Florida Freezes Its Fund as Governments Pull Out

The New York Times reports:

Seeking to stem a multibillion-dollar run on an investment pool for local governments, top Florida officials voted yesterday to suspend withdrawals from the fund, leaving some towns and school districts worrying about how they would pay their bills.

Local governments in recent weeks have been withdrawing billions of dollars from the fund, fearing losses on investments in debt related to subprime mortgages. The rush to get out of the fund began even though a relatively small percentage of the fund is invested in subprime-related debt, and it is unclear what losses the fund may sustain.

Florida’s troubles were the latest episode in the running crisis in subprime lending that has been troubling the credit markets this fall, hitting homeowners, mortgage providers, hedge funds and Wall Street firms. It was the first time since the problems started that a large state investment pool has been forced to freeze withdrawals.

“If we don’t do something quickly, we’re not going to have an investment pool,” warned Coleman Stipanovich, executive director of the Florida State Board of Administration, which operates the investment fund. He spoke at a special board meeting yesterday, called to decide what to do about the flood of withdrawals.

The state-run fund pools money from local communities so they can get better returns on investments. The Florida fund, known as the Local Government Investment Pool, had about $27 billion in assets until this fall. Its value had fallen to just $15 billion this month because of withdrawals, Mr. Stipanovich told the three-member board, which consists of Governor Charlie Christ; the state attorney general, Bill McCollum; and the state chief financial officer, Alex Sink.

The fund gave back worried investors $3 billion just yesterday, before the window closed, Mr. Stipanovich said.

A glimpse of a future chapter in the coming credit crisis: municipalities that made investments gone wrong.