Florida Unethical To Shout Last Ones Out Of Risk-Pool Lose

Published: Dec 21, 2007

It's obvious mistakes were made with the state's purchase of risky mortgage-backed investments. Heads have rolled. But now that the dust is settling, it's unfair and probably illegal to punish counties such as Hillsborough that didn't rush to withdraw all their money.

Pat Frank, Hillsborough County clerk of court, is right to demand that Hillsborough taxpayers get stuck with only a fair share of whatever losses the fund ultimately sustains. By standing firm and helping avoid panic, Hillsborough subsidized some other counties, cities and school boards that withdrew all of their investments in the Local Government Investment Pool when investment surprises surfaced last month.

It seems that the fund, which is supposed to be filled with low-risk, liquid investments, had bought some mortgage-backed securities that were downgraded and couldn't easily be sold.

Why the purchases were made warrants further investigation.

Perhaps it was a coincidence that Lehman Brothers Holdings Inc. sold Florida some $842 million of high-risk, mortgage-backed debt in July and August shortly after hiring former Gov. Jeb Bush as a consultant.

Bush has told the press he had nothing to do with the state's transactions. His employer won't say how much he was paid.

Whatever Bush's involvement, the state also made ill-advised investments with other companies. It is possible that Coleman Stipanovich, who resigned Dec. 4 as head of the State Board of Administration, made the bad decisions without undue influence.

In any case, the state's own policies are partly to blame. Stipanovich was to get an 8 percent bonus if he improved the fund's investment returns.

You don't need to pay someone more than the $180,000 a year Stipanovich was making if you only want to buy government-guaranteed risk-free investments. And when the higher-paying mortgage ventures begin to turn sour, it's no surprise that Stipanovich tried to hold on and downplay the risks in hopes the housing market would bounce back, as many experts predicted.

But Stipanovich wasn't the only one who was overly optimistic.

Former Federal Reserve chief Alan Greenspan explained that mortgage risk was "under priced," which is to say lots of high-paid bankers and brokers really didn't know what they were doing.

It is unreasonable to expect county officials to outsmart the nation's experts. Yet that's exactly what the state is asking them to do by rewarding those who panicked at the first whiff of financial uncertainty.

Before the run on the local government fund, unsound investments were only 3.4 percent of the total. But the hasty withdrawals by some governments left those who remained with a higher percentage of the bad debt - at least 14 percent.

Frank is right that Hillsborough shouldn't lose 14 percent while those first who fled the pool lose nothing. Under that approach, the last ones out would lose everything, which defeats the risk-sharing purpose of the fund.

If counties must constantly monitor the fund's safety, they may as well do their own investing.

No one complained two months ago when the fund was returning some of the nation's highest interest rates on taxpayers' investments. Now, no local government should complain about repaying 3.4 percent, or whatever the losses turn out to be.

Perhaps no money will be lost in the end. But if it is, Hillsborough should not be left holding the bag.