Florida Halts Withdrawals From Investment Pool

Yesterday, Bloomberg reported that a state-run investment fund in Florida witnessed $8 billion of redemptions out of a total fund size of $27 billion because its investors learned the fund held $700 million of defaulted paper. The fund froze the remaining fund assets today. Apparently withdrawals continued yesterday after the Bloomberg story was released, since the latest coverage says that the fund had another $3 billion of redemptions today before the state shut the window.

The latest report comes from Bloomberg:

Florida officials voted at a special meeting to suspend withdrawals from an investment pool for schools and local governments after redemptions reduced assets by 44 percent in the past month.

The pool had $3 billion of withdrawals today alone, putting assets at $15 billion, said Coleman Stipanovich, executive director of the State Board of Administration. The board manages the pool 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,” said Stipanovich 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 pool, 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 pool 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 insurance premium. Sink immediately rejected the idea.

“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 seeking a top credit rating for the pool from Standard & Poor’s.

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One comment

  1. Anonymous

    Thank God The Fed is cutting rates and sending out hints, one can only wonder how that will impact Florida having liquidity problems.

    On that note, this old news seems very related: October 31 – Bloomberg (Jody Shenn): “Fannie Mae, the government-chartered company that finances one-sixth of U.S. apartment-building debt, this month loosened its review process for multifamily-property loans it will buy, allowing lenders to act faster in a potentially weaker market. The first ‘significant’ changes to the Delegated Underwriting and Servicing program in 20 years will enable lenders to make more loans that Fannie Mae will buy without first looking at their details, said Michele Evans, vice president of multifamily corporate affairs at [Fannie]…”

    October 30 – Bloomberg (James Tyson and Jody Shenn): “Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression. Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6%. The government-sponsored companies were able to make loans at about 4.9%, saving the private banks about $1 billion in annual interest. To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September…”

    Oh yes, and 5 million adjustable-rate US mortgages (ARM’S) are slated to reset in the next 18-months. More than two million of these ARM’s are sub-prime and as many as 600,000 sub-prime borrowers could lose their homes..

    Anyone watching Treasury yields fall?

    Heck of a job Brownie….this feels a lot like FEMA policy before during and after Katrina.

    Is this what a liquidity trap looks like as the jaws snap shut?

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