WASHINGTON—State and local governments from Florida to California believed their public money was safe in top-rated accounts at Lehman Brothers. What could be safer than putting cash in a venerable investment bank that helped finance America’s railroads?
When the 158-year-old Lehman went belly-up last September and the government decided against a bailout, public officials in at least 20 states watched no less than $1.7 billion set aside for hospitals, fire houses, roads and schools evaporate from their books.
Lehman’s bankruptcy, the biggest in U.S. history, cut deeply into the budgets of state and local governments and other publicly funded entities, which by law keep operating money in conservative, interest-bearing instruments until it’s needed.
Minnesota lost more than $56 million. Missouri lost $50 million. Oregon lost $173 million. Arizona lost $61 million. Florida lost more than $465 million. Public agencies in California’s San Mateo County—one of 35 public entities hit in that state—lost $155 million.
On Tuesday, public officials came to Capitol Hill pleading for a bailout. They asked the House Financial Services Committee to back legislation directing the Treasury Department to take some of the money left in the government’s $700 billion financial bailout and buy back certain Lehman investments at full face value.
It’s only fair, they said. It’s not like these government entities were using taxpayer funds to speculate in the market. The money was invested in top-rated corporate bonds and the like. Now, they are fighting in court to get pennies on the dollar for their bad Lehman investments.
Boulder County and 61 other local governments in Colorado were forced to write off $5 million plus interest because the Colorado Diversified Trust had invested part of its assets in highly rated commercial paper issued by Lehman.
“Ours was not a speculative investment,” said Bob Hullinghorst, treasurer of Boulder County, 30 miles northwest of Denver and home to the University of Colorado. “We should not have been talking risks with taxpayers’ dollars. We did not think we were.”
The money lost in California’s San Mateo county, in the San Francisco Bay area, was parked in highly rated, liquid Lehman securities, waiting to be used to fund schools, public works projects, prisons and transportation services.
The human cost of the loss of money: 1,658 local jobs—about one-half of 1 percent of the employment base in a county where the jobless rate has risen from less than 4 percent to more than 8 percent in the past year. An estimated $40 million was lost in operating funds for schools, which includes teacher salaries, books, construction and maintenance. Also lost was more than $36 million that supports the county’s public hospital, affordable housing, parks and in-home support services for the elderly and disabled.
The state of Florida, already hit by high unemployment and home foreclosures, was holding more than $300 million. Sarasota County had $40 million in Lehman bonds when the storied company went under, according to Karen Rushing, comptroller of Sarasota County. Now, Sarasota County can’t build, equip or staff a new fire station that would have expand ambulance coverage in the eastern part of the county. It can’t construct two new libraries or new parks.
Democrats said using money from the Troubled Asset Relief Program, or TARP, would help put new stock on Main Street amid the recession.
Republicans argued that it’s just one more in a series of bailouts that shouldn’t have been made in the first place. “Bailouts beget bailouts, which beget more bailouts,” said Rep. Jeb Hensarling, R-Texas.
While recognizing that municipalities suffered considerable losses, Rep. Spencer Bachus, R-Ala., said the government shouldn’t have bailed out insurance giant American International Group or any other company. “I think the American people are in a state of bailout fatigue,” Bachus said.
Reps. Jackie Speier and Anna Eshoo, two California Democrats who introduced legislation in January to use the TARP money, said it hardly amounts to another bailout. This time, they said, the money is going back to the taxpayers for classrooms, sewers and roads.
