Possible Financial Mismangement by Lingle's team

[808shooter]

This has got to be one of the biggest embarassments to the Lingle administration. Wonder why it took so long to see the light of day?

I also wonder why the state investment guidelines allowed state funds be invested in these kinds of complex long term investments? I'd like to take a look at the investment policy and Marion Higa's findings. I recall in the past she's unbiased and has issued harsh findings under Democratic administrations as well.

Another thing I'd like investigated is who benefited from these investments. Who was the brokerage firm that sold the state these investments and who related to the administration benefitted?

Follow the money trail right? Relatives of the administration, donors to the local GOP. I bet there is something folks are afraid of given the nastiness of the criticism of the auditor.

State investment practices to be curbed
Law getting rewrite because $1.1B got tied up in market
http://www.honoluluadvertiser.com/ar...s+to+be+curbed

The state Legislature is taking aim at an investment practice that resulted in the state treasury being left with about $1 billion of securities that it largely has been unable to sell.

The pending measure would restrict the state's further buying of so-called auction rate securities as a short-term investment.

Only in cases where the securities mature in less than five years would the purchases be allowed, ruling out most of the investments made in these vehicles.

The proposed law comes in the wake of relevations that the state had $1.1 billion tied up in the market at the time of its collapse in February 2008.

Since that time the state has been unable to sell most of the securities and may have to wait until they mature over the next several decades to get its money out.

The controversy has resulted in a legislative hearing and a review of the Department of Budget and Finance by the state auditor.

The pending bill, SB 2825, also came out of the controversy.

It adds wording to the current law governing what kinds of investments the state can make, to clear up any lingering questions about the maturity dates of auction rate securities.

"This is all about short-term investments," said Rep. Karl Rhoads, D-28th (Palama, Downtown, Lower Makiki), who authored the House version of the bill and asked that a duplicate measure be introduced in the Senate.

The measures, while slightly different in wording, would correct an ambiguity in the law that relates to state purchases of the auction-rate securities and the way the complex investments are structured.

The issuers of the securities were able to offer higher interest rates because they are actually long-term obligations that have been chopped into chunks that were resold every seven to 49 days via auctions.

The market came to a standstill 26 months ago when buyers pulled back from the auctions because of the credit crunch.

State auditor Marion Higa's report slammed the state's purchases of the auction-rate securities, questioning whether the Department of Budget and Finance had adequate oversight of the purchases, and saying it may have failed to do risk assessments and may have broken its own guidelines on amount of certain holdings.

Higa also criticized the state for breaking a law requiring investments to have shorter maturity dates. The underlying obligations for the auction rate securities have maturities that in some cases are almost 40 years out.

Gov. Linda Lingle's administration has disputed Higa's report and said the law allowed the purchases because the auctions were held regularly until the freezing of the market.

Rhoads said the pending legislative bill is an effort to remove any ambiguity.

Under it, the state would be banned from buying investments where the underlying obligations have maturities that are longer than five years.

The bill has passed both the House and Senate with slightly different wording and has been sent to a conference committee to resolve differences.

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

oh brah, found this gem online just now...

any reporters out there awake? why isn't this getting presss here in Hawaii. We are yet again a laughingstock on a national level.

out of all of the government entities, multinational corporate entities, and rich folks out there, we're the biggest losers of all? Come on... us? Hawaii? How is it that one of the smallest states in Union is the biggest loser?

How is it that no one at the local level is aware of this?

Guess the folks at the Advertiser and Star Bulletin are worried about their jobs. All I read is how the Gov and the Auditor are at odds but the real story is how we got ourselves in this mess.

(And if this has been reported and I've been asleep while reading the papers, shame on me - and I'm sorry. But I haven't heard a whole lot about this problem so far...)

Bloomberg
Citigroup’s Auction-Rate Bonds Freeze $1 Billion in Hawaii Cash
March 04, 2010, 12:22 AM EST
http://www.businessweek.com/news/201...waii-cash.html

By Christopher Palmeri

March 4 (Bloomberg) -- Two years after the auction-rate bond market froze, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities sold by a single Citigroup Inc. broker as a cash substitute that the state has had difficulty unloading.

Hawaii purchased half of the securities for its short-term treasury account from Honolulu broker Pete Thompson, 60, in the eight months before the market collapsed, according to Scott Kami, an administrator at the state finance department.

The transactions came while Citigroup was increasing brokerage commissions and traders were being told to “make sure all hands are on deck” and “do whatever is necessary” to dispose of auction-rate bonds as the $330 billion market began to fail, according to a 2008 U.S. Securities and Exchange Commission complaint against the New York-based bank in a separate case related to sales of the debt.

“I was shocked,” state Representative Karl Rhoads said of his reaction when a constituent informed him last year that Hawaii was stuck with the auction-rate securities. “I didn’t believe it. We’re a small state, only 1.3 million people,” Rhoads said in a telephone interview.

Hawaii’s frozen-cash crunch complicates efforts by Governor Linda Lingle, 56, to close a $1.2 billion budget deficit as tourism revenue has fallen during the worst recession since the 1930s. She has proposed eliminating 800 state jobs, with teachers being told to stay home without pay for 17 days from November 2009 to May of this year.

