Venture

Robert Trigaux

Lehman Brothers blowback: St. Pete's $16 million loss 6th largest among municipalities

24

February

Wake up and good morning. To the average, busy Floridian, the collapse and failure of the Wall Street firm Lehman Brothers seems like something that happened a long time ago in a financial galaxy far, far away. But in fact, Lehman's 2008 bankruptcy is still plaguing some very specific cities across the state and country -- in effect, taking money right out of that average, busy Floridian's pocket. And Sarasota County and St. Petersburg residents are primary victims in this mess.

We already knew St. Petersburg lost $16 million on the Lehman Brothers failure (thought the story, explained below, is not so simple). What we did not know -- as the table below spells out -- is that little old St. Pete suffered the 6th biggest loss of any municipality in the country.

It's a reminder of (1) how Wall Street's tentacles are long and deep and (2) how cities can get themselves in trouble by stretching via overly complex transactions for that extra income.

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Today's Wall Street Journal headline -- Lehman's Ghost Haunts California -- could just as easily read Lehman's Ghost Haunts Florida. Sarasota County and Port St. Lucie lost $40 million and $18 million, respectively, while St. Petersburg saw a $16 million Lehman investment evaporate. As if the recession isn't bad enough, the Lehman losses add to the local pain. (Table courtesy of Wall Street Journal.)

"Dozens of cities and counties around the country, from Sarasota, Fla., to Boulder, Colo., lost a total of $1.7 billion when Lehman went under, because they held Lehman bonds or other securities," the Journal story notes. "The two worst hit states are Florida and California." Here's the complete Wall Street Journal story

So how did St. Petersburg manage to lose $16 million? By pursuing something called "securities lending" in which the city acts as a bank, loaning out its investments for a short time and making a small profit off the transaction. According to a St. Petersburg Times story last October, the city began participating in securities lending in 2001 and maintained that strategy for years.

In 2007, the city said that the bank (Wachovia) handling its securities lending had deviated from rules set up between the city and the financial institution. That policy shift put the city's loans at greater risk, and the city subsequently lost more than $15 million when Lehman Bros. folded and the collateral the city was holding became largely worthless. (My question? If St. Petersburg had merely held those securities and not loaned them out for fee income, wouldn't they have lost the same sum of money just the same?)

Jeffspiesfinancedirectorcityst.petersburg Yet another St. Pete Times story says the city was lax in overseeing its securities lending. A city suit against Wachovia was considered earlier last year but it seems to have been lost in the shuffle of one mayor's (Rick Baker) term ending and another mayor's (Bill Foster) term starting.

There is one change: St. Petersburg's longstanding finance director, Jeff Spies (see photo), will retire in May. But St. Petersburg is still out $16 million.

-- Robert Trigaux, Times Business Columnist

[Last modified: Tuesday, June 1, 2010 12:27pm]

    

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