Security of bonds concerns Byers

Fabrizio says Treasurer's Office has no intention of selling at this time

KINGMAN - The investment problems that have affected Wall Street have come home to roost in Mohave County.

Tuesday, County Supervisor Pete Byers expressed concern over the security of some of the bonds the County Treasurer's Office has invested.

County Treasurer Lee Fabrizio and former Deputy Treasurer Janet Barker invested $50.8 million with the help of Merrill Lynch into 11 corporate bonds, including Lehman Brothers, a firm that recently closed.

Fabrizio explained that his office had placed some money into corporate bonds as part of a diversified pool of investments that was well recommended by other investment agencies.

"It's very scary," Byers said. "It's not all ours."

Fabrizio explained that the county does pool and then invest money from some local school, fire and improvement districts.

If the county or any of those entities would need the funds now and have to sell a bond, they could lose a lot of money, Byers said.

"He put everybody's money in jeopardy," Byers said, referring to Fabrizio.

"What do you think would happen if a school lost everything?"

Fabrizio agreed that if a bond needed to be sold now, an entity could lose money on it. There have been occasions where the county has sold bonds at a loss.

However the situation may not turn out to be as dire as it looks.

"What they're talking about is unrealized losses," Fabrizio said. Bonds mature over a certain period of time. As the bond matures, it gathers interest, which increases its value. If a bond is sold before it matures the owner of the bond loses any interest the bond may have accrued.

For example, an investor purchases a 10-year bond, but cashes it in after five years. The investor loses five years of interest on the bond. Right now the bonds are not due to mature until 2012.

Fabrizio said it would be unusual, but not unheard of for a bond to lose principle when it was sold.

However, the Treasurer's Office had no plans to sell any of the bonds right now, he said. The office is waiting for the market for the bonds to increase. There are plenty of other sources of money to pull from in the meantime, he said.

"We haven't lost a dime," he said.

Byers agreed, saying that the amount of the losses depended on when the bonds were sold.

He asked why someone would invest the county's and other entities' money in something so risky when there were other safer alternatives. Fabrizio and Barker could have invested the funds into more secure government bonds or into the State Treasurer's Local Government Investment Pool.

"This is Wall Street reaching out into Mohave County," Byers said.

Fabrizio pointed out that Mohave County was not the only entity that invested in Lehman Brothers or any of the other companies now struggling.

"Why should we be any different from any other investor," he said. "They (other county officials) need to blame it on Wall Street."

Byers said he would like to see more regulation of investments not only at the federal level but at the county and state level as well.

A representative from the State of Arizona Office of the Auditor General is coming Oct. 6 to review the procurement requirements and investment policies of the County Treasurer's Office.

The AG will not be reviewing "management decisions made by the County Treasurer's Office related to investment activities," according to a letter sent to Byers. Nor will the audit address a possible conflict of interest between the office and Merrill Lynch.

Questions were raised earlier this year about investment strategies and possible conflict of interest in having Merrill Lynch handle the county's investments because Barker worked at one time for the investment firm.

The issue was discovered when the County's Office of Management and Budget audited the Treasurer's investments shortly after Barker left in July.

Fabrizio didn't seem to be worried about the audit. His office had followed the required policies and procedures when it came to investing the county's and other entities' money, he said.

Byers asked what the point of the investigation was if the AG was not going to look into how the funds were invested.