Feeding Subprime

Public attention has been focused on Wall Street banks’ role in feeding the subprime-debt crisis by creating credit- default swaps, real-estate derivatives and off-balance-sheet financing. The resulting blowup of the U.S. property market led to the 2008 collapse of Lehman Brothers Holdings Inc. and produced $1.7 trillion in financial-company loan losses and writedowns worldwide.

The same Wall Street salesmanship helped fuel a second financial crisis for states, cities and universities from Massachusetts to California that have lost billions of dollars on derivative contracts and municipal-investment deals.

Auction-rate securities typically have maturities as long as 40 years and yields that are reset in periodic sales held as frequently as every seven days. As the global credit crisis deepened in 2008, banks that underwrote the obligations reversed decades of support for the market when they declined to bid for the debt.

Cash Substitute

The action left purchasers such as Hawaii, which viewed auction-rate debt as a higher-yielding cash substitute, unable to sell without taking losses. Citigroup provided the state with a valuation on Dec. 28 saying securities with a face value of about $1 billion were worth $752 million, according to bank documents.

“It was represented to us that these were liquid investments that we could get out every seven to 10 days,” Kami said in an interview.

Alexander Samuelson, a Citigroup spokesman in New York, said he couldn’t comment on Hawaii’s investments or the bank’s offers.

“Citi has worked diligently with issuers, investors and regulatory authorities to identify and offer a number of solutions in the auction-rate securities market,” he said.

Reached by telephone at his Honolulu office, Thompson said, “I’m not in a position to answer any questions.” He’s now employed by Morgan Stanley Smith Barney LLC, a joint venture formed last year by Citigroup and Morgan Stanley.

Texas Instruments

In a market known for its lack of transparency, Hawaii’s holdings are double the $524 million in auction-rate debt bought by Texas Instruments Inc., the Dallas-based semiconductor maker, which has sued Citigroup, New York-based Morgan Stanley and BNY Capital Markets, now part of Bank of New York Mellon Corp., claiming they misled the company about the securities’ liquidity.

Businesses have been unable to gain access to $25 billion of the obligations since February 2008, according to an estimate last year by SecondMarket Inc., a New York-based clearinghouse for illiquid securities.

Under pressure from U.S. and state regulators, 20 firms led by Citigroup; Merrill Lynch, which was bought by Charlotte, North Carolina-based Bank of America Corp.; and UBS AG of Zurich have settled $94 billion in claims, mostly by individual investors who bought auction-rate debt, according to SecondMarket. Corporate and municipal investors have had mixed success pursuing claims against banks in lawsuits and arbitrations, according to Rick Ryder, president of Securities Arbitration Commentator Inc., a Maplewood, New Jersey-based newsletter that tracks securities cases.

Baltimore Lawsuit

A federal judge in New York on Jan. 27 dismissed an auction-rate securities lawsuit brought by the mayor and city council of Baltimore against 10 banks led by Citigroup.

“The retail investors were taken care of in the settlements,” Ryder said in an interview. “That left the institutional investors with their losses.”

Hawaii’s involvement with auction-rate securities dates back to 1997, when Thompson, a broker since 1984 according to a regulatory filing, lobbied legislators to change the law to permit state investments in bonds backed by student loans.

The auction-rate debt had a “high degree of liquidity” and would allow the state to “earn at least several million dollars more without raising taxes,” Thompson told legislators at the time, according to Hawaii State Archives records.

Thompson was ranked 51st on Registered Rep. magazine’s list of the top 100 brokers in the U.S. in 2008, reporting assets under management of $1.6 billion. He’s a victim of the collapse of the auction-rate market, his wife, Sylvia Thompson, said in a telephone interview.

‘Wonderful Guy’

“He’s a wonderful guy; he just got stuck in it,” said Sylvia in a telephone interview from Licious Dishes, her vegetarian takeout shop in Honolulu. “Citibank couldn’t fund the auctions.”

The Thompsons are wine connoisseurs and members of a group of local collectors called the Burgundy Club that meets four times a year to open “extravagant burgundies and Champagnes,” according Stephen Hinck, a manager at the Waikoloa Beach Marriott Resort & Spa on the island of Hawaii, who said his wife is Sylvia’s cousin.

The Thompsons are putting their wine collection up for sale, Sylvia said. “It’s definitely recession adjusting,” she said. “Pete’s got to reinvent himself, too. He’s hurting just like everyone else.”

Hawaii’s auction-rate investments are held in the state’s treasury account, which sweeps in money from sources such as highway fuel taxes and harbor tariffs, Budget and Finance Director Georgina Kawamura, whose department supervises the fund, said in a phone interview.

‘Attractive’ Investment

The securities provided higher rates relative to other short-term investments, she said. “While it was working, it was attractive.”

Hawaii owns 67 issues of auction-rate securities, all backed by student loans from issuers such as Reston, Virginia- based Sallie Mae and Brazos Student Loan Finance Corp. in Waco, Texas. All but 10 of the issues were underwritten by Citigroup, according to documents provided by the state and data compiled by Bloomberg.

The state purchased the bulk of its holdings in the eight months before the market collapsed. The amount of auction-rate investments climbed to close to $1.1 billion in February 2008 from $452 million on June 30, 2007, according to Kami, who supervises the investments at the state finance department. The state bought all of the securities from Thompson, Kami said.

