irrelevant at this point," Crist said. Wayne Blanton, executive director of the Florida School Boards Association, said districts have other assets and lines of credit they can use until Tuesday.

"We can make payroll, but the fact is the purpose of that system is to help us move our money in and out and at any given time - 24 hours a day," Blanton said. "Right now they have frozen that ability."

Crist and the other board members, Chief Financial Officer Alex Sink and Attorney General Bill McCollum, were worried that without suspending withdrawals, the pool would run out of money because the downgraded assets would have to be sold at a loss. That would leave the last local governments in the pool with nothing.

McCollum participated by telephone from Utah, where he is attending a meeting of the National Association of Attorneys General.

Stipanovich proposed using the state's $137 billion pension fund to secure the downgraded paper, but board members were cool to that idea. They voted, instead, to seek advice from outside financial experts before considering the proposal again Tuesday.

"It's something that, speaking for myself, I'm not excited about," Sink said.

Crist agreed. He said he didn't want to do anything to harm the pension plan and state and local government employees who depend upon it.

Stipanovich said there would be little risk to the pension plan because the downgraded paper is backed by highly rated mortgages that continue to return millions of dollars in premiums and interest to investors.

Their market value, though, has plummeted because investors are shunning all mortgage-related securities due to losses on subprime mortgages.

Even if they do default, the pension fund would receive the mortgages as collateral and they would continue to pay off, Stipanovich said. He said they also should regain their market value although that could take years.

That's no problem for the pension fund, which invests for the long term, but it is for the local government pool because it needs to keep its assets liquid.