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Losses Stack Up

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By Tomoeh Murakami Tse
Washington Post Staff Writer
Tuesday, December 4, 2007

NEW YORK, Dec. 3 -- Local governments and school districts in Florida scrambled Monday to assess the damage to their investment portfolios from subprime mortgage loans, as the credit crisis reached into pockets of the investment world previously thought to be out of harm's way.

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Florida last Thursday froze withdrawals from its Local Government Investment Pool, a sort of money-market fund for the state's public agencies, after nervous investors pulled out $10 billion in 15 days.

On Monday evening, public school superintendents, municipal finance directors and county clerks from all over Florida participated in a tense conference call to inquire about the fate of their money -- money that was supposed to gain modest interest in a supposedly risk-free, easy-to-access fund.

"We keep the lights on and we keep the buses running and we make payroll with that money," said Stephen Hegarty, a spokesman for the Hillsborough County School District in Tampa, which has $573 million invested in the frozen fund. "We're paying very close attention to this thing."

The run on Florida's state fund was sparked after local governments discovered it held subprime mortgage assets that had soured.

The Florida fund had invested in about $2 billion in what are known as structured investment vehicles and other debt instruments that have been downgraded by rating agencies and no longer meet the fund's minimum requirement for investment. Those hard-to-value assets have been roiling financial markets for months as housing values decline and mortgage delinquencies rise.

Florida public agencies are not the only ones having problems. A number of local and state funds have exposure to subprime assets whose values have fallen dramatically. While no other state fund has taken the drastic step of stopping withdrawals, analysts say more pain is on the way.

Moody's said last week that it had downgraded or put on watch for downgrades more than $100 billion of debt sold by structured investment vehicles. Standard & Poor's said last month that it could downgrade a $5 billion investment pool in Kings County, Wash., because of its exposure to the vehicles.

"Things like this don't usually come in ones," said Ed Rombach, senior derivatives analyst at Thomson Financial. "The Wall Street distribution machine fed this stuff everywhere."

Susan Mangiero, president of independent research company Pension Governance, added that many public investment plans are run by a small staff juggling other duties and that there is no experience or education requirement for trustees. "Statistically speaking, you know there are going to be some problems," she said.

In Montana, local governments have pulled $260 million from the state's $2.4 billion Short Term Investment Pool, said Carroll South, executive director of the Montana Board of Investments.

The fund, records show, has $550 million invested in structured investment vehicles (SIVs), which borrow short-term money by issuing commercial paper and invest in higher-yielding, longer-term assets, including subprime-mortgage backed securities. But the vehicles have been squeezed as mortgage investments shed value and buyers for the commercial paper have all but disappeared.

Of the $550 million, $90 million is invested in Axon Financial, which has been downgraded and is being reorganized. South said the fund started investing in SIVs in April.

He added that Montana's investment pool would not be at risk of a freeze similar to Florida's, because 70 percent of the money is from state agencies that "can't invest anywhere else."

Officials in Virginia, Maryland and the District said their exposures to SIVs and other mortgage-related assets were either non-existent or negligible.

Overseers of the troubled Florida fund are scheduled to meet Tuesday to consider a proposal from BlackRock, an asset manager hired to help the state reopen the fund.

In the Monday conference call with Florida's local governments and schools, BlackRock explained that of the $14 billion left in the fund, $12 billion -- or 86 percent -- was in "high-quality" assets. The rest were either securities in default or under stress because of credit issues. The team proposed breaking the fund into two, with one holding the "clean" assets and the other holding the distressed. If a school district had $100 million invested, $86 million would go into the clean fund under this scenario.

BlackRock officials also proposed redemption fees for the "clean" fund after a certain threshold to prevent massive withdrawals.


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