The treasury runs a cash pool which consists of the treasury’s money that is not immediately needed to pay expenses. Currently, it totals $750 million, give or take. It is essentially the same as your checking account. You put your excess funds (but not this time of year) into a money market; the state creates its own money market.
Money markets buy short-term debt and so does the cash pool. On their website, www.maine.gov/treasurer/cash/management, the treasury states that they purchase commercial paper, government bonds, CDs in Maine banks, money market mutual funds, corporate bonds and repurchase agreements for the pool.
On Aug. 8, the pool put $20 million into an investment called Mainsail II — which is a SIV — something I explained last month. SIVs issue short-term commercial paper to raise funds which are put into longer-term securities and structured products. The paper the state bought matured in 23 days, paid 5.45% and had S&P’s highest rating. On the surface, it looked like a short-term CD.
Unfortunately, 12 days later, on Aug. 20, the trustee on the fund, Bank of New York, said that the fund failed a “capital test” and the bank froze its assets. The next day S&P changed the rating on the fund from highest to sub-prime. Yes, S&P changed the rating the day AFTER the funds were frozen. I think that is spelled ah-duh. You cannot make this stuff up.
OK, now whose fault is it that $20 million is at risk? I would have to say the obvious culprit is not the treasurer, it is the rating agency. Yes, if the treasurer had read my articles in Switch this summer, maybe he would have avoided SIVs and mortgage paper altogether. But, in his defense, he bought an investment that had S&P’s highest rating for quality and safety.
A bond does not go from A+ to bust in a single day. Which is why S&P and Moody’s are now issuing wholesale ratings changes for all SIVs. And that is known as closing the barn door after the cow has already been run over.
Terry Davies is portfolio manager at Investment Management & Consulting Group, a registered investment advisor in Portland. IMCG provides comprehensive financial and investment guidance to individuals, families, endowments and businesses. He welcomes your feedback by phone: 800-605-6552, or email: tdavies@imcgrp.com. The analysis of the financial markets in this column is not meant as investment advice.