BOSTON Maine's state Treasurer blamed Merrill
Lynch & Co Inc MER.N and credit agencies on Wednesday for
leading the state into a failed commercial paper investment
that later sparked a ban on these popular securities.
Controversy is heating up in the state over who is at fault
for having put $20 million, about 3 percent, of the state's
roughly $725 million cash pool this summer into an investment
fund called Mainsail II -- two weeks before its sterling
ratings crumbled to junk.
The investment met all of the state's investment criteria,
but exposed the state to the mortgage market-related losses
that have roiled credit markets for a few months. It also
prompted the Treasurer to prohibit new commercial paper
investments that could cut the interest the state earns.
"I have deep concerns about the recommendations and the
process by which that (paper) was delivered to us," Maine state
Treasurer David Lemoine told Reuters in an interview. "What was
in the background at Merrill Lynch for funneling that
suggestion through their broker to us for purchase?"
Mainsail II assets were frozen in late August.
Standard & Poor's on Tuesday cut the ratings on Mainsail II
and three other "SIV-lite" investment funds. Other agencies
acted more quickly, but not soon enough to keep Maine and
others, including Connecticut, Florida, Montana and King County
in Washington from getting in.
Some Maine lawmakers are now saying the Treasurer
misstepped and are questioning the state's entire investment
"They are critical of me because somehow this has happened
and it must mean that the Treasurer made a mistake," Lemoine
But Lemoine, a lawyer who has been in the job since 2005
and served in the state legislature before that, said he was
convinced by the Merrill broker that it was a good choice.
"It is not like we go out shopping for commercial paper,"
Lemoine said. "We have approved brokers who bring suggestions
to us and we rely upon them to fully vet them before bringing
the paper forward."
Merrill Lynch spokesman Mark Herr said: "The investments
were in line with the investment policies that Maine developed
for itself. When we executed these sales for Maine, we provided
Maine with the relevant information."
So far, Lemoine is the Mainsail II investor most critical
of Merrill Lynch, whose subprime-related losses totaled over $2
billion in the last quarter, prompted a roughly $8 billion
write-down and cost former CEO Stanley O'Neal his job.
While Maine has not lost any money on the Mainsail II
investment yet, Lemoine said it will take weeks if not months
for the investment to be unwound carefully. Mainsail II was run
by British hedge fund Solent Capital Partners.
Only after that can the state consider possible next steps
against Merrill Lynch, one of a handful of approved brokers the
state has long relied on for investment advice.
"If there is no harm, there is no foul. We need to see how
it unfolds eventually in terms of the payment process," Lemoine
said, declining to say how he might move against the New York
investment bank and its brokers.
Currently, Maine is also reviewing its entire investment
process and sidestepping all commercial paper investments.
"As a practical matter, we are not using commercial paper
anymore and so we are not dealing with any brokers, including
Merrill Lynch," Lemoine said.
Instead, some of Maine's short-term cash is now being
invested in fully collateralized bank deposits, which earn the
state less money, but are deemed very safe.
(Reporting by Svea Herbst-Bayliss; editing by Andre Grenon)