Two years after the auction-rate bond market froze, Hawaii has lost about $250 million in market value on $1 billion in student-loan securities sold by a single Citigroup Inc. broker as a cash substitute that the state has had difficulty unloading.

Hawaii purchased half of the securities for its short-term treasury account from Honolulu broker Pete Thompson, 60, in the eight months before the market collapsed, according to Scott Kamii, an administrator at the state finance department.

The transactions came while Citigroup was increasing brokerage commissions and traders were being told to “;make sure all hands are on deck”; and “;do whatever is necessary”; to dispose of auction-rate bonds as the $330 billion market began to fail, according to a 2008 U.S. Securities and Exchange Commission complaint against the New York-based bank in a separate case related to sales of the debt.

“;I was shocked,”; state Rep. Karl Rhoads (D, Kakaako-Downtown) said of his reaction when a constituent informed him last year that Hawaii was stuck with the auction-rate securities.

“;I didn't believe it. We're a small state, only 1.3 million people,”; Rhoads said in a telephone interview.

Hawaii's frozen-cash crunch complicates efforts by Gov. Linda Lingle to close a $1.2 billion budget deficit as tourism revenue has fallen during the worst recession since the 1930s. She has proposed eliminating 800 state jobs, with teachers being told to stay home without pay for 17 days from November 2009 to May of this year.

Public attention has been focused on Wall Street banks' role in feeding the subprime-debt crisis by creating credit-default swaps, real estate derivatives and off-balance-sheet financing. The resulting blowup of the U.S. property market led to the 2008 collapse of Lehman Brothers Holdings Inc. and produced $1.7 trillion in financial company loan losses and writedowns worldwide.

The same Wall Street salesmanship helped fuel a second financial crisis for states, cities and universities from Massachusetts to California that have lost billions of dollars on derivative contracts and municipal-investment deals.

Auction-rate securities typically have maturities as long as 40 years and yields that are reset in periodic sales held as frequently as every seven days. As the global credit crisis deepened in 2008, banks that underwrote the obligations reversed decades of support for the market when they declined to bid for the debt.

The action left purchasers such as Hawaii, which viewed auction-rate debt as a higher-yielding cash substitute, unable to sell without taking losses. Citigroup provided the state with a valuation on Dec. 28 saying securities with a face value of about $1 billion were worth $752 million, according to bank documents.

“;It was represented to us that these were liquid investments that we could get out every seven to 10 days,”; Kamii said in an interview.

Thompson, now works for Morgan Stanley Smith Barney LLC, said “;I'm not in a position to answer any questions.”;

State auditor Marion Higa is preparing a report on the state finance department and its auction-rate investments that will be released shortly.

But state Budget and Finance Director Georgina Kawamura said “;there has never been one dollar lost in auction-rate securities.”;

“;We intend to hold these securities until maturity as the investments themselves remain sound and the state has been receiving all of the principal and interest payments in a timely basis,”; Kawamura said.