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Shaky Lehman Brothers has deep ties to Florida

By Sydney P. Freedberg, Times Staff Writer
In print: Thursday, September 11, 2008

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Troubled U.S. investment bank Lehman Brothers fought to survive Wednesday in a Wall Street crisis that could also rock the Florida agency that manages billions of dollars for the state and local governments.

The bank, which lost nearly half its value in the stock market on Tuesday, announced Wednesday that it would spin off real estate holdings and sell a majority of its investment management division.

The news temporarily buoyed the company's stock, but it finished down 6.93 percent, closing at $7.25. The stock's 52-week high is $67.73, set last Nov. 14.

In Tallahassee, a spokesman for the State Board of Administration, which handles investments for the Florida retirement system and 32 other funds, said it was too early to gauge the impact of the Lehman crisis on the state.

"It's awfully early to tell,'' said Dennis MacKee. "Keep in mind, we have both investments through them and business relationships with them.''

In fact, Lehman Brothers is a huge player in Florida government finance:

•The SBA has hundreds of millions in potential losses from mortgage-related securities it bought last year from companies that used the bank as a broker.

•Through the SBA, state and local government are heavily invested in Lehman's own securities.

•Lehman manages the assets in two SBA funds.

Lehman Brothers, the fourth largest U.S. investment bank, has been scrambling for a financial lifeline for weeks. It got into trouble by buying and financing real estate, including subprime mortgages.

The situation grew more dire after the federal government announced a takeover of mortgage giants Fannie Mae and Freddie Mac. The government had previously brokered the rescue of another investment bank, Bear Stearns, and there was a sense on Wall Street that the government might not rescue another failing financial company.

In Florida, Lehman Brothers was one of several brokers that sold the SBA billions in shaky, mortgage-related securities that ran into trouble last year and were eventually downgraded by rating agencies. In November, it sparked a run in which some local government agencies withdrew billions from the SBA's local government fund. The turmoil left some local agencies struggling to pay salaries and bills and led to the resignation of the SBA's executive director.

Gov. Charlie Crist and Chief Financial Officer Alex Sink, who serve on the SBA's three-member board of trustees, have said they suspect Lehman dumped tainted securities on the state.

The SBA also has bought billions of dollars worth of Lehman's own securities in recent months. Many have matured, but SBA records suggest that several are still outstanding.

Those securities are held in several funds, including the local government fund and the Florida Hurricane Catastrophe Fund, which helps insurance companies pay for storm damages.

In addition to securities dealings, Lehman Brothers manages assets for the SBA.

MacKee, the agency's spokesman, said Wednesday afternoon that he would provide an accounting of the agency's financial relationships with Lehman Brothers. But later, he sent an e-mail saying, "We won't be getting the holdings tonight. I will get them for you as soon as I can. Talk to you in the morning.''

He also did not provide information about Lehman's work as a state investment manager or elaborate on its role in selling tainted securities last year.

Lehman has a number of other ties to Florida. It earns lucrative fees underwriting bond deals for an assortment of state agencies. Last year, Lehman tried to sell Gov. Crist on a plan to sell off Florida's lottery. Nothing came of it.

Citizens Property Insurance Co., a state-run insurer of homes and condos, said Wednesday that it holds more than $35-million in Lehman securities.

The investment bank also has a big Florida name on its payroll.

In June 2007, the firm hired former Gov. Jeb Bush — five months after he left office and the SBA board of trustees — to serve as a consultant and member of its private equity advisory board, which buys and sells companies worldwide.

Bush has declined to elaborate on his work for the firm but has said he played no role in the sale of securities that were later downgraded.

On Wednesday, he did not respond to an e-mail requesting comments. Lehman Brothers has refused to comment on Bush's duties or compensation.

Times computer-assisted reporting specialist Connie Humburg contributed to this report, which contains information from the New York Times.