City wants its $5M back

Costa Mesa invested $5 million in Lehman Brothers corporate notes, which went from outwardly rock-solid investments to near-worthless pieces of paper overnight when the company declared bankruptcy in September.

Around the same time, the federal government was bailing out several large banks, but decided to let the 150-year-old investment firm fail.

Just hours before the company went under, its debts were A-rated, meaning there was little risk the company would default.

When Costa Mesa’s finance director, Marc Puckett, found out about the loss, he formed a coalition of other cities and local agencies up and down the state that had also lost millions with Lehman. The coalition eventually grew to encompass agencies in states across the country.

Puckett and several representatives from the group went to Washington, D.C., last week to ask Congress to reimburse losses they sustained on investments thought to be safe.

According to Puckett’s count, there are at least 120 cities and other local agencies in California alone that lost money in Lehman. The resolution being considered by the finance committee, HR 467, asks the federal government to use TARP funds to cover $1.7 billion local agencies in more than 20 states invested in Lehman.

State standards forbid cities such as Costa Mesa from investing in anything thought to carry a substantial risk of failure and Lehman met and exceeded state standards.

The agencies that lost money — locally, the Orange County Transportation Authority also had Lehman investments — did not make mistakes by gambling on risky ventures, Puckett said. On the contrary, they were trying to be as conservative with their money as possible. He likened the situation to a person putting money in a bank, a situation in which the government guarantees that it will cover any losses.

That’s why Puckett was so surprised to see Orange County Treasurer Chriss Street at the hearing as the only person testifying against the bailout that the cities, counties and other agencies were requesting.

Of all the opposition Puckett thought the proposal might garner, he didn’t expect it to come from his own county’s treasurer.

Street was invited to testify, he said, because he had watched Orange County go bankrupt years back and subsequently recover without the help of federal money. He had also written an opinion piece recently opposing the use of federal money to guarantee California debt.

“If we are going to shelter our local leaders from the consequences of their investments in Lehman Brothers, how can we stop there,” Street told the House Financial Services Committee. “Why not reimburse cities and counties for their mistaken investments in Chrysler, General Motors, AIG and Washington Mutual.”

To make the situation more awkward, Orange County’s supervisors — the county’s governing body — had not yet taken a position on the bailout and Street had not notified them that he was going to speak out against it.

Orange County’s treasurer is an elected official, not an appointed one, so the independent political statement was well within his rights even without the supervisors’ blessing.

Nonetheless, the Orange County Transportation Authority and the California State Assn. of Counties (of which Orange County is a part) were fully in favor of the resolution, which made for an odd mixed message.

To supervisor John Moorlach’s chagrin, he heard about Street’s trip via an e-mail from a representative from the association of counties right before the hearing saying, “We’re testifying in favor of this resolution, why is your treasurer scheduled to speak against it?”

“He didn’t go through anybody. It was just like, ‘Hey, surprise! I’m here,’” Moorlach said.

Deputy Treasurer Keith Rodenhuis, who went with Street to the hearing, said it was a last-minute decision to speak and the treasurer didn’t have time to tell the supervisors about his plans. The treasurers didn’t realize at the time that Costa Mesa or the county transportation authority were part of the national group they were speaking against, but Rodenhuis said the message would not have changed.

Moorlach says he has sympathy for the cities and local agencies asking for the Lehman bailout because it was a different situation than the other bailouts.

“This one was like being blindsided. It wasn’t like Marc was holding paper like GM that was deteriorating over months and months and months. It’s more like you’re a victim than a poor money manager,” he said.

Street, however, said he purposely kept the county from investing its money in Lehman because of the company’s exposure to sub-prime mortgages and its reputation for being highly leveraged.

“What [Costa Mesa] did with their investments was their choice,” Street said. “I think it’s a tremendously bad idea to bail people out of their investment mistakes.”

Moorlach thinks the treasurer should have more compassion for governmental money managers who get hit with unexpected losses because Street invested $80 million of the county’s money in a structured investment vehicle called Whistlejacket that defaulted last year. Although Street said he still hopes to get 100% of that money back, Whistlejacket investments are reportedly selling at less than 70 cents on the dollar.

Street called the comparison “apples and oranges” because they were different types of investments.

Costa Mesa, the Orange County Transportation Authority and the association of counties are all waiting for HR 467 to make it out of committee and onto the legislature floor for a vote. Puckett is hopeful it could happen within two to three weeks.

He said Street’s opposition was a hollow political move without any understanding of what’s at stake.

“This is not a Republican or Democratic issue. It’s an issue that crosses the aisle and affects agencies around the country,” Puckett said.

While the city waits to hear if it will be able to recoup its Lehman loss, Puckett will be busy trying to fill a projected $19-million hole in the city’s budget, which is expected to cause programs to be cut, projects to be delayed, and police and firefighters to be laid off.

Being able to tell his bosses the city has $5 million more to work into the budget would be a welcome bright spot for him in an otherwise grim year.