Citigroup's Auction-Rate Bonds Freeze $1 Billion in Hawaii Cash

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March 4 (Bloomberg) — Two years after the auction-rate bond market froze, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities sold by a single Citigroup Inc. broker as a cash substitute that the state has had difficulty unloading.

Hawaii purchased half of the securities for its short-term treasury account from Honolulu broker Pete Thompson, 60, in the eight months before the market collapsed, according to Scott Kami, an administrator at the state finance department.


The transactions came while Citigroup was increasing brokerage commissions and traders were being told to “make sure all hands are on deck” and “do whatever is necessary” to dispose of auction-rate bonds as the $330 billion market began to fail, according to a 2008 U.S. Securities and Exchange Commission complaint against the New York-based bank in a separate case related to sales of the debt.

“I was shocked,” state Representative Karl Rhoads said of his reaction when a constituent informed him last year that Hawaii was stuck with the auction-rate securities. “I didn’t believe it. We’re a small state, only 1.3 million people,” Rhoads said in a telephone interview.

Hawaii’s frozen-cash crunch complicates efforts by Governor Linda Lingle, 56, to close a $1.2 billion budget deficit as tourism revenue has fallen during the worst recession since the 1930s. She has proposed eliminating 800 state jobs, with teachers being told to stay home without pay for 17 days from November 2009 to May of this year.

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