Declining values at mutual funds managed by veteran Miami investment advisors are creating problems for smaller banks.

BY JANE BUSSEY

Citing mounting losses, community banks in California and Washington have pulled their investments from a group of mutual funds managed by longtime Miami investment advisor Rodger D. Shay Sr.

More small banks, along with other investors, could be affected by the decline in asset values at the Asset Management Fund family of mutual funds.

The losses underscore how the financial crisis that started with subprime mortgages has spread in indirect ways to other financial institutions. In this case, the banks were walloped because they invested in once top-rated securities that have sunk in value.

In what financial experts say is an unusual move, Asset Management Fund restricted redemptions from its funds to ”in-kind” withdrawals.

That means investors can take out only a small amount of cash; the bulk of withdrawals must be taken as a transfer of a portion of the securities or bonds themselves. If an institution held 10 percent of the fund, which consists of a $1 million bond, the bank takes possession of 10 percent of the bond, for instance.

The Asset Management Fund is managed by Shay Assets Management, a Chicago company. Shay is chairman of the board and his son, Rodger D. Shay Jr., is president. Both of them are based in Miami with offices on Brickell Avenue.

Shay, who once served as chairman of Merrill Lynch Government Securities, serves on the board of trustees of the Catholic University of America and is vice chairman of the board of trustees of St. Thomas University.

Restricting institutions or people from withdrawing cash from hedge funds as values head south has been gaining in practice as markets worsen. Fund managers argue it is the only way to stop the equivalent of a run on the bank in a market where securities are illiquid but could eventually regain value.

But mutual funds are supposed to provide liquidity, providing investors with ease in withdrawal.

Shay Sr., in a telephone interview with The Miami Herald, said restricting the withdrawals to ”in-kind” is intended to protect investors who decide to remain in the fund.

”The board of directors [of Asset Management Fund] has decided that they should institute a redemption in kind as opposed to a cash redemption to protect the investors in the funds,” Shay said.

”It’s unfortunate that this market has taken the turn that it has,” he said.

So far two banks, Timberland Bancorp and Pacific Premier Bancorp have announced they redeemed their investments in cash and securities from the Asset Management Fund. The story was first reported in American Banker.

In late June, Pacific Premier, announced it was taking an impairment charge of $2.1 million, or 34 cents a share, because it had redeemed its investments in Asset Management Fund for cash and securities.

”We were not expecting to take these types of losses,” said John Shindler, chief financial officer for Pacific Premier, which has headquarters in Costa Mesa, Calif. “When we did our research on it [Asset Management Fund], it seemed a very safe investment. They were rated a five star from Morningstar.”

Earlier in June, Timberland, based in Hoquiam, Wash., announced a $2.5 million cash and non-cash charge to its earnings in the second quarter because of its investment in Asset Management Fund.

Both banks expect to collect income on the securities, which should increase in value.

It’s unclear whether any South Florida-based bank has funds placed with the Asset Management Fund.

Asset Management Fund had funds that were primarily investment vehicles for banks, credit unions and thrifts, although individuals could also invest.

Problems started at Asset Management Fund when it purchased some private label mortgage-backed securities whose ratings have toppled from triple A to junk-bond status. There is no market for these kind of securities under present conditions because large banks, reluctant to buy securities that have subprime components, are not purchasing them.

”You might get pennies or dimes on the dollar,” said Edward Krei, managing director of Baker Group, an institutional securities dealer in Oklahoma City. Krei said he was not sure how many banks would be affected but believed it would be in the hundreds rather than thousands.

Asset Management Fund currently has almost $3 billion under management, down from its peak of $5.2 billion in 2003.

Source: http://www.miamiherald.com/business/story/593434.html