TREASURY UPDATE

February 24, 2010’s WallStreet Journal ran an article entitled Lehman’s Ghost Haunts California. This article is well worth a good and critical read. Emphasis on the critical. It covers, essentially, one side of the story about San Mateo County and their loss of $155mm (reported by them) from the collapse of Lehman Brothers. We’ll be more frank in this blog entry even if it makes people feel uncomfortable.

The article states that “San Mateo’s board of supervisors ordered an independent review of the way the county investment fund was run, but found no wrongdoing.” And, a little later “San Mateo’s treasurer had invested in highly rated securities and put no more than 10% of the fund in any single issuer.”  Okay, no laws were broken. Nobody violated the written investment policy as written. However, this fails to tell all of the key points about what was going on at the time. I would like to see the reporter dig up some useful information to tell us – such as:

• Why, according to San Mateo County’s own research (as shown in a chart in the same WSJ article) did they hold $155mm when the next seven largest county/municipal holders of Lehman paper held less than that in total?
• Since everyone was talking about Lehman issues before its collapse – and most were reducing their holdings – what was San Mateo doing to stay situationally-aware? By everyone – we include treasurers of municipalities and counties.
• If they were increasing these holdings, why? For the yield?

“If there are warning signs all over the place about ice on the road -  and snow is falling, anyone who doesn’t slow down to adjust for conditions is responsible for flying off the road. Claiming they didn’t break the posted speed limit isn’t going to be a good argument – especially if they were accelerating into the corner when they hit the ice.”

The article highlights a push to try to secure bailout funds for municipalities that held Lehman paper and makes comparisons to the bank bailout. While we can all argue about appropriateness of the ‘voluntary’ capital infusions to banks, there are some important differences that are not noted:

• Bank bailouts didn’t seem to be voluntary
• The US Government – and taxpayers – appear to be getting their principle back with substantial interest
• Bailout for the banks equates to temporary loan with interest
• Bailout, if given, to those who held Lehman Bros paper equates to a gift with nothing coming back

Lessons Re-Learned:

1. Ensure you are plugged into the discussions so you can remain situationally-aware.
2. Remain diversified (% of holdings, total amount of any one holding, source of ratings or proxy for ratings).
3. Ensure the technological tools are in place to monitor your holdings, counterparty risk levels, changes in quality of issuers, etc.
4. Take responsibility.

If anyone thinks that reducing treasury staff levels or eliminating funding for treasury systems and tools is a good idea, they may need some shock therapy or recent (and old) history lessons. However, no system can completely prevent operator error.