Politics

Fund didn't share worries

Trustees weren't told about meetings concerning troubled securities for months.

By Jennifer Liberto, Times Staff Writer
Published February 13, 2008

TALLAHASSEE - Key managers at a government-run fund knew they had a crisis brewing with questionable securities at least two months before they alerted stakeholders or their own bosses, new records suggest.

The State Board of Administration released a time line on Tuesday of the meltdown of its local government investment fund. The document reveals that a small SBA team held internal meetings and participated in conference calls with other investors of the same troubled securities starting in August.

But the team would take months to inform local governments that had money in the fund or the SBA trustees: Gov. Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum.

"The SBA was in very intense negotiations in August to restructure over a billion dollars in assets without any disclosure to this board, which is unacceptable," Sink said Tuesday after the trustees were given the time line. "It made me mad all over again."

In November, the SBA experienced a $10-billion run on what had been a roughly $25-billion local government investment fund earlier that month, as dozens of municipalities pulled money as word spread that the mortgage crisis could impact the fund. SBA director Coleman Stipanovich resigned the following month.

The fund didn't hold subprime mortgages, which are at the heart of the mortgage crisis, but the state pool bought about $1-billion in securities backed by other types of mortgages. The securities were eventually downgraded, and their values dropped as investors shied away from anything mortgage-related.

Since then, the fund has been reorganized with bad investments segregated in a fund that can't be touched. Good investments tallying roughly $10-billion can be tapped, with some restrictions. The SBA trustees have ordered an outside audit of the matter.

Yet the time line gives a sneak peek of what auditors may later find, pointing out that SBA managers were aware of significant problems much earlier than they let on.

Sometime before November, SBA even hired an outside lawyer to help it negotiate its position on troubled securities, Sink said. She learned of the move only a few weeks ago while meeting with SBA fund managers, she said.

The time line states that SBA staff and other investors in KKR Atlantic Funding and KKR Pacific Funding, two troubled securities caught up in the mortgage crisis, began a series of conference calls about KKR's problems on Aug. 21. On the same day, Sink's chief of staff, Jim Cassady, sent an e-mail to the SBA's chief executive, asking about "subprime risk," a review of e-mails by the St. Petersburg Times found.

Stipanovich answered Cassady in another e-mail that SBA had "some exposure" to troubled securities but that those investments had been "affirmed by the rating agencies."

"We believe the investments remain sound from a credit quality perspective," he added.

Another SBA e-mail dated Aug. 30 suggests that SBA employees were even starting to duck blame for the troubled investments early on.

"Let's be sure we're clear on what I expect from you in terms of managing any 'problematic' ... investments," wrote senior investment officer Rob Smith to subordinate Michael Lombardi, who oversees the fund's investment purchases. "The decision and resultant ownership of performance, positive or negative, is yours."

The first hint of problems to counties, cities, schools and courts - whose money was at stake - came in an SBA quarterly newsletter to local government fund investors released Oct. 31. It mentioned "restructuring negotiations with two asset-backed commercial paper issuers" but added that "credit markets are showing some signs of gradually recovering."

"That October report painted a rather positive picture, saying there was no reason to be concerned," said Pat Frank, clerk of Hillsborough County Circuit Court, which still has money in the local government fund. "As I look at the whole picture, it seems like it was deftly designed so nobody would know they were trying to ... correct things before anyone found out."

Hillsborough school superintendent MaryEllen Elia said she wasn't surprised to hear SBA managers knew of problems months before mentioning it to investors.

"Who did they tell? And when did they tell them? We're hoping to get to that piece with the external auditors," said Elia, who sits on an SBA advisory committee looking into fund problems.

The time line report seemed to annoy Sink more than any of the other trustees. Other SBA board trustees said they were waiting for the external audit to explain more.

"The attorney general saw nothing troublesome about the time line, but he's looking forward to the results of the audit, because he is suspicious and it may uncover some potential problems," McCollum spokeswoman Sandi Copes said.

Jennifer Liberto can be reached at jliberto@sptimes.com or 850 224-7263.

[Last modified February 13, 2008, 10:20:18]