Perspective

Draining risk from investment pool

It is the modern-day version of It's a Wonderful Life. Depositors hear bad news. Too many want all of their money back immediately, and there's a run that makes the situation worse. Jimmy Stewart makes everything work out fine in the movie, but the final scene for Florida's troubled government investment pool has yet to be written.

The State Board of Administration trustees -- Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink -- acted appropriately in temporarily shutting down the pool after its assets shrank from about $27-billion to $14-billion. Their prudent approach to restructuring the pool did not stop withdrawals when it reopened Thursday, but it gives the pool a reasonable chance to recover and local governments that deposited money there adequate -- but not complete - protection.

By separating some 14 percent of the pool's assets that are primarily troubled securities tied to the subprime mortgage crisis, the state enabled local governments desperate for cash to make limited withdrawals from the remaining high-quality assets. Some local officials have complained about the restraints and possible fees, but this is a sensible solution as long as it is not permanent. There have to be some temporary restrictions to slow withdrawals and provide some opportunity for the pool to survive, the troubled securities to recover (more than half of those are expected to pay in full) and local governments that did not panic to avoid major losses. Investors took more than $1.7-billion from the high-quality fund in the two days after it reopened, but in a positive sign the pace of withdrawals had slowed by the close of business Friday.

Florida is not the only state to feel the consequences of the subprime mortgage meltdown, which have rippled throughout the economy. Sink says there is no indication that managers of the investment pool strayed from investment guidelines or its mission to provide a liquid, short-term, high-quality fund for local governments. Even if a review confirms that assessment, there are lessons to learn with the benefit of 20/20 hindsight.

First, the state's investment managers were not transparent enough with the state board trustees or the local government investors about the investment pool's problems and their efforts to deal with them. That criticism contributed to the resignation of Coleman Stipanovich, the executive director of the state board whose departure is for the best.

Second, local governments developed a false sense of security about the fund. While their fears about being unable to pay bills or meet payrolls without access to their money are legitimate, the insistence by some that the state guarantee their entire investment is unreasonable. While no government had lost money in the fund's history, the fund's annual return consistently beat its benchmarks. The state fund was low-risk; that does not mean no-risk.

This crisis provides an opportunity for Crist, McCollum and Sink to make improvements. First, they should conduct a national search for Stipanovich's replacement. This job is too important to be filled by political appointees as it has been in the past. Second, the governor and Cabinet members should insist on more transparency about the fund's management, review the investment rules and discuss the level of acceptable risk while investing public money in such an uncertain economy.

[Last modified December 10, 2007, 07:38:16]