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.”

The state’s top elected officials were taken by surprise, says Sink’s deputy chief of staff, Kathy Baughman-McLeod. At 9:51 p.m., Crist’s press office e-mailed a news release saying Sink had requested an emergency trustees meeting the next morning.

While Stipanovich was still speaking at 11 a.m., his investment pool had fallen to $12 billion, and there was no end in sight.

No bailout

Stipanovich thought he had some honeymoon money — Florida’s $137-billion pension fund, the world’s 12th-largest pension system and by far the largest of the six investment pools managed by Stipanovich and the State Board of Administration. But in state government, you can’t just dole out cash. There are rules, fiduciary duties, politics. Stipanovich had money, but he didn’t yet have a plan on how to get to it.

There were no Mary and George Baileys in the Capitol’s Cabinet room that day — no one offering a cash infusion, no one with a rousing speech about the public interest in sticking together. No one noted all that Stipanovich and his predecessors had done for the investors — above-average returns on the local government pool, 18% last year on the huge pension fund (which gave Florida taxpayers a windfall savings of about $14 billion in future pension costs). Lacking available cash or any other plan, the trustees froze the fund through Dec. 4, directed the hiring of an outside financial adviser to deal with the run, then got up and left the table.

No bailout, Crist told reporters afterward.

“They really should have been on top of this and pledged the full faith and credit of the state,” says Jeannie Garner, director of financial services at the Florida League of Cities, which had $18 million in the investment pool but had avoided drawing it out until the Cabinet could speak. “They haven’t said that. Nobody has said that.”

Some surprised government agencies, with virtually all their money still in the fund, had to take out loans overnight to meet payroll and other obligations.
When the fund reopened, the troublesome investments, by then about 14% of the shrunken pool, were isolated in a “Fund B” to be held until the troubled assets matured. Stipanovich and his new advisers, the highly regarded global investment firm Blackrock, thought the defaulted securities would eventually pay out in full, but it would take more time than expected.

Meanwhile, withdrawals were limited to 15% of an investor’s account, or $2 million for smaller investors. You could take more, but there was a penalty of 2%. By year-end, 21 investors had paid the fee on $309 million in withdrawals. Another $2.2 billion was pulled out without penalty. The good news, for those still in the fund, was all the November interest plus the redemption fees would go to shore up Fund B.

In Hillsborough County, the largest local government investor in the pool with $700 million at year-end, financial managers began wondering whether they were heroes or chumps. Clerk of Court Pat Frank, a former state senator and county commissioner, had left Hillsborough’s money where it was, though she diverted the fall flood of new tax revenue to other accounts.

“I think Pat Frank did the right thing,” says Hillsborough’s deputy finance director, Eric R. Johnson (who doesn’t work for Frank). “We may pay some price for that. But if we had pulled our money out when everybody else did, we would have guaranteed that the fund would have spiraled into illiquidity.”

“Government is a different kind of investor,” he adds. “It’s like disaster
preparedness. We have a concept of mutual aid. It burns me that Pinellas, Leon County, all those governments bailed out ... risking the funds of every remaining investor.”

Act of faith

On a conference call Nov. 30, members of a hastily assembled investor committee were further discouraged when SBA Deputy Director Kevin SigRist filled in for Stipanovich and proposed surveying investors about accepting 90 cents on the dollar in exchange for immediate access to their money. The investors declared it “unacceptable” to get less than 100%.

When the fund reopened Dec. 5, Blackrock had taken over management. Stipanovich had resigned, at the suggestion of Sink, who was frustrated at the continual surprises and the lack of effective communication with investors.

Sink has talked about outsourcing the management of the pool permanently, but it is not clear what that would give investors besides higher fees. (Blackrock is charging .39 cents on each dollar of troubled assets and .075 cents on the rest. SBA’s fee was .015 cents per dollar.) There could be legislation to let the state invest its funds in the pool, which Sink deputy chief of staff Baughman-McLeod says Sink explored but felt the law didn’t allow.

By year-end, outflows had fallen to a mere $1 million a day. And money was coming in. The Friday before Christmas, Miami-Dade’s Children’s Trust, a taxpayer-created entity, sent $44 million to the investment pool. “Yes, I want state institutions to be solid and strong,” explained former Miami Herald Publisher David G. Lawrence Jr., chairman of the trust. But the SBA also had delivered returns. “We’re not trying to make a killing. We want an honorable return because frankly it’s not our money. It’s the taxpayers’.”

But investors were not getting the same sense of strong confidence and tangible commitment from Crist & Co. Even now it’s not clear whether the troubled assets really will pay out for these faithful investors. It’s only clear that there aren’t enough Mary or George Baileys willing to take a big risk for the public good.