(cont on next post.)

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

$114 Million Writedown

Last year, at the urging of the state’s accounting firm, Deloitte & Touche LLP, Hawaii took a $114 million writedown on its auction-rate investments, according to Marion Higa, the state auditor.

Higa is preparing a report on the state finance department and its auction-rate investments that would be released shortly, she said in a telephone interview March 2. She had a “personal, political” motive in preparing the report, Lingle told a March 2 press conference, according to the Honolulu Star-Bulletin.

“There has never been one dollar lost in auction-rate securities,” Kawamura told reporters on March 2, according to the newspaper. “As recently as Feb. 24, we sold $10 million of these securities at par value,” the newspaper quoted her as saying. “They outright accused us of violating state law in holding these investments.”

“We intend to hold these securities until maturity as the investments themselves remain sound and the state has been receiving all of the principal and interest payments in a timely basis,” Kawamura said in a March 1 letter to Higa released by Lingle’s press secretary, Russell Pang.

20 Percent

Hawaii’s investment guidelines limit holdings in auction- rate securities to no more than 20 percent of cash assets, according to a state document. Finance department officials told legislators in December that the bonds made up 29 percent of the Treasury’s short-term funds when the market collapsed in 2008, Senator Donna Mercado Kim, a Democrat who chairs the Ways and Means Committee, said in a telephone interview.

The guidelines also say that “individual security maturities shall not exceed five years,” according to the state document. Some of the auction-rate investments have maturity dates of 2045.

“While there is a guideline of a 20 percent limit, built- in to the policy is a provision that allows the state to exceed it,” Pang said in an e-mail.

“They have a different interpretation of the guidelines,” Higa said in the March 2 interview. She wouldn’t comment further.

‘Sorely Lacking’

Federal funds, which are the cost of overnight loans between banks, were quoted at 0.16 percent yesterday, less than a 10th of what the bonds Thompson sold are generating for the state in interest. Hawaii is earning 1.8 percent on the debt, which continues to pay interest despite the decline in market value, Kami said.

The state is not the only Hawaiian municipal investor to buy student-loan auction debt. Maui County, Hawaii’s third- largest with 128,000 residents, sued Merrill Lynch on Feb. 12 over $44 million of the securities it bought from the firm starting in August 2007 to February 2008.

Highly Liquid

The broker “should have known that the County of Maui Investment Policy required Plaintiff to invest in highly-liquid short term investments with a maturity not more than five years for the date of investment,” according to the complaint.

“We acted appropriately, made relevant disclosures and intend to vigorously defend ourselves in this matter,” Merrill Lynch spokesman William Halldin said in an e-mailed statement from Sacramento, California.

The state’s own auction-rate freeze is beginning to affect at least one Hawaiian agency’s credit rating.

Moody’s Investors Service on Jan. 12 downgraded $253 million worth of the state’s Harbor Revenue Bonds to A2, the sixth-highest rating, from A1, in part because of a lack of liquidity in the auction-rate securities in the agency’s account.

“The diminished value of the auction-rate securities has to some degree reduced the financial flexibility of both the ports and the airports,” said Kurt Krummenacker, a Moody’s analyst.

--With assistance from Dunstan McNichol in Trenton, New Jersey and Thom Weidlich in New York. Editors: William Glasgall, Mark Tannenbaum, Melinda Grenier

-0- Mar/04/2010 05:00 GMT

To contact the reporter on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

anyone have any intelligent thoughts on this?

Reading this blows me away?

Things to do if I was an Advertiser Reporter trying to save my (azz) job.

1. Get my hands on Marion Higa's report.

2. Buy 808Shooter a beer to read the report and translate it in English.

3. Write a story more accurately describing the sorry state of affairs we find ourselves in. Yeah we haven't lost a dime on paper (per the Genius Kawamura...) ever heard of what illiquid means? We don't need the money 40 years from now, we need it today! If we want the money now we have to sell it at a loss and aren't we writing down 200+ million on the 1billion investment??? What a clusterfahk. And our kids our enduring furlough days? Maybe this has something to do with it!

4. Hope that the Black ownership group aren't buddy buddy with Lingle and doesn't can your ass. It's probably toast anyway - the Star Bulletin crew are going to get taken care of.

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

i just can't stop commenting on this, I am so irked

Some things I'd be asking if I were a reporter:

1. Why are we working with this broker Pete Thompson? How much in comissions did he make? How much and who does he donate to?

2. Georgina K. Kawamura, Director of State Finance Dept. Is she qualified to be making investment decisions for our multibillion dollar operating budget? Who among her relatives benefitted recently from promotions, new home purchases, fancy new cars or trips. (after reviewing this I want to say that I am only insinuating that something fishy happened because I cannot imagine someone in this position would be so foolish.)

3. Who else is in a pickle like us? What did everyone else do to get out of this mess? Were we asleep at the wheel?

That Kami guy is probably not an appointed guy so he's probably just an unfortunate sap that has to be the messanger.

I'd put a lot of these folks under a big magnifying glass... or a microscope but I like the magnifying glass, it also generates heat under the right conditions.

