THE LOCALS ARE GOING TO BE HURT, TOO

States, counties, school districts and other public entities that have money to invest are also being hurt by the sub-prime collapse, mostly because the rating agencies wildly over-estimated these securities.

Public School Funds Hit by SIV Debts Hidden in Investment Pools
By David Evans

Nov. 15 (Bloomberg) -- Hal Wilson smiles at the blue numbers on his desktop screen. His money is yielding 5.77 percent. For the chief financial officer of Florida's Jefferson County school board, that means the $2.7 million of taxpayer funds he's placed in the state's Local Government Investment Pool is earning more on this October day than it would get in a money market fund.

What Wilson didn't know in October -- and what thousands of municipal finance managers like him across the country still haven't been told -- is that state-run pools have parked taxpayers' money in some of the most confusing, opaque and illiquid debt investments ever devised.

These include so-called structured investment vehicles, or SIVs, which are among the subprime mortgage debt-filled contrivances that have blown up at the biggest banks in the world.

The $27 billion Florida pool, the largest in the U.S., has invested $2 billion in SIVs and other subprime-tainted debt, state records show. About $725 million of these holdings have already defaulted.

All told, there were about 100 such pools, containing more than $200 billion at the end of 2006, according to Westborough, Massachusetts-based iMoneyNet, a research firm that tracks these funds.

Public fund managers say they've bought SIV debt because it had the safest credit ratings and offered higher yields than other short-term fixed-income investments.

King County finance director Ken Guy says he thought the fund was making a safe investment when it bought $53.5 million in commercial paper of an SIV-lite called Mainsail II in July. Fund managers found that Mainsail, incorporated in the Cayman Islands, was top rated, Guy says. ... The pool bought the paper from New York-based Merrill Lynch. Just three weeks after King County invested, Moody's dropped its rating for Mainsail by three notches from its highest Prime-1 rating to its lowest rating, Not Prime, or junk. Mainsail failed to make payments to investors, including King County, on Oct. 4.

State fund managers looking for more information on SIVs won't find it in SEC filings; there are none. SIVs, which are companies with no employees, aren't required to publicly disclose audited financial statements.