Florida state fund sings the sub-prime blues

05 December 2007

Florida state officials are scrambling to keep a $14 billion investment fund for local governments afloat. Spurred by a run from depositors stung by downgrades of some $2 billion of the investment pool''s assets, they decided to isolate $2 billion of the fund''s worrisome holdings and to restrict withdrawals on Tuesday 4 December.

Florida''s governor Charlie Crist, a Republican who heads the three-member State Board of Administration, named BlackRock as the fund's interim administrator. BlackRock representatives said the fund, whose assets have been frozen since last Thursday, could be reopened on a restricted basis as early as the coming Thursday.

Like other states, Florida runs a short-term investment pool similar to a money-market fund so that school districts and other local governments can earn higher interest on their cash holdings. Some of these deposits were invested in securities whose ratings and values have been badly damaged by the ongoing sub-prime mortgage crisis.

Florida is not the only state in this predicament. Maine, Connecticut, Montana and Washington state''s King County have also admitted that their funds contain sub-prime-related holdings. But none of them have seen a run by depositors on the fund or had to take the extreme measures that Florida''s 25-year-old investment pool has had to endure.

BlackRock executives have told Florida officials that about 86 per cent of the pool''s assets, which are quite solid, would be placed in a high-quality fund. A second fund would contain the worrisome securities from issuers such as Axon Financial, KKR Atlantic and KKR Pacific, and would contain about 14 per cent of assets.

The proposal would allow investors to withdraw up to 15 per cent of their deposits or $2 million — whichever is greater — from the preferred fund. That would satisfy the liquidity needs of about 70 per cent of the investors, a BlackRock representative said.