Florida's 'Run on the Bank'
Some lost confidence in the local investment pool. Some pointed fingers, and a few rose to the occasion.
Donna Reed helped save Bailey Building and Loan in It’s a Wonderful Life. The state-run investment pool could have used more people like her.
[Photo: KO/The Koball Collection]
It’s hard to think of the run on the state’s local government investment pool without thinking of the Bailey Building and Loan.
It was Donna Reed, of course, who saved that little thrift institution from movie disaster in It’s a Wonderful Life. The Depression-era villagers of Frank Capra’s mythical Bedford Falls were clamoring for their deposits back, and Jimmy Stewart’s George Bailey pleaded with a panicked crowd. “Now, we can get through this thing all right,” he says. “We’ve got to stick together, though.”
The crowd, however, still wants its money.
That’s when Donna Reed, as newlywed Mary Hatch Bailey, pulls her honeymoon money from her purse and waves it. “How much do you need?” she says. With Mary’s cash and George’s cajoling, they ended the day with two bucks. The Bailey Building and Loan did not have to close its doors.
Alas, Florida’s very real drama over its Local Government Investment Pool was “It’s a Wonderful Life without the happy ending,” in the words of Leon County Clerk of Court Bob Inzer. Between Halloween and Nov. 29, local governments’ financial officers from around the state — Inzer included — pulled half the money out of a fund that once managed $27 billion.
The fund, started in January 1982, was designed to let local governments pool their idle cash and get better returns than they might get on their own. It worked, too. Before the crisis hit, it was paying about 5.25%, about a point more than money market funds.
The State Board of Administration, the pool manager, had long used short-term asset-backed commercial paper to boost returns. These securities became suspect as the national “subprime loan crisis” grew at midyear. Several of the pool’s holdings were downgraded and even went into default. Word of the SBA’s holdings got around among the county court clerks, the local elected officials who oversee county funds. At the group’s statewide convention in late October, a few talked about pulling money out, Inzer says.
That was when it began.
Inzer says he had a fiduciary obligation to the Leon County taxpayers. He took the issue to his investment oversight committee, which voted to pull
its money out the next business day, Nov. 13. The same day, SBA Executive Director Coleman Stipanovich delivered to his trustees a headline-making report asserting SBA had no subprime investments but disclosing it would have to “restructure” $2 billion in mortgage-backed securities downgraded from AAA to junk.
Withdrawals jumped to $724 million, twice the amount of the day before. The Cabinet met routinely on Nov. 14, with two Cabinet members, Chief Financial Officer Alex Sink and Attorney General Bill McCollum, joining Gov. Charlie Crist as the SBA trustees. Stipanovich made an appearance as the last agenda item to address his report. He denied there was a “run.”
“I’ll tell you there are a lot of rumors flying around,” he told the trustees, but he was “not aware that there has been any material outflow as a result of this.”
Crist told him, “We’re concerned, but we’re also hopeful.”
Outflows continued: $1.497 billion on the 16th, then $1.23 billion, then around $1 billion on each of the next five days. The SBA seemed immobilized. It was unaccustomed to scrutiny. “We want to be in the back row of the classroom and hope we don’t get called on,” Stipanovich told me in 2005 ["Enron, Politics and the Pension Fund,” June 2005].
By Nov. 28, Bloomberg News Service reported “an unprecedented wave of withdrawals” from the pool, $8 billion in all, including $370 million by Orange County on Nov. 16, $388 million earlier by Orange County schools and earlier withdrawals by Miami-Dade County and others.
Finally, at 6:53 p.m. on Nov. 28, the SBA e-mailed a news release saying Stipanovich would propose on Dec. 4 a plan that included unspecified “credit protection for the pool against the potential for default by approximately $1.5 billion in securities from four issuers.”