Three-Card Monte

Bloomberg News reports that local governments and school districts have pulled $8 billion dollars out of a state-run investment pool after learning that the money market fund was backed by $700 million dollars in defaulted debt.

The withdrawals have been made since November 14 when the head of the agency that manages the state's short-term investments revealed the defaulted debt in a report delivered to the governor. About $19 billion dollars remains in the state-run investment pool.

Lehman Brothers Holdings Inc. sold Florida most of the now-defaulted asset-backed commercial paper. The defaults are related to sub-prime, near-prime and prime mortgage problems that have roiled the credit market in recent months.

When asked why Orange County in Florida withdrew its money from the state-run investment pool, Martha Haynie, the county's comptroller, said

"I want Orange County to be first in a lot of things, but I don't want Orange County to be the first to lose money in the state's Local Government Investment Pool.''

What Ms. Haynie is talking about is what happened to four little Norwegian towns near the Article Circle:

Officials in four northern Norwegian townships (Narvik, Rana, Hemnes and Hattfjelldal) went along with an alleged recommendation by Terra Securities to invest a total of NOK 451 million in what they're now calling "high-risk structured products" offered by Citibank and sold for Citibank by Terra.

The American commercial paper was also tied to bonds issued by local governments in the US, and Norwegian Broadcasting (NRK) reported that hedge funds were involved. To boost returns, the Norwegian townships also borrowed NOK 3.5 billion to invest in Citibank's products, which later lost as much as 50 percent of their value because of the US credit crunch.

News started leaking out about the troubled investments when the townships were ordered to pay in millions more, to satisfy guarantee requirements. Mayor Asgeir Almås in Hattfjelldal feels cheated.

"I wonder whether Terra had such a lucrative deal with Citibank that they found some fools to earn quick money," Almås told newspaper Aftenposten. His little township with a population of just 1,500 but solid revenues from power plants, invested NOK 100 million and since has paid in another NOK 20 million in guarantees.

Both Terra Securities, which said it would file for bankruptcy protection, and Citigroup, which itself has written down billions of dollars related to mortgage problems, absolved themselves of complicity in the matter.

Terra officials said they're sorry about the losses but the townships must be considered "professional players" who must take responsibility "for the investments they choose to make."

The Wall Street Journal reports that Citigroup said it "believed that the risks of investing in the notes were described in the materials provided to Terra."

The officials in the Norwegian towns say they "asked all the questions we could" about risk levels, including currency valuations.

Nonetheless, the towns have taken big losses on the investments and must "throw good money after bad" to cover guarantee requirements.

The problem, of course, is that the Norwegian towns didn't get out of the garbage investment funds in time like the Florida townships and school districts have.

With banks announcing new write downs related to credit crunch and mortgage problems nearly every day (Wells Fargo and IKB are the latest to do so) and with the housing market continuing to tank nation-wide, you can bet that more homeowners will be defaulting on mortgages, more banks will be writing down losses and more townships, more school districts, more pension funds and more retail investors will risk losing their shirts in this financial mess.

It's all a big three-card monte game and investors need to remember that the game is rigged in favor of the Wall Street guys, the hedge fund managers and the multi-national banks that Helicopter Ben Bernanke continues to keep rescuing while little guys who were stupid enough to buy into what Wall Street was selling lose nearly everything.

Now you'll have to excuse me, I have to go and take a look at what toxic crap my own pension fund has been invested in.