The state treasurer apparently got caught in the subprime mortgage lending mess when a $20 million short-term investment designed to raise money for the state’s cash pool was made in a fund whose assets are frozen, at least for now.

That leaves the state short its $20 million and any interest that money would have earned until the assets of the investment fund can be sold.

State Treasurer David Lemoine, whose office made the investment based on advice from its financial advisers at Merrill Lynch, said Monday he believes the money will be repaid.

“I haven’t booked it yet,” he said, but, “I’m pretty confident, that with patience, we should get our money back.”

Before the Thanksgiving holiday, Lemoine sent out an e-mail to the Appropriations Committee saying “the ultimate resolution of the investment is still unknown.”

The investment was made in asset-based commercial paper called Mainsail II on Aug. 8, when the fund was receiving the highest rating possible by Standard and Poor’s and Moody’s. Commercial paper is a short-term obligation with maturities ranging from two to 270 days. They are issued by banks, corporations and other borrowers to investors with idle cash. In less than two weeks, the Mainsail II rating was downgraded and assets frozen after it ran into trouble because of its holdings in the subprime mortgage market.

“Virtually within days their assets were frozen and the rating went from top rate to junk bond status overnight,” Lemoine said.

He believes the state’s money will be recovered, however, because offers already have been made to buy out assets of the Mainsail fund, meaning at the very least, the state’s initial investment would be returned without interest.

On Monday, Lemoine he sent out an updated e-mail, saying press reports published that day “indicate a manager for the wind-down sale of Mainsail assets has been selected,” which indicates a sale is moving forward, although the time frame was still not clear.

Lemoine’s office was made aware of the problem on Aug. 20, but news of it broke just last week when it was reported on a Portland TV station. The report created a flurry of e-mail activity, from the House Majority Office out to legislators, and among members of the Appropriations Committee, which oversees the state’s finances.

Sen. Karl Turner, R-Cumberland County, who serves on the Appropriations Committee and works as an investment adviser, said there were possible red flags on the investment since it was offering a higher return than more traditional funds.

“This is just one person’s view of the world, but I tend to like my investments to be pretty much plain vanilla,” he said, and Mainsail II was hardly a well-known investment.

He said the Treasurer’s Office was “at the mercy of a provider, in this case a broker from Merrill Lynch, with a long-term relationship with the state. “Had I been treasurer, I probably would have steered away from asset-based commercial paper,” Turner said. The downside is conservative investments earn less interest, he said.

Lemoine responded to a series of questions last Wednesday afternoon posed to him by Rep. Jayne Crosby Giles, R-Belfast, a member of the Appropriations Committee, who also is a banker. Giles asked whether the state had any other similar investments “backed by submprime mortgage assets.”

Lemoine said the state was moving out of asset-backed commercial paper in August as subprime investment concerns arose, and has since moved out “almost entirely.”

The one remaining investment is a $1.7 million investment that matures in February.

According to a fact sheet sent out by the Treasurer’s Office, when the state has excess money that is not needed to meet current obligations, the treasurer invests money to earn interest. Last year, the cash-pool investments earned more than $63 million. The investments are made according to regulations outlined in state law.


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