By David Evans
Dec. 3 (Bloomberg) -- Montana and Connecticut state-run investment pools hold debt tainted by the subprime mortgage collapse whose ratings were cut or put under review by Moody's Investors Service, the latest examples of downgraded holdings leaving local-government investors vulnerable to losses.
In Florida, disclosures that a state-run pool for schools and cities held $1.5 billion of downgraded and defaulted debt prompted governments to pull out almost half of the fund's $27 billion in assets.
Moody's lowered its rating on commercial paper issued by the Orion Finance structured investment vehicle, or SIV, to ``Not Prime'' on Nov. 30, saying its net asset value is inconsistent with Orion's former Prime-1 rating. Montana owns $50 million of the paper. Moody's put another $105 billion of SIVs on review for a possible downgrade, of which Montana holds $80 million and Connecticut holds $300 million, records show.
``This just reinforces the fact that we have a serious issue,'' said State Senator Dave Lewis, of Helena, Montana, a member of the Legislative Audit Committee.
Schools, fire departments and towns across the U.S. that use state- and county-run funds like a bank account are seeing the far-ranging effects of the housing slump, as complex investments once sold as high-yielding, safe havens are now backed by collateral investors don't want. Modeled after private money-market funds, the investment pools are supposed to hold safe, liquid, short-term debt.
Florida officials halted further withdrawals on Nov. 29 as they consider options to address the crisis. The State Board of Administration's three trustees, Governor Charlie Crist, state Chief Financial Officer Alex Sink and Attorney General Bill McCollum are to meet tomorrow to consider the crisis.
Montana's $2.2 billion fund has already had $250 million of withdrawals since the fund's $90 million holding of Axon Financial was cut to ``D,'' or default, by Standard & Poor's last week. It was lowered to ``Not Prime'' by Moody's on Oct. 23.
The Montana pool, managed by the Montana Board of Investments, has 25 percent, or $550 million, invested in SIVs, all of which carried top investment ratings when purchased.
The city of Billings withdrew $26 million from the pool last week along with Yellowstone County, which pulled $59.5 million, Richland County, which took out $51.3 million and the Lockwood school district, which withdrew $12.1 million.
SIVs are typically offshore companies created by banks and other firms to sell short-term debt to buy mortgage securities and finance company bonds with higher yields. They profit on the spread between the two. Moody's last week said it may lower ratings on $105 billion of debt sold by SIVs after the average net asset values of those sponsored by firms including New York- based Citigroup Inc. declined to 55 percent from 71 percent a month ago. The assets were valued at 102 percent in June.
Connecticut's Short-Term Investment Fund, which invests cash for state agencies and municipalities, is holding $300 million in debt issued by SIVs that may be downgraded by Moody's. The state's $5.8 billion fund held notes issued by SIVs affiliated with Citigroup as of Sept. 30: Beta Finance, Dorada Finance and Five Finance, according to its most recent quarterly report.
Connecticut also holds $100 million in defaulted SIV notes issued by Cheyne Finance. The fund has a $52 million reserve to absorb losses.
Gary Conrad, chief financial officer of New Canaan, Connecticut, said he's withdrawn $20 million of the town's short-term cash from the state's investment fund in the last three weeks. ``We're taking as conservative an approach as possible.''
Kathleen Murphy, the treasurer in Greenwich, said she won't deposit $150 million in tax receipts and proceeds from a bond issue into the Connecticut fund until she gets a better handle on the valuations of its debt holdings.
``We want to have options,'' Murphy said. ``Any kind of downgrades of their securities could end up blowing through their reserve. That needs to be clarified before we put new monies in there.''
Lewis, a member of the Legislative Audit Committee in Montana, questioned whether the state board's policy of allowing pool participants to remove their money at full value, which concentrates the risk among those with money still entrusted to the pool. The majority of the money in the pool belongs to state agencies.
``I think we may need a special session of the state Legislature,'' he said.
Carroll South, executive director of the Montana Board of Investments, said Nov. 30 he will have enough cash to address any further withdrawals.
South said he participated in a conference call for investors in Axon Financial on Nov. 30 and still has no idea how much can be recovered from its collateral.
Placed on review by Moody's were Zela Finance, of which the pool owns $25 million, Hudson Thames Capital, in which the fund invested $25 million, and Premier Asset Collateralized Entity, of which the pool owns $30 million.