Like thousands of investors worldwide, the Oregon Short-Term Fund found itself holding paper worth pennies on the dollar when Lehman Brothers Holdings filed for Chapter 11 bankruptcy earlier this week.

Like thousands of investors worldwide, the Oregon Short-Term Fund found itself holding paper worth pennies on the dollar when Lehman Brothers Holdings filed for Chapter 11 bankruptcy earlier this week.

The state's nearly $10 billion short-term fund investment pool held two Lehman bonds (LEH) with a face value of $191.302 million — a little less than 2 percent of its holdings.

There are 1,002 participants in the pool, from the Adair Rural Fire Protection District outside Corvallis to the Zumwalt Rural Fire District in Wallowa County, listed on the OSTF Web site. About 60 of them are from Jackson and Josephine counties.

While no entity stands to lose dollars invested in the fund, Lehman's collapse resulted in OSTF lowering its return rate Wednesday by three-quarters of a point, from 3.25 percent to 2.5 percent.

"If a local government has put in $6 million and took all its money out, it would get $6 million, not $5.8 million," said Kate Richardson, chief of staff for State Treasurer Randall Edwards. "What has happened is the rate of return is diminished and adjusted to reflect our exposure."

The sharp drop in return rates contrasts with September 2001, when the yield dropped from 3.78 percent to 3.7 on Sept. 11 and continued to slip for the rest of the month, finishing at 3.32 percent. That .46 percent decline was roughly two-thirds of Tuesday's decline.

OSTF return rates fluctuate based on market conditions and the return rate has changed two dozen times since Sept. 13, 2007.

"This is a more significant, immediate action than is usually the case," Richardson said.

A year ago, the return rate was 5.35 percent. But more than 20 times in the past 12 months the rate has dropped. After falling to 3.15 percent on June 27, the yield grew to 3.2 percent on July 11 and 3.25 percent on July 24.

The fund held a bond with a coupon rate of 4.25 percent and a maturity date of Jan. 27, 2010. The second floating rate bond had a May 25, 2010, maturity date.

"We haven't written it down to nothing," Richardson said. "Historically, in bankruptcies you get a few pennies back on the dollar."

The treasurer's office issued an update to OSTF participants on Tuesday to disclose the exposure, explain its next steps and "attempt to ease any anxiety our customers may be feeling."

"Prior to the LEH announcement, the OSTF has been able to maintain an attractive, above-market rate for a long period of time," the memo stated. "The adjustment for the LEH exposure still results in a very attractive rate versus alternatives with daily liquidity."

The OSTF staff has increased Treasury holdings along with government-secured equities (such as Freddie Mac and Fannie Mae), the memo stated. "With the current crisis state of the market, this trend will continue."

The nature of the pool provides swift access to cash for its participants.

The OSTF presently has 13.8 percent of its holdings maturing within seven days, 12.2 percent between seven and 14 days, 9.4 percent between 15 to 21 days, and 9.8 percent between 22 and 30 days. Some $3.99 billion is available within 30 days. The memo indicated the OSTF has a total of 53.4 percent, or $5.04 billion, maturing within 93 days.

The fund staff concluded with a cautionary note:

"Given the large amount of outstanding LEH commercial paper and debt, staff expects continued fallout from the Lehman filing in days and weeks to come, including announcements from the money market fund universe. Investments, outside of government securities, all carry some measure of risk — that's exactly what creates yields above Treasury benchmark rates."

Reach reporter Greg Stiles at 776-4463 or e-mail business@mailtribune.com.