Hawaii purchased half of the securities for its short-term treasury account from Honolulu broker Pete Thompson, 60, in the eight months before the market collapsed, according to Scott Kami, an administrator at the state finance department.

The transactions came while Citigroup was increasing brokerage commissions and traders were being told to “make sure all hands are on deck” and “do whatever is necessary” to dispose of auction-rate bonds as the $330 billion market began to fail, according to a 2008 U.S. Securities and Exchange Commission complaint against the New York-based bank in a separate case related to sales of the debt.

this here says it all. wtf? WTF??? something shady went down here.

either someone or someones are crooked or someone or someones are colossal idiots. Either way, both explanations are unacceptable.

[Kimo]

Re: Possible Financial Mismangement by Lingle's team

Just to clarify some comments here - this matter did receive quite a bit of Hawaii media coverage -STARTING with Lingle blasting "shoddy, politically-motivated" work by the auditor -BEFORE the audit was even released to the public.
Offense is the best defense?

It's since been in the news often . . .

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

maybe it just didn't sink in with me. All I remember was another audit and a war of words between the gov and the auditor.

Most news stories I must have skimmed didn't bother to do the in depth research that the bloomberg/business week article did.

either that or I've been working too much.

[Frankie's Market]

Re: Possible Financial Mismangement by Lingle's team

Just to clarify some comments here - this matter did receive quite a bit of Hawaii media coverage -STARTING with Lingle blasting "shoddy, politically-motivated" work by the auditor -BEFORE the audit was even released to the public.
Offense is the best defense?

It's since been in the news often . . .

Not to mention being talked about in this very forum.

Lingle vs. Higa - Catfight!

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

Not to mention being talked about in this very forum.
[/URL]

I deserve that.

But even your title takes the conversation in the wrong direction. The fact that the auditor and the gov are at odds shouldn't matter a whit! Why do the papers even mention it???

The story is the fiscal mismanagement and lack of accountability. I've read more stories about how this Georgiana wasn't even consulted when the state's stake in the investment went from 19% to 29%.

[Nords]

Re: Possible Financial Mismangement by Lingle's team

anyone have any intelligent thoughts on this?
Reading this blows me away?
3. Write a story more accurately describing the sorry state of affairs we find ourselves in. Yeah we haven't lost a dime on paper (per the Genius Kawamura...) ever heard of what illiquid means? We don't need the money 40 years from now, we need it today! If we want the money now we have to sell it at a loss and aren't we writing down 200+ million on the 1billion investment??? What a clusterfahk.

I think it's perceived to be old news, especially nationally. If any attention got called to Hawaii it'd be by 30-40 other state pension funds, and hundreds of municipal funds, caught holding this "high-quality paper" and hoping to deflect the spotlight glare on someone else.

Back in 2007 auction-rate securities were one of the hottest investments around. Sure, they weren't insured like the FDIC or NCUA for CDs, but they were auctioned off like crazy with stronger demand than Treasuries-- and a good bit more yield. Money wasn't locked up on deposit, it was a lot cheaper than paying commissions on trading other commercial paper, and they met every definition of "liquid" and "prudent". They're very short term (they were extremely liquid in 2007!) and people kept rolling them over. They were practically used as checking accounts, only at a much better yield.

Then the music stopped. In fact the entire commercial-paper market darn near froze up. It was the most bizarre thing anyone had ever seen, and the only event that even came close was the stock market's re-opening after 9/11 or the crash of Oct 1987.

Analogies are especially flawed in this situation but I'll try anyway. Imagine that the pension funds are cars running on H-1 on a good weekday around 1:30 PM. Suddenly every car on the road screeches to a halt, all lanes from Kalanianaole to Kapolei, and about half of the drivers leap out of their cars and run away. You're sitting there, tired & frustrated and maybe getting a little warm, dreading the start of rush hour, and wondering what's happening. Did you miss a news alert? Is there a traffic accident? What should you do? Now imagine that the traffic doesn't start moving (one lane at a time) for weeks, and some lanes don't recover for months. You have to walk if you want to get home today.

Underfunded pensions are a huge problem, but it used to be a problem that was impossible to quantify even by the people who ran them. It's only in the last decade that states & municipalities have been required to impose reasonable accounting on estimating their pension & healthcare liabilities. To make reasonable assumptions on stock-market returns for their investment portfolios. To "mark to market" the value of their assets (although this law contributed to the credit-freeze symptoms and may be permanently repealed). Just complying with the regulations, let alone finding a cheap stock, has become so cumbersome that a staff has to practically have a CPA for everyone just to understand the reporting requirements. They're underpaid and subject to constant second-guessing from people who are tired of having to listen to their brothers-in-law bragging about making 20% in the stock market last quarter. Pension contributions keep rolling in after every payday and this constant fire-hose stream of money has to go somewhere or it's stuck earning 0.05% in an institutional checking account. "Managers" have to make decisions and pitchfork it into the markets as quickly as possible, properly diversified at low expenses, and hope that everything works the way the computer models claim it should. Or at least that it doesn't lose money before they're up for a performance review.

So for a frazzled pension fund manager, a broker would seem like the answer to their prayers. He can quickly invest all the excess cash in something yielding a lot more money at what seems to be a very minor risk. Wow, look at those low commissions. Sure, he's probably getting paid by the auction-CD market makers as well as your commissions, but he's one of the cheapest brokers in town and he's a "good guy".

