SunTrust Banks Inc.'s involvement in the Orange County bond debacle illustrates how panic can damage even the most conservative investments.

Atlanta-based SunTrust was forced to sell $5 million worth of Orange County bonds at a slight loss last Thursday, even though the bonds were backed by Treasury securities and were not linked to the creditworthiness of the financially troubled California county.

It's a shame there's such a panic in the market, said Ron Schwartz, a SunTrust fund manager.

The Orange County securities held by SunTrust's $103 millionasset Investment Grade Tax-Exempt Bond Fund were actually "pre-refunded" bonds, those from a refinancing of a previous issue. The interest and principal payments are covered by an escrow account containing U.S. Treasury securities.

"They're basically the most secure bonds in the municipal market," Mr. Schwartz said. The bonds Mr. Schwartz sold were still rated triple-A, despite Orange County's downgrading last week from AA-minus to CCC by Standard & Poor's.

Because the pre-refunded bond market is so liquid, Mr. Schwartz was able to swap out of the Orange County bonds at a small loss. "From my point of view, I felt very fine with the bonds. The problem is my investors might not understand it."

Mr. Schwartz's investors did receive a severe shock last Thursday when The New York Times ran a table showing the mutual funds most exposed to Orange County bonds. The SunTrust fund was listed No. 1, with a 12% exposure. But the table was based on out-of-date information. The fund's actual exposure was only 4.4%, according to Mr. Schwartz.

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