The Daily Briefing

LEHMAN BROTHERS BANKRUPTCY COSTS CITY $25.8 MILLION

Theo DouglasWed. October 08
 

Purchasing $20 million in commercial paper from Lehman Brothers just 12 days before the firm declared bankruptcy will wind up costing the city of Long Beach $25.8 million, Paul Eakins reports in this morning’s Press-Telegram.

That’s a $20 million loss from the Lehman Brothers debacle and, according to Eakins, another $5.8 million hit as the city shifts “its money from corporate to U.S. Treasury investments.”

“We’re definitely going to take a much more conservative stance,” the city’s Finance Director Lori Ann Farrell told the P-T.

“Of the $20 million Lehman loss, $350,000 to $900,000 will come out of the general fund,” Eakins writes, citing his conversation with Farrell. “The additional $5.8 million loss from switching to lower-yield investments will cause a $700,000 hit to the general fund.”

What is probably one of Long Beach’s biggest links to date to the nation’s ongoing economic crisis got its first public airing at last night’s Long Beach City Council meeting, but no comment from the council.

As you might suspect, though, comments on the P-T website don’t mince words about Long Beach’s loss, which many folks are laying at Farrell’s feet.

“City Finance Director Lori Ann Farrell should be fired immediately,” writes someone named Fire Her, from the United States. “What kind of research did she do before she gave away our money?”

LBResident1 agrees, writing, “Ms. Farrell should join City Manager Pat West on the unemployment line.”

Aldo LB points out that–Lehman Brothers aside–buying commercial paper is not an unusual investment strategy.

“Buying Commercial paper is NOT speculating. Commercial paper is the lifeblood of commerce in the U.S. and has been one of the most stable investments until this crisis,” Aldo LB writes. “Ms. Farrell was doing her job and doing it well.”

Other P-T readers are already seeing a link between the city’s Lehman Brothers loss and Mayor Bob Foster’s $571 million parcel tax, which will need a two-thirds vote to pass Nov. 4.

“And your city hall has the audacity to ask taxpayers to pay a parcel tax for infrastructure improvements,” writes Santa Rosa’s Juan Pardell, a former Long Beach resident.

“i was having a hard time with the parcel tax BEFORE this news….now? i don’t think so,” writes LB single mom. “and yes, i see the need for improvements but i don’t feel we can count on the money being used wisely. it’s like throwing good money after bad money…”

Eakins’ story already had 20 comments by 9 a.m.

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  • I was not aware of the Lehman Brothers investment and potential problem at the time several weeks ago I asked the City Council to reexamine its dealings with Merrill Lynch regarding natural gas contracts. At that time it had been announced that Merrill Lynch was going out of business and being taken over. The Council delayed its vote on the Merrill Lynch contracts until the City Attorney came back with an opinion that there would not be an impact.

    Upon learning about the Lehman problem I located the Standard and Poor's profile of the City of Long Beach Investment Portfolio which is coordinated by the Bank of New York. The profile was prepared in March of this year and showed 4.2% of the total LB investments in Lehman holdings. I understand the City reduced that percentage to 1% -- otherwise the losses would have been greater. So we need to give credit to City staff for helping to minimize the losses by shifting away somewhat from commercial paper when it did.

    Now we have to deal with what the impact of the loss will have on our budget. By the way, CAL-PERS -- the pension pool used by the City also took a hit because of the financial crisis. We have not yet heard what this means for the cities who use the pool for retirement pensions.
  • Theo Douglas
    Wow! Thanks for writing, Ms. Schipske.
    Regardless of one's personal opinion of the city's investment in Lehman Brothers, I think everyone who lives here should consider him or herself fortunate that the city's losses weren't greater.
    In coming months, I'm sure we'll probably see signs of its financial impact.
    Theo Douglas
  • Mike Ruehle
    It had been speculated and reported for many months that Lehman was going under. Whether true or not, why would the city invest taxpayer's money during September in such a widely regarded risky investment? Why weren’t all of the Lehman funds liquidated? Was it because city management was pressed to find high yield, risky investments to offset the city’s budget deficit? I will be interested to know what other comparable cities have made the same mistake?

    Most people in the investment community moved their money away from these financial institutions and into safer places months ago. That is why the risk premium was so high and is also one of the reasons causing the financial institutions to spiral downwards. I find it questionable that the city would take a risk with Lehman while admitting safer options existed in the crazy market we have been experiencing for months.

    Whether this was Port money or general fund money is irrelevant. It's all taxpayer's money. The question is, should someone be accountable for losing $25 million of taxpayer’s dollars? If not, how high must the price tag be before accountability is considered in Long Beach?
  • John_B
    You pose some really good questions, Mike.

