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County tries to recoup investment principal: $30 million tied up in failed banks
Jim Johnson
May 07, 2009 (The Monterey County Herald - McClatchy-Tribune Information Services via COMTEX) --
Monterey County residents had about 30 million reasons to pay attention to a crucial congressional hearing in Washington, D.C., on Tuesday.
That's because the county was being represented by a cadre of officials from state and local governments and public agencies across the nation who made their plea before the House Financial Services Committee for help from the $700 billion federal bank rescue fund to offset nearly $2 billion in losses after the failure of venerable Lehman Brothers last year.
The county had about $10 million on the line with the 158-year-old investment bank, which went belly-up in September after the federal government decided against a bailout for the well-known firm. It also had about $20 million riding on Washington Mutual, which declared bankruptcy in September in the largest bank failure in U.S. history.
A provision in the Toxic Assets Relief Program allows Treasury Secretary Timothy Geithner the latitude to use bank bailout funds to compensate local governments for the Lehman failure, a move urged by congressional representatives. Instead, the Treasury Department has focused on using the TARP money to prop up struggling banks.
But County Treasurer Lou Solton said the federal government's decision to pass over Lehman while bailing out other institutions, including Fannie Mae, Freddie Mac and AIG, makes this a special case.
Solton, who said he declined an offer to be one of several government officials to represent the group,
believes the county's investment in Washington Mutual should be treated the same way as its investment with Lehman because the feds also allowed that bank to fail.
In a letter to the committee, Solton pointed out that Lehman Brothers and Washington Mutual were considered top-flight firms and both had earned top credit ratings.
"The real issue is fairness," Solton said. "The bottom line is these are taxpayer dollars being returned to taxpayers. We're bailing out Wall Street, what about Main Street?"
Ultimately, he said, the bailout money would go a long way toward helping save crucial jobs and services provided by local governments hit hard by the loss of investment interest income, as well as the potential loss of most of their investment principal.
Monterey County is expected to lose about $2.8 million in interest income this fiscal year, a difficult proposition made tougher by drooping revenue as a result of the recession and the housing market meltdown.
The county controls a $1 billion investment portfolio that includes money from local schools and special districts.
Solton, who will deliver a report today to the county's Treasury Oversight Committee on efforts to recoup millions of dollars in losses from the county's investment pool, said legislation is likely the best shot the county has to recover its money.
Rep. Anna Eshoo, D-Palo Alto, has introduced legislation calling for local governments to be repaid their investment principal through TARP.
Solton said local government officials are "strategizing" about other ways to go after their investment principal, including the possibility of signing on to other pending or yet-to-be-proposed legislation.
The county is seeking relief through the bankruptcy courts, but that is moving slowly, and has sued Lehman Brothers, Washington Mutual and their accounting firms.
County attorneys allege that both banking firms misled investors by artificially inflating their value while concealing exposure from low-grade mortgage-based holdings. The suit accuses the firms' managers of fraud and deceit, negligent misrepresentation and breach of fiduciary duty.
According to the suit, the banking companies' accounting firms simply looked the other way.
At Lehman, according to the county's suit, Chief Executive Officer Richard Fuld took nearly $500 million out of the firm as investors such as Monterey County were losing billions, and purchased a lavish Greenwich, Conn., mansion, a $21 million Park Avenue apartment in New York City, a $13 million beachfront vacation home in Florida, a million-dollar ski house in Sun Valley, Idaho, and a multi-million-dollar art collection.
In the wake of all that, the suit says, Lehman Brothers "had the audacity" to ask for a federal bailout.
Solton said there is still plenty of work to be done before the county can possibly recover its investment.
"We're on Chapter 5 of a 10-chapter book," he said, "and there's more to come. So stay tuned."
Jim Johnson can be reached at 753-6753 or jjohnson@montereyherald.com. |
