On Wednesday in Florida School Fund Faces Bankruptcy Over ABCP...

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. BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? The State of Florida will freeze withdrawals and come up with a hokey plan to fix things just as happened with ABCP in Canada. 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 ' '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.' My Comment' Every one of these managers thought they were geniuses for eking out an extra.1-.2% annually. All of that has now been given back and then some. 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 8 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. 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. 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? Hal Wilson, chief financial officer for the school district in Jefferson County, located 30 miles (42 kilometers) east of Tallahassee, said he had decided not to pull the district's $2.7 million from the fund. He said he relied on assurances from the state board that the money would be secure for his 1,559-student school system, with 220 employees. 'I might not be able to pay our employees tomorrow,' he said, referring to his $850,000 payroll. 'I am sure that those money managers who withdrew all their funds are feeling really smug right now, thinking they did the right thing. But it left the rest of us holding the bag.' My Comment: Hal, you clearly forgot the first rule of panic: If you are going to panic, do so before everyone else does. In this case it probably is not even panic we are talking about. Rather it's ability to smell a rat. 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. 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. The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. 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