    Here are a few of my own: When will we, the electorate, learn to link 'accountability' with 'consequences' where our elected and appointed officials are concerned?

    One can argue that City Finance Director Lori Ann Farrell is certainly ‘accountable’ for the loss of $20 million of our money. That is to say she was asked to provide an explanation and she has done so.

    But there appear to be no ‘consequences’ suffered by the person(s) responsible for this loss (if anyone). That is to say; no person or group (at least that we know of) has been deemed responsible and then been required to suffer reasonable consequences for their actions.

    Beyond not demanding consequences for failure, no one even seems to be demanding the specifics of how this happened, why and whether it could have reasonably been avoided. After losing $20 million of our dollars I’d like to see a little more by way of explanation than:

    “Long Beach purchased commercial paper from Lehman Brothers in what is essentially a loan. Companies issue commercial paper to pay for day-to-day operations, and the investment is generally considered low-risk. Long Beach's investment was to mature after 27 days on Sept. 30, but on Sept. 15 Lehman Brothers declared bankruptcy, Farrell said.”

    Well, that’s not good enough, Ms. Farrell. “Long Beach” didn’t purchase this commercial paper, someone in your office did, and someone else authorized the purchase. Did they do their due diligence before making/authorizing this purchase? What, exactly, was done do to research this investment? Can the decision/authorization to purchase be justified and, if not, why not? Is City Manager West conducting an investigation to determine whether any negligence occurred and if not, why not? If such an investigation reveals negligence, what reasonable consequences will be suffered by those found to be responsible?

    Perhaps this significant loss of public funds could be neither anticipated nor avoided. But is anyone (besides me) even asking these very basic questions?
  • SickofIt
    thats bull - its not standard when the market is crashing and housing is plummeting....anyone who knows investments knows Lehman's involvement and therefore by process of deduction dont invest until there is a "deal" and one that makes sense as in energy. We have drilling right off Long Beach and energy is the next needed commodity. Can her.
  • My take
    It's not a matter of if her investment strategy was sound.
    Farrell should have known as much as any amateur investor. An amateur investor would have known that Lehman was a dead man walking by the end of August, since they were soliciting a Korean state-owned bank to purchase HALF of Lehman.
    To put it in perspective, the next small step down from that would be approaching the bank of Zimbabwe.
    I doubt they could have even gotten away with it. I think we have federal laws against selling american banks to countries like Korea.
    There were other indicator's that strongly suggested that Lehman was DOA before Farrell decided to dump tens of millions with Lehman.
    Her contention that if things went wrong, they could solicit the government for a partial repayment of the funds is the most asinine assertion she could possibly make, since the repayment would have to be made by US Taxpayers! What kind of mitigation is that?!
    In the meantime, Long Beach loses the interest from that 20 or so million forever, if she had just mustered the thought to park it in Farmer's and Merchants bank for a few months until most of the dominoes on Wall Street had fallen.
    The anger of posters stems from her complete lack of remorse.
    Her attitude, when questioned by the PT of, "hey! shit happens," is not only unacceptable, it's just plain vile.
    She's incompetent, and she's not even aware of it. She is a detriment to the fiscal stability of Long Beach, and should be fired immediately.
  • Duke
    Given the volatility of the market, is it not unreasonable to assume no matter where this money was put, something negative would have happened to it? I'm using vague and general terms on purpose. Isn't it extremely probable there would have been a sizable loss no matter what was done?

    Are we now going to fire people because the stock market is crashing? Is the stock market all Farrell's fault? Even if Lehman was avoided, there would have been losses. And if the city simply sat on the money, well, that's not what Farrell is supposed to do either, especially in early September, before the events of the last 10 days or so. Who among us has so far been unscathed in this market? Anyone? Bueller?

    Before this is all over, it may be this was a valuable lesson, and losses could have been worse. Let's not start with the knee jerk reactions. But wait, this is Long Beach, where Santa Rosa's Juan Pardell weighs in with regularity.
  • Mike Ruehle
    Hello Mr. Duke,

    I'm certainly not a financial genius, but I'm pretty sure that there is a difference between "a sizable loss" and a 100% loss. I agree with you that knee jerk reactions are undesirable. However, I’m still waiting for our city leaders to announce that they are investigating this loss further. Personally, I’d like to hear the city announce that an independent group will be investigating and reporting how the decision was made to invest in Lehman days before its bankruptcy. Failing that, maybe you can tell us what reaction, other than knee jerk, that we, the tax paying public, should start with.
  • LB City Girl
    One more reason to vote down Measure I. This is proof the city can't be trusted with any more money.
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