Funds Tote Up Huge Losses from Sour Investments

Article excerpt

Hundreds of millions of dollars in losses are showing up at state and local investment funds around the nation in the wake of investment strategies gone sour.

San Diego County and Florida have racked up more than $530 million in paper losses. And Texas officials said a fund lost $70 million.

The disclosures came in the wake of the disastrous financial strategy of Orange County, Calif., that resulted in a $1.5 billion paper loss from derivative investments.

Meanwhile, Wall Street's major credit rating agencies on Wednesday downgraded certain bonds issued by local governments wrapped up in the Orange County financial crisis. And mutual funds that invested in California municipal bonds experienced losses during Wednesday's trading session, although analysts expect the losses will be short-lived.

The Florida Treasury portfolio, currently valued at $8 billion, has lost more than $175 million on paper after investing in collateralized mortgage obligations, according to Treasury spokeswoman Karen Chandler.

Collateralized mortgage obligations, or CMOs, represent an investor's stake in pools of home mortgages. The mortgages are marketed as an array of bonds of varying maturity, interest rate and risk.

Chandler said $3 billion of the state's portfolio is invested by 24 outside money managers. The remaining $5 billion is invested internally by Florida's Treasury.

The Treasury staff put its money only in investments of six months or less, Chandler said. But she said the outside money managers placed about $832 million of the state's funds in CMOs.

When interest rates rose, the value of Florida's long-term holdings declined, resulting in the paper losses, Chandler said. Actual losses won't occur unless the holdings are sold.

Chandler said that since the inception of the program four years ago, Florida has earned about $200 million more than it would have been earned had the Treasury kept the money and invested it internally.

"Some people are getting the sense that this is trouble, and we're losing money. That is absolutely not the case. There is no need for us to sell these bonds off and we have no intention to do so," Chandler said. …