Now multiply this by hundreds, maybe even thousands, of pension funds across the nation. It's not just Hawaii. You think Hawaii's bad-- read about New York City or San Diego in Roger Lowenstein's book "While America Aged". They make Hawaii look like Warren Buffett.

In fact the pension funds were "lucky". One local acquaintance had been earning a living since the late 1990s using the equivalent of auction-rate CDs, and in a couple weeks his asset's values plummeted by 90%. That's nine-tenths of the way to going out of business. He was still getting the interest from the securities but "marked to market" was a dime on the dollar. Imagine if you logged into your IRA account tomorrow and it was worth only 10%.

A local startup company had put about 90% of their "working capital" at a soon-to-be-bankrupt brokerage with auction-rate securities. They almost had to liquidate when their brokerage closed their doors. Sure, they were getting interest on the CDs, but they wanted to sell them to pay their bills for raw materials and manufacturing equipment and paychecks. The brokerage's "new management" offered to loan the startup only a quarter of their own principal at margin interest rates, take it or leave it, we have bigger problems to work on and people willing to pay us more to access their money.

A little introspection might temper the apparent outrage. I know it's easy to shoot our elected & appointed officials who don't live up to the higher standards of fiduciary ethics, transparency, and performance... but imagine if you were under the same scrutiny from your spouse or significant other. How does your own pension fund look? How fiduciary are you to yourself and your family? Is your investment portfolio fully funded for your projected retirement expenses, or will you be working into your 70s? Have you maxed out your employer's tax-deferred pension contributions, and have you maxed your own IRAs? Are your kid's college funds on track for whatever you're planning to fund? Is your portfolio properly diversified at low expense ratios in a tax-efficient manner with index funds at appropriate asset allocations, or are you winging it from the latest issue of Money magazine's "Hot Funds" articles? How come you're not invested in Apple stock? Where's your investment policy statement? When do you rebalance your asset allocations? Are you carrying any credit-card debt? When's the last time you've refinanced your mortgage? What are all these "entertainment" and "dining out" expenses on your monthly report?!?

Small wonder that people use investment managers... or that they don't save for retirement at all.

I'm no shill for the Lingle administration-- they've expended plenty of ammunition on their footwear-- but I can appreciate getting blindsided. I could give them a pass on this situation, although the public bickering between Higa & Lingle seems very unprofessional.

A couple authors who are very good at explaining complex financial topics have books that might be at our library by now: Michael Lewis' "The Big Short" and Roger Lowenstein's "The End of Wall Street". I'm also looking forward to Gregory Zuckerman’s "The Greatest Trade Ever" about a trader named Paulson who shorted the mortgage market to the tune of a $15 b-b-b-b-BILLION profit.

Suddenly those 3.5% APY five-year CDs we bought last month seem pretty good...

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

thanks for the long, thoughtful, educated and well organized post.

I for one, do understand that the investment was perceived to be liquid. with the auctions happening on a regular basis there did seem to be the illusion of liquidity. of course, hindsight is 20-20 so they will be given a pass on the liquidity issue.

But the fact that we own a billion dollars of these auction rate securities and I read in another article that we're the second largest holder of these securities is mind boggling. Diversification is key and being overweighted in an investment vehicle you don't understand is not very intelligent or prudent - not to mention that we violated our own state investment policy. all that rubbish about their being a loophole that allowed the overweighting of that asset class is total bunk. that is someone looking for cover after the disaster and negligence has occured.

As for comparing myself or the average joe's finances to the state's budget director is a little unfair. of course she should be held to a higher standard! lingle gets to appoint someone who should be vetted and viewed as highly competetant in their field. i am a private citizen whose decisions affect only myself and my family. when you deal with the public good and welfare, the standard of conduct and performance is much higher and deservedly so.

you bring up many interesting points which I have thought about when thinking about how institutional money is invested in this country but the bottom line is that our situation - although similiar is not the same as defined benefit pension liability across the country.

i just saw your post at 1:45 am so i'm kinda tired to write more but i will take the time to further the discussion. i've liked your posts in the past. thanks for taking the time to respond.

mahalos!

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

they've expended plenty of ammunition on their footwear

oh this is classic. i had to read twice to figure it out what you were saying.

fahken classic.

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

Had to post this. Doesn't seem like old news to Hawaii Business.

http://www.hawaiibusiness.com/Hawaii...ticle=0#artanc

The Billion Dollar Gamble
How the State Invests Your Money (and What Needs to Change)
Dennis Hollier

What a difference a billion dollars makes.

Until recently, the state treasury – officially, the Treasury Management Branch of the Financial Administration Division of the Department of Budget and Finance – has operated in relative obscurity. With its staff of seven or eight employees, the treasury acts as cash manager for the state government. Its primary responsibility is to make sure the state always has enough cash reserves to meet its ongoing obligations: payroll, debt service, pension contributions, etc.

The treasury also manages the day-to-day investment of so-called excess funds: monies collected, but not yet spent, by state agencies. As it happens, that’s a lot of money – more than $3 billion at last count. Even so, these investments are hardly sexy, consisting mostly of safe, low-yield, highly liquid instruments like U.S Treasury securities, Federal Agency securities, collateralized CDs and something called SLARS, student loan auction rate securities. In other words: boring, boring, boring.

