The credit market mess is affecting the finances of an increasing number of government bodies. A weekend story in the New York Times described how small towns in Norway had taken steep losses on complex US debt instruments (why were they even taking the currency risk?).
Today, Bloomberg reports that the further SIV downgrades are hitting government cash funds. Montana had already seen withdrawals, but Connecticut appears to be a new victim, although its exposure (at least as of now) is not as great.
Montana and Connecticut state-run investment funds hold debt tainted by the subprime mortgage collapse that was cut or put under review by Moody’s Investors Service, leaving local governments vulnerable to losses.
Moody’s lowered its rating on commercial paper issued by the Orion Finance structured investment vehicle, or SIV, to “Not Prime” on Nov. 30, saying its net asset value is inconsistent with Orion’s former Prime-1 rating. Montana owns $50 million of the paper. Moody’s put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records showt….
Montana’s $2.2 billion fund has already had $250 million of withdrawals since the fund’s $90 million holding of Axon Financial was cut to “D,” or default, by Standard & Poor’s last week. It was lowered to “Not Prime” by Moody’s on Oct. 23.
The Montana pool, managed by the Montana Board of Investments, has 25 percent, or $550 million, invested in SIVs, all of which carried top investment ratings when purchased….
Connecticut’s Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody’s. The state’s $5.8 billion fund held notes issued by SIVs affiliated with Citigroup as of Sept. 30: Beta Finance, Dorada Finance and Five Finance, according to its most recent quarterly report.
Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance.
Lewis, a member of the Legislative Audit Committee in Montana, questioned whether the state board’s policy of allowing pool participants to remove their money at full value, which concentrates the risk among those with money still entrusted to the pool. The majority of the money in the pool belongs to state agencies….
Carroll South, executive director of the Montana Board of Investments, said Nov. 30 he will have enough cash to address any further withdrawals