ATLANTA -- The treasurer of Greenwood County, S.C., resigned Sunday following paper losses to an $8.4 million trust fund that had slashed its value by about 40% in the past year.

S. Reel Robertson stepped down after the county council learned last week that the fund had made heavy bets in collateralized mortgage obligations and other derivatives, contributing to unrealized losses of about $3 million in fiscal 1994, according to County Manager Robert Haynie.

Robertson "came to the difficult decision to resign because our confidence in his abilities to perform his job had been seriously eroded," Haynie said in a telephone interview yesterday. "This is unfortunate because he was otherwise capable and conscientious."

Haynie said the fund's market losses ending June 30 occurred because "investments in rate-sensitive securities magnified the effects of interest rate increases in the bond market."

Greenwood's county council on Tuesday voted unanimously to implement a system of controls on the fund, including appointment of an investment committee to monitor the fund's performance at least quarterly, the county manager added. The council also hired Greenwood Capital Associates -- investment consultants based in the county -- to restructure the portfolio to eliminate risky investments, he said.

In a statement released yesterday, the council said it "will consider every legal means to seek redress, including litigation."

The county manager said that the investment banking firm that sold the county most of its recent investments was Houston-based WestCap Corp. LP.

Haynie said, however, that unlike the situation in Orange County, Calif., the market deterioration of the Greenwood fund does not affect any county debt service payments or its ability to provide ongoing services.

Also unlike Orange County, he added, the South Carolina fund did not leverage assets to fund additional investment.

Last Tuesday, Orange County filed for bankruptcy under Chapter 9 protection, citing an estimated loss of $1.5 billion, or 20%, to a $7.5 billion local government investment pool it sponsored. This week estimates of the pool's losses were increased to over $2 billion, or 27%.

Haynie noted that Greenwood County, which is located in the western portion of the state, set up the fund in 1966 with proceeds from the sale of electric distribution facilities to Duke Power Company. Since that time, he said, the county has left the original principal of the Electric Capital Fund intact, using interest income and capital gains to supplement general operating revenues.

The $467,190 generated by the fund in the county's 1994 fiscal year accounted for 3.7% of Greenwood's total revenues of $12.7 million. Haynie said that the county's general fiscal health is good, having begun its current fiscal year on July 1 with a $2.5 million undesignated fund surplus.

Greenwood County has the "option" of holding all of its current investments to maturity to avoid realizing losses, Haynie said, but would probably not do so because the current structure of the trust fund has compromised the county's ability to generate income.

According to a report prepared by the fund's new financial adviser, at worst estimate the fund will earn income of 2% to 3% a year. This contrasts with the 5.56% return that the fund earned during the Greenwood's 1994 fiscal year.

"At some point the recommendation may be made to sell and take some loses," Haynie said. "But before we reach that point a great deal of analysis is necessary."

Haynie said that Robertson first brought the portfolio's paper losses to his attention in July when a market valuation of the fund was prepared in conjunction with its annual audit. At the time, Haynie said, he was "under the impression that the fund's principal was protected, and that we could sit on the problem until the bonds matured."

Robertson was not available for comment.

Officials at WestCap did not return phone calls.

According to William Allin, Greenwood Capital Associates' president, about 60% of the fund's portfolio is in collateralized mortgage obligations, with significant exposure in structured notes from the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.

He said that derivatives exposure included "inverse floaters," and interest-only and principal-only CMOs.

Allin said his firm's approach to the portfolio will be to take an "active management stance," looking for "conservative quality-driven" alternative securities that will allow the fund to take advantage of market opportunities while protecting principal.

"We will not be in any hurry," he said. "In restructuring the portfolio, we will work one security at a time."

State officials said yesterday that cities and counties in South Carolina would be well-advised to exercise special caution in managing their investment portfolios, particularly with regard to complex, structured securities and those with long-dated maturities.

"The premise you should operate under is to know what you're buying and who you're buying it from," state Treasurer Grady Patterson advised local governments yesterday in an interview.

Patterson said that his office sent out an advisory to local governments in March warning them of the pitfalls of risky investments.

He said that legislation to increase state oversight of local governments "might be beneficial, but it is not necessary constitutional."

State Comptroller Earle Morris said that the lack of state oversight of local governments in South Carolina may have contributed to Greenwood County's woes. He noted that the state does not collect information on the investment pools of its cities and counties.

Neither Patterson nor Morris knew of other local governments in the state that have suffered investment losses comparable to those in Greenwood County.

"The state wouldn't know at this point, because there is really no record," Morris said.

Christopher McEntee contributed to this article.

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