Sunday, November 18, 2007

Bloomberg: Public School Funds Hit by SIV Debts Hidden in Investment Pools

Hal Wilson smiles at the blue numbers on his desktop screen. His money is yielding 5.77 percent. For the chief financial officer of Florida's Jefferson County school board, that means the $2.7 million of taxpayer funds he's placed in the state's Local Government Investment Pool is earning more on this October day than it would get in a money market fund.

And Wilson says he knows the Florida officials who manage the funds of the 1,559-student district have invested them wisely.

``We're such a small school district,'' Wilson, 55, says. ``We don't have the time or staff for professional money management. They have lots of investment advisers. It's risk free and easy.''

It may be easy, but it's not risk free. What Wilson didn't know in October -- and what thousands of municipal finance managers like him across the country still haven't been told -- is that state-run pools have parked taxpayers' money in some of the most confusing, opaque and illiquid debt investments ever devised.

These include so-called structured investment vehicles, or SIVs, which are among the subprime mortgage debt-filled contrivances that have blown up at the biggest banks in the world......

Among the places caught up in the SIV and subprime snarls are Connecticut, Florida, Maine, Montana and King County, Washington. Public funds hold $1 billion of defaulted asset- backed commercial paper, including $273.5 million from SIVs.

Montana entrusted $465 million, or 19 percent of its $2.5 billion investment pool, to SIVs.

Nobody knows how much more pain is coming. State funds could lose hundreds of millions of dollars, says Lynn Turner, chief accountant of the U.S. Securities and Exchange Commission from 1998 to 2001.

Wall Street peddled toxic waste to many, many bagholders. Cities and States are just some of the victims. These local governments are going to face massive losses in their investment portfolios just as they face declining tax revenues and increased expenditures in the economic slowdown. I bet it's going to play well in the Mudville Gazette: "School loses millions on subprime investments".

Wall Street is the next Detroit, they are building their legions of burned customers now. All of the institutions who purchased something toxic that their rep at the Wall Street Banks said was safe are going to remember this. Even if it cannot be proved, they will remember this as fraud. The big boys should go to Detroit and ask them what it's like to sell to a cynical customer base that does not believe what you say about the quality and safety of your products, if they listen at all.

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