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Wednesday, November 28, 2007 12:09 PM

Florida School Fund Faces Bankruptcy Over ABCP

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I spoke of the pending disaster for public school funds in general and Florida specifically on November 21 in SIV Debts A Disaster For Public School Funds.

As of that time Florida was still hiding losses on defaults. Not any more.

Amid rising asset backed commercial paper defaults, a Florida School Fund is Rocked by an $8 Billion Pullout.

Florida local governments and school districts pulled $8 billion out of a state-run investment pool, or 30 percent of its assets, after learning that the money- market fund contained more than $700 million of defaulted debt.

Orange County, home of Disney World, removed its entire $370 million from the pool on Nov. 16, two days after the head of the agency that manages the state's short-term investments disclosed the defaulted debt in a report delivered to Governor Charlie Crist.

The State Board of Administration manages about $42 billion of short-term investments, including the pool, as well as the state's $137 billion pension fund. Almost 6 percent, or $2.4 billion, of its short-term investments consist of asset-backed commercial paper that has defaulted. Those holdings include $425 million in Axon Financial, a structured investment vehicle, or SIV, according to state records.

About $19 billion remained in the pool this week after the unprecedented wave of withdrawals, which came after the State Board of Administration reported its holdings of downgraded debt to Crist at a Nov. 14 public meeting of his cabinet in Tallahassee. The disclosures followed a month of inquiries by Bloomberg News to Florida officials.

Word Spreads

"Knowing other people were pulling out, and that word was spreading, we looked at the potential for a run on the pool," said Orange County's Moye.
My Comment: Potential has turned into reality and the word is still spreading.
Should the withdrawals continue, Florida's pool may have to consider filing for bankruptcy protection, says John Coffee, a securities law professor at Columbia Law School in New York. "A bankruptcy could handle these kinds of problems if they feel they'll become insolvent,'' he said.

"I'd expect the pool is going to sue the people who sold them the commercial paper, saying the risks were hidden," he said.

Lehman Brothers Holdings Inc. sold Florida most of its now-default-rated asset-backed commercial paper. Lehman spokesman Randall Whitestone declined to comment.
My Comment: A lawsuit would be wasted money. Nothing will be recovered from Lehman.
At Crist's Nov. 14 cabinet meeting, Stipanovich said that while there was "disappointment" over recent downgraded investments, no local government had ever lost money in the pool since its creation in 1982.
My Comment: Well that trend is over.
Investor Confidence

Stipanovich also assured Crist and Florida Chief Financial Officer Alex Sink at that time that the pool maintained the confidence of its depositors.

"There are a lot of rumors flying around," testified Stipanovich. "I'm not aware that there have been any material outflows."
My Comment: Alex Sink and Stipanovich are living in fantasy land to be talking about confidence in the pool.
Because Florida's pool has been forced to quickly raise billions of dollars to meet withdrawal demands, it won't get top dollar for its asset sales, says Joseph Mason, professor of finance at Drexel University.

Mason, who has studied the history of bank failures, understands the rush by Florida municipalities to pull their money from the pool.

"The first people in the withdrawal line get 100 percent of their money," he said. "The loss is suffered by the people behind them in line. Since nobody wants to be at the end, you get a run on the pool."
My Comment: The first rule of panic is to do so before everyone else does. Mason clearly understands this principle.
Mason says while the state of Florida has a moral duty to cover any losses suffered by the pool participants, its own shaky finances will make that difficult. The fourth most- populous state, hurt by the housing slump, cut its revenue projections by 3.9 percent for the fiscal year ending June 30, and 5.2 percent for the following year.

"The state appears to have breached the trust of the investors by putting money in new kinds of debt its managers didn't fully understand, in their search for higher yields," Mason said.
My Comment: Breach of trust is putting things lightly.

I have 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.

For more on the crisis in Canada and an idea of bailout plans that may be concocted here to address the issue please read Global Credit Crisis Canadian Style.

Mike Shedlock / Mish
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