I'm not reading much about it in the local newspaper, but I gather from the Tallahassee Democrat that we here in South Florida are at risk of bearing a large share of the losses coming from the collapse and likely fire-sale liquidation of Florida's Local Government Investment Pool (LGIP). And this even though the local county government pulled out its money before the fund temporarily (?) closed redemptions.
The LGIP is a 25-year-old fund that was designed to let local governments, especially smaller ones without investment advisers, to make some short-term returns on tax revenues. The money is supposed to be readily available for payments of bills and payroll, so it's basically a money-market fund for local government. One that has fancy financial advisers, and still ended up holding some dodgy mortgage-backed securities and being long in Countrywide Financial Corp.
Calculated Risk is all over this story. The basic facts of the run on what amounts to a non-bank bank fund are at Bloomberg, Florida Schools Struggle to Pay Teachers Amid Freeze (Update4): The smarter investors pulled out somewhere between $8-$13 billion during the past month. The slower dumber ones are stuck with an illiquid investment of uncertain value — and many of them need the cash for operating expenses.
Add in the unintentionally darkly funny Florida Governments Reject Idea of Accepting Losses on Pool, in which politicians acted as if bluster could replace economic reality,
A newly formed advisory panel composed of Florida school and local government officials with money frozen in a state-run investment pool said they won't accept a return of less than 100 percent of their investment.
Slow-moving parties are left holding the bag, which still has $14 billion invested in it, but much less if you try to take it out. And who are among the top 20 investors in this decaying fund? Why lots of people around here. Of the (nominal) $14 billion left in the fund, a full seventh, $2 billion, was left there by my insurance company, the state insurer of last resort, Citizens Insurance Co. Depending on the size of the losses, I can imagine much higher premiums next year.
Number seven on the top-20 list is the Southwest Florida Water Management District, which has $285.4 million at risk. Miami-Dade Community College, with $146 million, is number 20. Several near-by counties are also on the list, but not it seems Miami-Dade itself, which pulled out its money before the fund stopped permitting withdrawals.
The strangest part of this story is that it does seem like panic is the worst thing that could happen here. From what I can figure out, originally the mortgage-backed paper was only a small percentage of the fund's holdings. As it has been liquidating assets to pay the governments pulling out, the fund has been selling more quality paper than the illiquid stuff. But as a result, the mortgage-backed paper becomes a larger percentage of the remaining holdings, making remaining investors ever-more nervous. Which is why the fund called a halt to redemptions.
At present, it may be that the 'bad' paper (not all of which is necessarily bad — the problem is no one knows so no one wants to buy it at anywhere near face value) is still only 10% of total assets. But it's a bank run: no one is going to put money in here, and everyone has a rational fear of coming at the tail end, when the mortgage-backed securities might be all that is left.
The fund's $900 million of asset-backed commercial paper that was downgraded to default amounts to 6 percent of its assets. Another $650 million, or 4 percent, is invested in certificates of deposit at Countrywide Bank FSB, a unit of Countrywide Financial Corp. The bank's rating was cut to Baa1, three levels above junk status, by Moody's Investors Service on Aug. 16.
The pool owns $168 million of debt from KKR Atlantic Funding Trust cut to D from B by Fitch Ratings on Oct. 8. It also has $356 million issued by KKR Pacific Funding Trust, cut to D from B by Fitch Ratings on Oct. 2. Fitch said the cut to default on the debt reflected non-payment under the original terms. The debt was restructured to extend the maturities to February and March, and interest payments are continuing.
…Florida's pool has $180 million of paper from Ottimo Funding, cut to D from C by S&P on Nov. 9. S&P said an auction of Ottimo's collateral “did not generate cash proceeds'' to repay the asset-backed commercial paper.
The pool also holds $175 million of short-term debt issued by Axon Financial Funding, the SIV also held by Montana. It was cut to D from C by S&P this week. S&P said Axon failed to pay liabilities maturing Nov. 26, causing an “automatic liquidation event.''
Florida isn't alone here: there are similar problems in many other states.
Oh yes, and PayPal too: PayPal customers' cash exposed to illiquid assets.
Update: And Norway, U.S. Credit Crisis Adds to Gloom in Arctic Norway. Norway?