It's possible the Florida State Board of Administration wasn't fully informed by Wall Street brokers three years ago when it cavalierly bought exotic mortgage-related securities just weeks before the credit markets crashed. But newly disclosed e-mails and internal documents show SBA staff members were just as eager to buy the securities as Wall Street was to sell. It was a reckless pursuit of higher returns that disregarded federal regulations, and those SBA staffers involved should have been fired.
The latest revelations cast a far different light on the official version of events offered by the SBA after the securities were given junk status in late 2007, prompting local governments to make a run on the SBA's Local Government Investment Pool. It suggests that SBA trustees — Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink — either are clueless regarding the facts or are shamefully willing to misrepresent them. Once again the agency, which invests about $140 billion in government assets, has broken faith with Floridians.
St. Petersburg Times' Sydney Freedberg reported this week that SBA money managers sought for years to circumvent decades-old federal regulation specifically aimed at protecting less-sophisticated investors, such as local municipalities or school boards, from dabbling in risky, unregistered securities. In 2007, the principal manager of the LGIP, Mike Lombardi, raised the issue again. He repeatedly sought to have the LGIP declared a "qualified institutional buyer" so he could invest its money in mortgage-related securities as he did for the state's pension account.
SBA managers never succeeded in changing the LGIP's classification. Yet Lombardi still invested hundreds of millions of dollars of the LGIP's assets, then $31 billion, in unregistered securities. By November 2007, many of the investments tied to the mortgage industry had been downgraded to junk status, prompting local governments to withdraw $13 billion before the trustees froze the fund.
When an outside consultant months later noted that such buys had violated federal rules as well as the agency's guidelines, the SBA claimed that they were legal under another federal code that would allow the LGIP to purchase the securities as long as they were buying from a "primary issuer." At best, that is exploiting a loophole — and some purchases didn't even qualify under that scenario.
There have been changes at the SBA since this debacle. Executive director Coleman Stipanovich quit under fire. New executive director Ash Williams insists internal controls have been tightened. The Local Government Investment Pool, now called Florida Prime, has moved to an outside money manger, tightened investment guidelines and secured a top rating from Standard & Poor's.
Trustees Crist, McCollum and Sink now meet four times a year solely to discuss the SBA and its operations in public. But that is inadequate for an agency that manages investments totaling nearly twice the state's annual budget. Crist and McCollum have summarily rejected Sink's prudent proposal to expand the SBA board of trustees to include individuals with financial backgrounds who would have more time than busy, statewide elected officials to run herd on the agency.
Besides Stipanovich, no one at SBA has been held to account. Lombardi and his two superiors forfeited annual bonuses but remain in their well-paying posts in Tallahassee. They should have been fired.
National embarrassment may succeed where old-fashioned accountability hasn't. Just this week, Congress' Financial Crisis Inquiry Commission sought documents aimed at understanding the forces at play when the SBA bought the tainted securities. That should force Crist, McCollum and Sink to provide a full public explanation of what happened inside the SBA in 2007 rather than place all of the blame on Wall Street. Such accounting is long overdue to the people of Florida.