Thursday October 9, 2008
by George Hohmann
Daily Mail Business Editor

CHARLESTON, W.Va. -- State Treasurer John Perdue says a real-time, online auction that places state money with West Virginia banks is like a football game: The players feel each other out, get a game plan together and battle to win.

Students at the University of Charleston's Graduate School of Business got an up-close look at how the Board of Treasury Investments' certificate-of-deposit auction works on Wednesday. Perdue and his staff turned one of the school's classrooms in the former Boll Furniture Building downtown into an auction room.

Before the half-hour auction started at 10 a.m., Perdue explained that the Board of Treasury Investments, which he chairs, manages $3.5 billion in short-term money it invests on behalf of state agencies, county and city governments.

The board has more than 1,332 accounts, said Kara Brewer, the board's chief financial officer. For example, "the Kanawha County Sheriff's Department has 22 accounts with us," she said.

Perdue said that before his office managed the money, "very little was being kept in West Virginia. So we started a pool, a certificate-of-deposit auction. We auction $25 million each quarter for banks to bid on."

The banks that offer the highest interest rates win the right to hold from $100,000 up to a maximum of $5 million for the certificate term. All of the 14 auctions to date have sold six-month certificates with a single exception: A one-year certificate auction was held last year.

The auction takes place online, in real time.

Perdue said the auctions produce only winners: State banks record the certificates they win as deposits, which they can loan to customers. Because only banks with a West Virginia presence can bid, the state's economy benefits. Perdue said the state and local agencies that invest their money with the Board of Treasury Investments win because the auction gets the board higher interest rates than it would earn by just buying U.S. Treasury bills. Since the auctions began in May 2006, the board has earned an additional $997,145 in interest.

Two screens set up in the University of Charleston's classroom on Wednesday displayed the bidding. The screens refreshed every 30 seconds, with new bids highlighted in blue.

Dan Lanier, a BB&T senior vice president and deposit manager for government and public funds, explained to the students that his company goes into the auction with several goals: To win the $5 million maximum allowed and to stay under the maximum interest rate he and other BB&T managers have determined the bank is willing to pay. In addition, "we would like to not be the highest bidder, although it doesn't always work out that way," he said.

Before each auction, Lanier consults with BB&T's funds managers in Winston-Salem, N.C. "They have the big picture of where our bank wants to be on deposits," he said. "We figure the maximum rate we'll bid. Then we get the minimum rate the Board of Treasury Investments will accept. I look at the two rates and decide where I want to start bidding."

On Wednesday the minimum bid was 1.122 - the rate the state could have received if it had just purchased U.S. Treasury bills.

Wednesday's auction took place amid a turbulent world credit market. "There's a lot of change," Lanier said. "It is impacting everybody's bottom line. Some banks need to drive up their deposits. Rates could be higher today than we experienced last month. You will see different strategies.

"Some banks will place a single bid for $5 million at the opening," he predicted. "They don't want to go through the charade of bidding in, falling out. You'll see others come in late. With less than 30 seconds to go, you'll see some banks that haven't bid before come in with a $5 million bid."

Perdue said, "Some banks come in at the last second and try a 'Hail Mary.' "

Lanier said that at every auction, participants "have got to make some decisions at the last second." He said BB&T likes to enter five bids early, each for $1-million certificates, and then, as necessary, ratchet up the amount of interest it offers.

Lanier and BB&T employees Regina Lewis and Nancy Kelly form BB&T's auction team. Although the team went into Wednesday's auction with a game plan, Lanier couldn't communicate with Lewis and Kelly while the auction was underway. That's because Lanier was in the auction room with the students, watching all of the bidding as it flashed up on the screens.

Bidders - including Lewis and Kelly - were back at their bank offices. Bidders can only see their own bids and only know if their own bids are "in the money" or not.

So Lanier observed with the students while Lewis and Kelly, working from BB&T Square, 300 Summers St., placed bids and executed the team's strategy.

One student asked why a bank would use the CD auction. Lanier said BB&T is seeking deposits from numerous sources and "the CD auction is another avenue."

Assistant Treasurer Paul Hill noted that it could take a lot of individual deposits to come up with $5 million. A bank that wins $5 million at auction can record that money as a deposit the next business day.

When the bidding started Wednesday, there were seven bids right away. "Game's on!" Perdue declared.

A little later, Perdue pointed out that there were four banks online but only two had submitted bids. "We're in the first quarter, just getting started," he said.

Ten minutes into the auction, bids quit coming in. "It always slows down in the middle," Perdue said. "It's like a time-out between quarters."

Lanier said that during the last minute of the auction, from 10:29 a.m. to 10:30 a.m., "I'm usually going crazy. That last 30 seconds is tough. Sometimes you've got to make a gut-wrenching decision."

As the clock ticked down with only seconds to go, United Bank weighed in with bids that won it the $5 million maximum. "What did I tell you about last-second bids? Perdue said. "There's a 'Hail Mary.' "

When the auction ended BB&T was among the winning bidders. Lewis and Kelly had snared the maximum, $5 million.

Lanier was all smiles.