Then, in February 2008, the market for those auction rate securities collapsed. Overnight, the state’s $1 billion investment in SLARS ceased to be either safe or liquid. And suddenly, the treasury didn’t seem so boring after all.

Where the money goes

So, where did it go wrong? Georgina Kawamura, director of the Department of Budget and Finance, and the official state treasurer, describes treasury operations as a juggling act. “Here’s the day,” she says. “We get daily reports from the banks to let us know our ‘checking account’ balance. We also know, on a daily basis, what investments will mature.” These figures, combined with information about payments that will go out, constitute the calculus of the day’s excess funds, the funds available for investment. This begins yet another juggling act.

For the most part, treasury investments are scheduled to mature around large payments. Scott Kami, administrator of the Financial Administration Division (FAD), which oversees day-to-day operations of the treasury, gives the example of payday. Payroll, he says, averages about $8 million per pay period. “Normally, we schedule about half of that to mature on Friday, and the other half to mature on the following Monday. Because, historically, that’s how the checks clear.”

Armed with that information, treasury accountants can now contact brokers, banks and other financial institutions to find investment opportunities. In this way, the treasury’s responsibilities of cash management and investing are always intertwined. Every debt obligation and every dollar of excess cash must be meticulously tracked because, as Kawamura points out, “All the money is invested. All of it is earning interest.”

And yet, in a scathing report on the Department of Budget and Finance released in March, state auditor Marion Higa turns most of these mundane details on their head. For example, the treasury uses an almost indecipherable, handwritten, color-coded monthly calendar to monitor its investments. It calculates excess cash from manually prepared worksheets rather than electronic spreadsheets like Excel. And it deals with brokers through a decidedly informal system of e-mail and faxes.

Still worse, Higa says, is the treasury’s lack of oversight. The report notes that the FAD failed to prepare and review bank reconciliations, failed to produce a monthly investment report, and routinely allowed investment classes to exceed their statutory limits. In her view, it was this lax supervision that allowed the SLARS calamity. When the independent accounting firm Accuity conducted the state’s fiscal year 2008 certified annual financial report, it also said flawed internal controls led to the SLARS purchase. In her report, Higa points out that treasury staff never even saw the offering documents for these investments. Those documents clearly state many of the risks pertaining to SLARS.


The state uses a handwritten monthly calendar to monitor the
treasury’s $3 billion portfolio.


What Are SLARS?

Auction rate securities are basically debt instruments consisting of bundles of securities – in this case, student loans. The interest rates are set through periodic auctions: sellers offer securities at the lowest rate they’re willing to accept; buyers indicate the highest rate they’re willing to pay and how many they want to buy at that rate. This process is designed to determine the lowest interest rate at which all available shares of a security can be sold at par. This is called the clearing rate, and it serves as the interest rate for that entire issue of SLARS until the next auction. In the event an auction fails, the rate is set based on a pre-established relationship to some benchmark, usually the London Interbank Offered Rate, or LIBOR. Naturally, brokers assure buyers that auctions never fail.

To be fair, these auctions appeared to work efficiently for more than 20 years. And because the auctions usually happened every seven, 28 or 35 days, investors like the state treasury could treat SLARS as liquid investments, even though the underlying securities might not mature for 35 years. But sustaining that liquidity meant that all the available SLARS had to sell at every auction. That didn’t always happen, but the underwriting broker quietly bought enough to keep the auction from failing. Between auctions, brokers often tried to unload these securities on their customers.

Nevertheless, in 2007, when the financial markets began to implode, these securities began to accumulate on the wire-houses’ books, and brokers regarded them nervously. They encouraged their sales divisions to push ARS aggressively, even though insiders knew the auctions were becoming tenuous. Another sign of some distress in the market was the steady increase in interest rates, which, in the case of SLARS, eventually reached 7.35 percent (compared with 2.07 percent for two-year CDs.) For most investors, higher interest rates reflect higher risk. And yet, in the six months leading up to the market failure, the Hawaii treasury’s holdings in SLARS went from $427 million to over $1 billion, and from just 14 percent of the state’s portfolio to nearly 30 percent.

Of course, the state of Hawaii wasn’t the only investor surprised by the failure of the ARS market. Thousands of individuals and hundreds of institutional investors were caught off guard. A diverse group of government entities – states, counties, water-district boards, et al. – now found themselves stuck with these now long-term investments. Although most individual investors eventually recouped their investments through settlements with the wire houses that underwrote the auctions and government regulators, institutional investors have been obliged to write down their ARS as part of the “mark to market” standards of generally accepted accounting practices. In the summer of 2008, for example, the state acknowledged a $114 million impairment on its certified annual financial report as a result of its SLARS holdings. Though Hawaii may have the largest holdings, it hasn’t taken the worst blow. Jefferson County, Ala., is verging on bankruptcy due to the failure of the auctions.

Closer to home, Maui County found itself stuck with more than $30 million in SLARS when the market crashed. Like the state, Maui seems to have relied on assurances by a broker, in this case, Merrill Lynch, that these were highly liquid securities. Also like the state, Maui invested heavily in SLARS in the months leading up to the market failure.


