Legislators want new probe of CitiGroup auction rate securities deal

By   /   January 5, 2011  /   News  /   No Comments

BY GREG WILES – Even as the Securities and Exchange Commission investigates increased transparency and oversight of state and municipal investments nationwide, Hawaii legislators pushed for another probe into a deal settled out of court that still ties up almost $1 billion in state funds for years.

Hawaii’s ill-timed investment in auction rate securities – and a subsequent settlement with investment broker Citigroup Global Markets Inc. – may come under investigation again.
A special House and Senate investigative committee, initiated by the Senate, on Tuesday recommended a further inquiry into how the state manages its money.
Nationally at least 33 states and an unknown number of municipalities have billions of dollars tied up in auction rate securities, variable rate demand obligations, interest rate swaps and other complicated deals marketed as safely earning higher returns than other short-term investments. Some cities have sued or reached settlements with brokers to free their funds.
Last year the SEC ordered new rules for disclosures on such deals. And in two field hearings – with more scheduled this year in Florida, Texas, Alabama and Illinois – it sought input on regulation of municipal investments.
Some Hawaii legislators don’t want to wait. “I think there needs to be a full vetting of the settlement,” said Senate Vice President Donna Mercado Kim, a member of a joint legislative committee.
Incoming Budget and Finance Director Kalbert Young said his staff and the attorney general’s office are assessing the settlement reached with Citigroup.
The state has been prevented from accessing most of the $1.09 billion placed into auction rate securities since the market for the investments crashed in February 2008.
Hawaii was unable to pull most of the money out of what were to be short-term investments without selling at a loss. Today most of the money figures to remain tied up for four and a half more years.
The Hawaii situation spawned a number of legislative hearings and a critical report last year by state Auditor Marion Higa. The auditor blasted the state Department of Budget and Finance for breaking policies and said the department lacked proper leadership and accountability in its investments.
The auditor found that the state accelerated purchases in the months leading up to the collapse of the market and that at one point the auction-rate securities were 37 percent of the state’s investment portfolio. That broke a guideline that they be no more than 20 percent of investments.
The report also says that the department did not perform a risk assessment prior to the securities being purchased, nor did its officers have a full understanding of the investments.
The state collected interest off of the investments. However, it has only been able to get back about $200 million as it negotiated with Citigroup.
In late November, then state Attorney General Mark Bennett announced a settlement with the broker in a deal that will return the remaining $869 million by mid 2015.
Citigroup agreed to repurchase up to $150 million of the securities in July 2012 and to repurchase the remainder three years later. It also agreed to make the state whole for any of the securities previously sold at less than face value.
In return, the state agreed to release Citigroup from the threat of lawsuits.
But the deal leaves the state funds tied up until then at a time when state lawmakers are looking to bring in more revenue to balance the budget.
A dissenting opinion was offered by Rep. Gene Ward, who said the report was being issued without the committee calling any witnesses and that the group was jumping to conclusions.
He said Hawaii’s situation with auction-rate securities was no different than what happened to 33 other states and to professional money managers who had not seen the auction-rate market collapse coming.
“We were not the only state in this ballgame,” said Ward, (R-Hawaii Kai, Queen’s Gate, Kalama Valley).