Audit warned about investment risk

Published: Thursday, January 3, 2008 at 3:45 p.m.
Last Modified: Thursday, January 3, 2008 at 3:46 p.m.

An internal audit warned last year that the state board that invests local government money should have a special committee to review overall risk in the agency's investments, and that it was relying on too few brokerages when buying securities.

The State Board of Administration audit was completed in March, several months before cities and counties began frantically withdrawing billions of dollars from the Local Government Investment Pool with fears of losses in risky mortgage-backed securities held by the fund.

The pool that works like a money market account was closed in November to stop the run. When it was reopened in December some assets in the account were walled off, limiting the access local governments have to their money.

Pool investors at a meeting in Tallahassee complained they remain unfairly handcuffed unable to get full access to their money when they stuck by the pool by not withdrawing their cash during the run.

Among those who are angry is a group of local governments in Hillsborough County, who charged that a fee requirement for investors to get access to all the money in their accounts isn't legal and shouldn't continue.

Pat Frank, the county's clerk of court, sent a letter to the board's trustees Thursday saying that the 2 percent fee for local governments wishing to withdraw more than 15 percent of their money "smacks of injustice," because governments that withdrew their money from the fund can now get back in to it and not be subject to such fees.

Investors heard from SBA officials that they expect to reduce restrictions on access to money in the pool in the next few months, raising the 15 percent threshold to more than 20 percent early this year.

Still, several governments have continued to lack confidence in the state board.

At the meeting, Lee County Schools Superintendent James Browder urged the SBA to move quickly in making the fund more liquid.

"I have people in my school district who are starting to ask the question, 'Jim, What did you do with our money?'"

Some local officials continued to complain about a lack of information from the SBA on what was going on with the fund. One local official told SBA interim director Bob Milligan that he got more information about the fund from a ratings agency than from the SBA.

Milligan said that was one of his top concerns and acknowledged that failure to keep local governments informed was part of what led to the run in the first place.

"I think the SBA failed to do as effective a job as they might have done communicating," Milligan said.

While the pool is overseen by the State Board of Administration, its day-to-day investment management has been contracted out to a private firm, BlackRock Inc.

In the audit, internal auditors had also warned that the agency needed a policy to review and approve investments in "new products." Analysts have criticized over-investment in certain mortgage-backed securities as overly complicated securities that investors haven't always understood.

The SBA responded to the audit that it generally agreed and had already undertaken an effort to create more oversight of its overall risk. The agency noted that in 2005 it created a risk management unit dedicated to monitoring, measuring and evaluating risks across the SBA, which manages and invests more than $180 billion in assets, including the $9.8 billion dollar local government pool.

The audit criticized a "heavy concentration of trading business with few brokers."

The SBA's auditors noted that in 2003 and the first half of 2004, 77 percent of trades were done through one of only five brokers. The auditors were particularly concerned that 20 percent of short-term trades were done with Bank of America Corp. and more than 25 percent of the long-term trading business was given to Barclays Bank PLC in 2003.

The audit noted that Lehman Brothers Holdings Inc. was one of the five brokers that garnered 77 percent of the SBA's business in the period. Lehman later sold the SBA nearly half the $2.75 billion in securities that were downgraded or defaulted that led to problems with the local government pool.

Former Gov. Jeb Bush was hired as a consultant to Lehman Brothers in June, but the brokerage has said his role with the firm had nothing to do with the sales of the securities in question.

SBA's management agreed to limit trading to a maximum of 30 percent for any one dealer, but noted that only a few dealers are willing to commit the capital to make such large transactions.

"We will, by default, have concentrated trading volumes," management said in its response. "To arbitrarily set limits on trading would prevent us from getting best execution and impair our ability to properly manage our portfolios."

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