Different Responses

Despite the similarities between Maui and the state, there have been striking differences in how they responded to the SLARS debacle. For example, the state continues to defend its investment. “The one thing that gets lost in this whole discussion about ARS,” says Scott Kami, “is that the securities themselves are very sound investments. There hasn’t been any default on them, and we continue to get all our interest paid when it comes due.” Moreover, he says, the yield on the state’s ARS, approximately 1.9 percent, is higher than that earned by the state’s other investments. He points out the yield on 30-day CDs is almost zero.

you guys have got to click on the link to see the chicken scratch calendar used to manage billions of dollars of our rmoney!

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

Kawamura takes another tack. “I think people have put too much emphasis on the write-down,” she says. “Everyone thinks we’ve lost money. We have not.” She acknowledges that accounting principles required the state to estimate an impairment on its SLARS holdings. She also admits that if the state were to sell its holdings today, it would likely incur an additional $250 million loss. But Kawamura views these as purely paper losses. “That’s assuming that you’re going to sell,” she says. “Of course, we haven’t sold, and we don’t intend to.”

But Maui County treasurer Suzanne Doodan is not convinced by the state’s arguments. “I spouted those same lines for the first few months,” she says. “But these are no longer short-term instruments; you have to compare them to 30-year investments.” So, while the state’s 1.9 percent yields on SLARS may look good compared to current rates for bank repos or short-term CDs, they’re low even compared to the 4.75 percent yield on a 30-year U.S. Treasury note. SLARS might have been attractive as short-term investments, but they are liabilities as long-term investments.

This difference in perspective led Maui to pursue a different strategy than the state. This January, the Maui County filed a federal lawsuit against Merrill Lynch, the broker that sold them the SLARS. (To see Maui’s lawsuit filing, click here to download the PDF file.) Like other institutional investors around the country, Maui alleges Merrill sold SLARS as “cash equivalents” even though it knew, or should have known, these investments were unsuitable for Maui’s needs.

The state declines to discuss whether it’s pursuing legal action related to SLARS. “We’re obviously letting our attorneys take care of reviewing our options,” says Kawamura. Tung Chan, commissioner of securities at the Department of Commerce and Consumer Affairs, acknowledges receiving complaints “against these companies – Citi and Merrill – related to ARS.” DCCA policy, though, is not to disclose the name of the complainant. It remains to be seen if the state, in steadfastly defending its investment in SLARS, has lost its opportunity for legal recourse.

“I wonder if they missed the date to file,” Doodan says. “I think it’s a two-year statute of limitations.”

A Better Way

There are other important differences between Maui and the state, according to Doodan. “To my knowledge, the state has only used two brokers for years and years and years,” she says. “In contrast, we go out to at least five, six, seven, eight brokers. And every few years, we go out and solicit new brokers.” It’s also interesting, she notes, that, while Maui has suspended doing business with Merrill, the state continues to use the same broker who sold them the SLARS as bond underwriters. (This same broker, Pete Thompson, of Morgan Stanley Smith Barney, played a key role in persuading the Legislature in 1998 to add SLARS to the list of acceptable investments for the state treasury.)

There is another difference between Maui and the state. To coordinate its investments and cash-management obligations, Maui uses sophisticated, Web-based software called QED. This program was specifically designed for treasury operations and automates many basic functions of a treasury. It continuously updates the status of investments, including the current value of securities. It also provides templates for more than 600 different reports, most of which can be produced almost instantaneously. This ease of reporting simplifies the supervision and oversight of the county treasury. That’s probably why more than 40 states and thousands of counties and smaller government entities use QED.

For its part, the state relies upon a software program called Microsoft Dynamics, which is primarily a program for enterprise solutions or customer contact management. Although it has been adapted to be used for financial purposes, it doesn’t address many of the specific needs of a state treasury. As one expert put it, “This is like hunting an elephant with a shotgun.” This may help explain the treasury’s failure to routinely produce the reports called for by its own investment policies. It may also explain why the state’s investment activities are largely tracked on manual worksheets or even handwritten calendars.

Most state treasuries are far more transparent and seem to sustain much more oversight than Hawaii’s. New Mexico – an apt comparison with Hawaii because of its population of 2 million people and treasury of about $5 billion – offers an excellent model for an efficiently run treasury. “I can tell you,” says chief investment officer Sheila Duffy, “we have a lot of oversight in New Mexico. And we like it.”

Structurally, that oversight takes the form of two standing committees. The Treasury Investment Committee, Duffy says, consists of treasury officials and two securities experts from private industry. The other oversight group, the Board of Finance, supervises the broader activities of the state treasury, which corresponds roughly with Hawaii’s Department of Budget and Finance. Neither group is passive.

“We have a once-a-month report, a book really, that we deliver to the Treasury Committee” and to Board of Finance, Duffy says. This substantial report – produced automatically using QED software – summarizes the treasury’s existing investments, including asset details, yields, and trends compared to a benchmark. These reports and the minutes from committee meetings are available on the treasury’s Web site, along with numerous other reports and resources. In contrast, although Hawaii’s state treasury policy requires monthly status reports for the director of the Department of Budget and Finance, this report hasn’t been prepared since 2007, according to the state auditor. Moreover, there’s no outside authority to review such a report.

