$afe and $ound

[December 5th, 2007]

Billions with a “b.” That’s how much local government agencies from Miami to Seattle have invested in an exotic type of supposedly safe security that’s plummeted in value recently.

But we bring you good news for a change in Oregon. Things are different here, thanks in part to a little-known Portland investment broker and a retired Eugene bureaucrat who in 1994 rewrote state law regarding permissible public-sector investments.

In 1993, state legislators appointed Lana Lindstrom, then Eugene’s treasury manager, to chair a committee charged with rewriting laws governing how local government entities could invest their short-term cash. Lindstrom, 59 and now retired, says David Sloop, a broker then with Bank of America in Portland, provided technical knowledge.

“Dave was particularly careful about paying attention to credit quality,” Lindstrom recalls.

The committee restricted entities such as city and county governments and school districts to investing only in securities for which collateral was transparent and easily valued.

“We thought that it was not appropriate to rely solely on ratings in cases where it was not obvious to ‘see’ what the credit was,” says Sloop, now 50 and working for Finacorp Securities.

Fast forward a decade to when investment bankers invented securities called “structured investment vehicles,” or SIVs. SIVS are off-shore investment vehicles that buy subprime mortgages and debt backed by more esoteric collateral. They finance those purchases through short-term borrowing, often from public bodies.

Although most SIVs carried a top AAA rating, their values have crashed since this summer. Some have defaulted, leaving investors, such as King County, Wash., and Montana in the lurch. The biggest disaster, according to Bloomberg News, is Florida’s Local Government Investment Pool. When locals there discovered the fund had 7 percent of its assets in SIV-like investments, they drew the $27 billion fund down to $15 billion in the past month, before the state froze withdrawals. It is unclear how much public money investors lost.

Local governments in Oregon can invest their money themselves or through the Oregon Short Term Fund, which holds about $12.5 billion in local and state money. The 1994 law precludes direct investment in SIVs, and the Short Term Fund has also stayed away from them.

Oregon state agencies, unlike local governments, can invest in SIVs. But Perrin Lim, who runs the Oregon Short Term Fund, says, “We have zero exposure to SIVs and have taken no write-offs.”