Florida Just First to Face National Run on the Bank: Joe Mysak
Joe Mysak
Dec. 4 (Bloomberg) -- Florida officials are going to meet today to talk about the crisis in the state's Local Government Investment Pool. I don't know what they are going to talk about, but I know what they had better decide.
The State Board of Administration runs the pool, and its three trustees, Governor Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum, had better decide that it's in the best interest of the state to ensure that all of the pool participants get their money back.
The investment pool, which contained $27 billion this summer, now has $14 billion, the result of withdrawals by municipalities with keenly developed senses of self- preservation. On Nov. 29 the board told the remaining participants they couldn't withdraw any more money from the pool.
The pool, which is where most of the state's municipalities put their money when they are not using it, owns $1.5 billion in securities that have been downgraded or defaulted as a result of the subprime market collapse.
In freezing the pool, Coleman Stipanovich, executive director of the board, said, ``If we don't do something quickly, we're not going to have an investment pool.''
The state stopped the clock.
The same clock is ticking for every state in the country where school districts and cities and towns put their faith in someone else, usually at the county or state level, to manage their money.
What's It Worth?
This means, I think, most of them.
Of course, that's the problem with Muniland in general: Nobody ever really knows precisely what's going on when a crisis like this hits. There might be as many as 100 pools like this across the nation, with assets of something like $200 billion.
They are supposed to offer daily liquidity for the public sector in much the same way that money-market funds do for the private sector. They are supposed to invest their clients' money in the safest possible securities, good old boring things like U.S. Treasuries, top-rated commercial paper and certificates of deposit.
It seems, however, that some of the commercial paper investments the Florida pool, and others like it across the country, purchased were backed by subprime mortgages and other things that have declined precipitously in value.
The people who manage the funds find themselves in the position of not being able to figure out exactly what the assets are worth, because they don't trade, or don't trade much, and no one seems to know what the stuff is.
Cents on the Dollar
Got that? Neither do I. Let me try this again. These state and county-sponsored pools invested in highly rated short-term securities that were subsequently downgraded really fast or even went into default because of the subprime disaster.
When word somehow gets out that the pools own this stuff, either because the pools themselves 'fess up or because some enterprising reporter drags the information out of them with open-records requests, pool participants withdraw their money.
If enough participants withdraw, the pools will have to sell some of that stuff that nobody can figure out what it's worth. You can bet that Wall Street, which packaged and sold the stuff in the first place, isn't going to offer 100 cents on the dollar for it.
This means that not everyone will get all their money back. On Nov. 30, an advisory panel of local governments in the Florida pool held a conference call with members of the State Board of Administration.
The SBA put out a ``Preferences Survey'' for discussion, and Question No. 1 was ``What percent of your current holding would you withdraw in December 2007, if it meant you would receive 99 cents on the dollar?'' The next three questions were exactly the same, except with 98 cents on the dollar, 95 cents on the dollar and 90 cents on the dollar.
Eyes on Florida
The municipal officials on the call would have none of it. They want 100 cents on the dollar. Anything less, they said, would be unacceptable.
They were a pretty conciliatory and reasonable bunch. They kept saying that what was needed was to restore confidence and trust in the fund. Most said they did not have immediate needs - -such as covering payroll or making debt-service payments -- and that they thought some provision should be made for the smaller municipalities among them who did.
The key word here, of course, is trust, and that is in very short supply at the moment. The state might make a real statement today, and assure municipalities that the great subprime meltdown of 2007 won't swallow them up.
Or it can let them all dangle. I have a feeling other municipalities across the nation will be watching, ready to reach for the telephone and bring their own deposits home.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net