DALLAS - The flow of withdrawals from the investment pool set up for Texas municipalities continued to decrease Thursday, while state officials expressed optimism edgy investors would return to the fund.

Participants of TexPool have drained about $1.9 billion from the fund within the past seven days in the wake of a severe financial crisis in Orange County, Calif., that was precipitated by risky investments.

But the flight of investors from the Texas fund thinned Thursday. Net withdrawals totaled $236 million, down from Wednesday's $271 million, Tuesday's $448 million, Monday's $646 million, and Friday's $326 million.

"I think the fear is gone," said Mike Doyle, deputy treasurer of Texas.

Standard & Poor's Corp. in a statement Thursday said the Texas Treasury could cover TexPool.

"The Texas Treasury has the capacity and flexibility to deal with any calls on the fund within its overall general obligation credit rating of double A," the statement said.

"The ebbs and flows of incoming and outgoing cash continues with indications that the outflows are subsiding," S&P said. "To the extent that any portfolio securities have to be sold, the state Treasury is expected to absorb such losses temporarily and hold such acquired securities to their respective maturity dates."

About a week ago, TexPool sold all derivatives which accounted for about two percent of its portfolio. It also has purchased other securities to maintain TexPool's liquidity in face withdrawals.

"They have funded all the withdrawals," said George Willifford of First Southwest Co. in Dallas. "They indicated Treasury would support TexPool and they have to date by purchasing some securities from the fund."

The state treasurer's office has worked all week calming edgy investors and reiterated the fund remains safe and sound, calling the run "unnecessary." Officials repeatedly assured that any participant of the pool wanting to withdraw money could do so.

"We told people we'd give them dollar for dollar," Doyle said.

Jim Gilley, a partner at Coastal Securities in Houston, said such assurances were helpful. "I think the state standing behind it is a significant confidence factor," he said.

TexPool's troubles came in the wake of a financial debacle in Orange County, Calif., which sought bankruptcy court protection last week after announcing its investment fund suffered an estimated $1.5 billion loss. The county fund held a number of risky derivatives.

TexPool had a much smaller, less risky holding in derivatives. Officials blame the run on the fund, in part, on a Wall Street Journal story comparing the Texas and California funds.

"People thought they were going to get screwed," Doyle said. "They were just temporarily scared away by negative publicity."

Doyle pointed out some investors "zeroed out" their accounts in TexPool but did not outright close them because of paperwork problems, suggesting hope exists the fund will improve.

"They got scared," he said. "They took the money and put it someplace. But they're okay with the pool now and thinking of maybe bringing it back.

"Most of the people we're talking to are saying, 'I took the money out. But I'll come back.' None of them are closing out. They've indicated they will come back."

Gilley said investors have pulled out of TexPool because they could get better returns on their money elsewhere.

"I think until the rates become more attractive it's going to be more difficult to bring investors back in who now have concerns about their security," he said.

Doyle acknowledged some investors are withdrawing for this reason.

"I'm sure there are other people taking it out because the can get higher yields elsewhere. I just hope their money is safe," he said.

TexPool is a state-run investment fund formed in 1989 and has more than 1,300 participants, including school districts, cities, counties, and utility districts.

The fund's portfolio includes Treasury bills, notes, strips, agency notes, and agency discounts.

Claire Cohen, vice chairman of Fitch Investors Service, said she has been in touch with Texas officials about TexPool.

"They don't feel the problem is a credit problem," Cohen said. "It's panic on the part of local units. They feel it's something they're handling."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.