The Cure

How can Hawaii improve its often informally structured, poorly supervised and cloistered state treasury? And what can we do about its extraordinary burden of SLARS?

As for the auction rate securities, the answer may be nothing. “For now, our liquidity issue is covered,” says Kawamura, by which she means that, as the treasury’s longer-term investments mature – and they’re allowed by statute to carry some investments out to five years – these are gradually replaced with the SLARS. And the state seems intent on either holding onto them until maturity – another 35 years, in some cases – or waiting until it’s possible to sell them at par. That might seem farfetched. After all, the allegations of fraud, negligence and collusion that have been leveled at the wire houses have stigmatized SLARS as an investment. But some believe the SLARS market will revive; Kami said as much in his Dec. 27 testimony at the state Legislature. Even Maui County finance director Kalbert Young holds out hope.

“I would point out,” Young says, “since the SLARS market failed in February 2008, there’s been a slow return of activity in this market.” He doesn’t mean the actual resumption of successful auctions – not yet, anyway – but that the underlying securities have started looking increasingly attractive to investors. “We’ve been getting calls from other institutions interested in buying our ARS,” he says. “Not at par, of course, but better than it was. Even Merrill Lynch was willing to purchase some.” Nevertheless, Young says, “we still want to pursue our legal filings.”

Improving Hawaii’s treasury operations may prove easier. It’s simple enough to look to the examples of other states, like New Mexico and New Jersey, that have modernized their treasuries. Software solutions typically come with extensive consulting services and are cost effective. (QED costs less than $100,000 a year, after the initial setup.) But the most important lessons probably come from history.

After the disastrous 1994 bankruptcy of Orange County, when the county treasurer’s wild, unsupervised speculation in risky derivatives cost the county over $2 billion, the California state auditor issued some familiar-sounding recommendations: Have a Board of Supervisors approve the treasury’s investment policies; appoint a committee to oversee investment decisions; require frequent, detailed reports from the treasurer; and establish stricter rules governing the selection of brokers and investment advisers.
Those sound a lot like the recommendations of the Hawaii state auditor. They’re also suspiciously close to the kinds of best practices employed in New Mexico. In other words: boring, boring, boring.





Risky Strategies
State’s mix of risky & safe, traditional investments

CASh

Demand Deposits1
$229,770,000

Cash with Fiscal Agents
$5,980,000

U.S. Unemployment Trust
$265,499,000

Investments

Investments Time Certificates of Deposit2
$618,192,000

U.S. Government Securities
$528,130,000

Student Loan Auction Rate Securities3
$1,006,975,000

Repurchase Agreements4
$1,151,620,000

Total Investments
$3,304,917,000

Total Cash and Investments
$3,806,166,000

1. The state routinely failed to reconcile bank statements. In addition, funds were often left in sub-accounts that did not earn interest.

2. At least five times, the state exceeded the 50 percent limit on CDs from a single issuer.

3. The state’s portfolio of SLARS remains at roughly 30 percent of its total investments.

4. Repurchase agreements exceeded the 70 percent statutory limit in four out of 12 months.

Source: State auditor’s report

all in all, a more comprehensive look at the failure rather than prior articles that focus on the wrong issues. "Catfight" author completely missed the boat. I question their ability as a journalist. Who the heck cares about Lingle and Higa disagreeing??? The real issue here is the mess we're in.

[Frankie's Market]

Re: Possible Financial Mismangement by Lingle's team

all in all, a more comprehensive look at the failure rather than prior articles that focus on the wrong issues. "Catfight" author completely missed the boat. I question their ability as a journalist. Who the heck cares about Lingle and Higa disagreeing??? The real issue here is the mess we're in.

"Missed the boat?" Whoa, what brought this on?

808Shooter, instead of taking cheap shots at me, why don't you take the time to read and fully comprehend what my post was talking about.

The conflict that exists between the Lingle administration and the state auditor isn't just a mere "disagreement" as you put it. The point here is that Marion Higa was claiming that state laws were broken in her report, when funds were invested in auction-rate securities that did not have a guaranteed maturity of 5 years of less. Lingle and her minions blasted the auditor's report and claims that the investments in questions were legal.

That the state is now in a serious fiscal crisis,..... well, duh! Everybody knows that. And it's a problem that obviously has to be dealt with. But if laws were broken, as Higa claims, then the people responsible for this violation should be held accountable and brought to justice. It shouldn't be something that is quietly swept under the rug while all the people in Hawaii have to make the necessary sacrifices and adjustments to get through these rough financial times. That was my point.

So let me ask you this: If laws governing the investment of state funds were broken which caused a billion dollars to be tied up in an illiquid status for who-knows-how-much-longer, why is a desire to hold the people accountable for this mess "missing the boat," as you put it? Would you rather those people get away scot-free and that everybody simply forget about this?

[808shooter]

Re: Possible Financial Mismangement by Lingle's team

dude i wasn't referring to you. i was referring to the author of the catfight article. did you write the article? geez calm down.

edit:

we pretty much see eye to eye on this.

i am not updating your thread because some of the links are broken and it was derailed. and you were kind of rude when i started this one. i feel our threads cover the same subject, just from different perspectives. i choose to focus on the failed investments and the impact on the state.