Bad news has come in about Maine’s unfortunate investment last August in something called Mainsail II, registered in the Cayman Islands. Receivers for the defunct venture now say that Maine can no longer count on getting back its full $20 million plus interest.

The deal looked good when Maine Treasurer David Lemoine made it on Aug. 8, 2007, on the advice of a trusted Merrill Lynch consultant. It was rated AAA. It would pay a generous annual interest rate of 5.45 percent. It would mature in 23 days, for a profit of nearly $70,000. But 13 days later the ratings dropped to pure junk and the investment has been frozen ever since. Mainsail II had been using Maine’s money to help gamble on mortgage-backed securities and got caught in the financial collapse.

The accounting firm of KPMG, now trying to salvage the mess, reports that “creditors of Mainsail II have been made aware that no valuation of the issuer’s asset portfolio provides any reasonable expectation that a sale of the assets would generate enough capital to repay its obligations to senior secured parties in full.”

Maine’s investment in commercial paper makes it a senior secured party. Junior investors in Mainsail’s “mezzanine notes and capital notes” will get back nothing at all, said the KPMG receivers.

The Maine Treasurer’s Office called the KPMG report good news and bad news, but the good news is hard to find. Treasurer Lemoine issued a relatively upbeat statement on April 4. He said that the appointment of the KPMG receivers meant that “the next market resolution phase” for the investment was finally underway. He went on: “This development appears to at last establish clear authority to fund refinancing solutions that can be supported by secured debt-holders like Maine.” His office also found encouraging a Mainsail II assurance that there would be no “automatic ‘fire sale’ of assets.”

Mr. Lemoine added that “Until the Mainsail II matter is fixed and I am satisfied that the Merrill Lynch brokerage culture is trustworthy, this office will not bring Merrill Lynch into any of our bond deals.”

If that sounds inadequate, watch as LD 2226, introduced by Sen. Richard Rosen, R-Bucksport, makes its way through the Legislature. It would prohibit the state treasurer from making any investments like the one in Mainsail II and limit investments to “bonds, certificates of indebtedness or other obligations of the United States.” It adds that the primary purposes of the treasurer’s investments are “the preservation of capital and the maintenance of maximum liquidity.”

How much of its $20 million Maine will get back remains up in the air. One of the KPMG receivers, Keith Blake in the Cayman Islands, says that “information is still being collated” and “it is intended that further information will be made available to the creditors later in April.

If it comes up short, then it will be time to consider other steps, including those in LD 2226.