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Freeze Is On In Florida


It's far too late to be thinking about credit protection.


On Wednesday in Florida School Fund Faces Bankruptcy Over ABCP I made a prediction: "The State of Florida will freeze withdrawals and come up with a hokey plan to fix things just as happened with ABCP in Canada."

So it was no shock that on Thursday Florida Halts Withdrawals From Local Investment Fund:

Florida officials voted to suspend withdrawals from an investment fund for schools and local governments after redemptions sparked by downgrades of debt held in the portfolio reduced assets by 44 percent.

The Local Government Investment Pool had $3.5 billion of withdrawals today alone, putting assets at $15 billion, said Coleman Stipanovich, executive director of the State Board of Administration, which manages the fund 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," Stipanovich said 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.

My comment: You already don't have an investment pool. What you have is frozen toxic waste. Freezing toxic waste does not make it any less toxic. Furthermore, and as a friend emailed me today, "there's no reason to keep an investment pool aside from a bunch of bureaucrats wanting to preserve their sinecures."

"The people who withdrew were right to withdraw," said Joseph Mason, finance professor at Drexel University in Philadelphia and a former economist at the U.S. Treasury Department.

"The people who trusted in the good faith of the pool's management were burned. This is a severe blow if not a death knell to the concept of state-run investment pools."

The board met today to consider ways to shore up the fund, including obtaining credit protection for $1.5 billion of downgraded and defaulted holdings hurt by the subprime market collapse.

My comment: It's far too late to be thinking about credit protection. For starters it's amazingly expensive now (it was cheap eight months ago) but the second problem is you cannot trust the protection you will get.

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.

"It will be a wonderful diversifier," Stipanovich said.

My comment: It will not diversify anything. It will rob Peter to pay Paul. What kind of diversification is that?

The trustees discussed an exemption to the suspension in withdrawals that would allow cities and schools to take money from the pool to pay employees; it was rejected.

"It's not set up to pay payroll," Crist said.

Because the trustees' decision to freeze withdrawals was an oral vote, not based on approving a written document, it is possible exceptions will be made to allow municipalities to meet their payrolls, said State Board of Administration spokesman Mike McCauley.

My comment: These conversations get loonier and loonier. I predicted "hokey". I have to take that back already. It's loony. They were actually discussing freezing the plan but making payroll payments from it based on a distinction between a written document and an oral vote. Would anyone but a bureaucrat desperate to shield himself from blame concoct such a strategy? Sheeesh.

Here are three simple questions: Don't you have to sell something to make payments? Can you sell something if it's frozen? Does it make any difference if the vote is oral vs. written?

The pool was created in 1982 to provide higher short-term returns for local schools and governments than were available at banks. Today, Crist suggested the pool's time may have passed.

My comment: The time to stop chasing yield has long passed. Please consider General Electric's (GE) "enhanced" cash fund breaks the buck: "GE made an extra .1%+- or so for three years (.3%+- total) and now have given back 4% in one fell swoop." The situation in Florida looks far more serious.

Local Government Return Pools

Click here to enlarge.

The above chart is thanks to SBA Florida: Investing for Florida's Future.

That chart was the pride and envy of the nation. I now wonder how many other plans got sucked into similar strategies.

Those left in the fund are going to bear the brunt of the losses. However, those losses are not possible to calculate at this time. The sad fact is there simply is no market for a lot of the junk remaining in the fund.

No positions in stocks mentioned.
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