[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE EFFECT OF THE LEHMAN BROTHERS
BANKRUPTCY ON STATE AND
LOCAL GOVERNMENTS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MAY 5, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-26
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51-585 PDF WASHINGTON : 2009
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
May 5, 2009.................................................. 1
Appendix:
May 5, 2009.................................................. 45
WITNESSES
Tuesday, May 5, 2009
Eshoo, Hon. Anna G., a Representative in Congress from the State
of California.................................................. 9
Galatolo, Ron, Chancellor, San Mateo County Community College
District....................................................... 18
Gordon, Hon. Richard S., Supervisor, San Mateo County Board of
Supervisors, California........................................ 19
Hullinghorst, Hon. Robert, Treasurer, Boulder County, Colorado... 20
Rushing, Hon. Karen E., Clerk of the Circuit Court and County
Comptroller, Sarasota County, Florida.......................... 17
Speier, Hon. Jackie, a Representative in Congress from the State
of California.................................................. 7
Street, Hon. Chriss W., Treasurer, Orange County, California..... 23
Thornberg, Christopher, Economist, Beacon Economics.............. 21
APPENDIX
Prepared statements:
Eshoo, Hon. Anna G........................................... 46
Speier, Hon. Jackie.......................................... 49
Church, Mark................................................. 53
Galatolo, Ron................................................ 56
Gordon, Hon. Richard S....................................... 58
Hullinghorst, Hon. Robert.................................... 62
Rushing, Hon. Karen E........................................ 64
Street, Hon. Chriss W........................................ 66
Thornberg, Christopher....................................... 72
THE EFFECT OF THE LEHMAN BROTHERS
BANKRUPTCY ON STATE AND
LOCAL GOVERNMENTS
----------
Tuesday, May 5, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Moore of Kansas,
Clay, McCarthy of New York, Baca, Lynch, Scott, Green, Cleaver,
Hodes, Ellison, Klein, Perlmutter, Donnelly, Carson, Speier,
Kosmas; Bachus, Royce, Manzullo, Biggert, Hensarling, Garrett,
Neugebauer, Price, Campbell, Posey, Jenkins, Paulsen, and
Lance.
The Chairman. The hearing will come to order.
This hearing is called at the request of two Members of the
House: one is a member of this committee, the gentlewoman from
California, Ms. Speier; and the other is the gentlewoman from
California, Ms. Eshoo. They share representation of San Mateo
County, which was one of the victims of the collapse of Lehman
Brothers and the inability of Lehman Brothers to make any
payments on the debt it owed.
They made the entirely reasonable request that we begin the
process of examining what we can do for public entities that
have lost funding in these situations. We will get to the
specific question of the Lehman Brothers failure. But there are
a couple of points that I think this illustrates in a broader
way that we want to talk about.
As is often the case, we find it I think easier to figure
out what to do to prevent a recurrence of something unfortunate
than to undo the consequences of it. This, to me, is a clear
example of why there needs to be in the Federal Government the
power to unwind nonbanks.
We have, through the FDIC, the power to deal with
situations where a bank is unable to meet its obligations. We
are in that situation because of deposit insurance. But it
became clear last year that there are problems that occur when
nonbanks are unable to meet their obligations.
Now there are several things we should be doing about that.
One, I am confident that before the end of the year, we will
have signed by the President legislation that makes it much
less likely that these institutions will become indebted to the
point where they cannot pay off their debts. There are
restrictions that should be imposed that are not now in
existence to deal with that. But no system will be fail-safe.
And therefore, there needs to be a method of genuine failure.
When banks fail, it is disruptive, but not to the degree
that it is when nonbanks have failed. Wachovia, Washington
Mutual, several banks failed. We had a mechanism in place for
dealing with them. But the failure of nonbanks, we have had
three different results that I can think of, none of them even
close to satisfactory.
First came the failure of Lehman Brothers. When Lehman
Brothers failed, the Bush Administration tried to find some way
to deal with the indebtedness and was unable to do so. There
had been a prior successful effort on their part, as they saw
it, to do that with regard to Bear Stearns, and they got the
Federal Reserve to pick up some of the obligation, although it
feels it is well collateralized here, and they got JPMorgan
Chase to take the rest. They could find no better institution
ready to do that for Lehman Brothers.
There was some hope at the time that Barclays Bank would do
it. There was some resistance, I am told, on behalf of the
British authorities. At any rate, Lehman Brothers failed, and
nobody stepped in. It was very soon the conviction of people in
the Bush Administration that the failure of Lehman Brothers
with no alleviation, no effort to pay off any of its creditors,
was the single worst thing that happened in the economy in 2008
and moved from pretty bad to God-awful.
As a consequence, when AIG faced the same situation, the
decision of the Bush Administration was to prevent any failure.
So, whereas in Lehman Brothers, nobody got paid off; in AIG,
the decision of the Bush Administration was to pay everybody
off. That has also not been the best received decision in the
history of the Republic.
Then we had the Merrill Lynch example, another nonbank that
was failing. And there the Administration encouraged, in 2008,
Bank of America to buy it, similar to what had been done with
JPMorgan Chase and Bear Stearns.
Later in the year, last year, Bank of America discovered
that Merrill Lynch was in worse shape than it had thought. So
it indicated that it wanted to let it drop. Once again, the
Bush Administration, having seen the cataclysmic effects in
their minds of Lehman Brothers, said, no, you can't do that. So
they--and this is now being debated--encouraged, insisted,
cajoled, bribed, whatever because the TARP money was involved.
At any rate, as a consequence of these discussions between the
Bush Administration and Bank of America, Bank of America bought
Merrill Lynch or continued with the purchase.
So we have had three approaches to failed nonbanks: Lehman
Brothers, where nothing happened; AIG, where everything
happened; and Merrill Lynch, which was Bank of America buying
it. In no case did we receive a satisfactory outcome. That
strongly argues to us later this year to have in place what
Secretary Paulson had called for, what the Obama Administration
calls for using the bankruptcy power under the Constitution to
tailor a statute that empowers some combination of Federal
authorities to resolve an institution, and that allows
differential levels of payment.
We see this in the Chrysler bankruptcy. There will be an
effort to, because it is bankruptcy, do that. But that does not
resolve the problem for the current creditors, and that is what
we would be talking about. So I do note that this underlines
the importance of a method of resolving institutions, and we do
have undeniably a situation where this public entity, San Mateo
County, can say, gee, we made a terrible mistake. We invested
with Lehman Brothers when it went bust. We should have done it
with AIG, because if we had been AIG creditors, we would have
gotten paid. It is only Lehman Brothers creditors that were not
paid.
There is no principle of any sort that can justify that
result, and our job is to try and see if it can be dealt with.
The gentleman from Alabama is now recognized for 4 minutes
Mr. Bachus. I thank the chairman.
Mr. Chairman, you have pointed out what I think is obvious
to everyone, and that is that the Federal Government, the
regulators did take different approaches. They let Lehman fail.
They did not in the case of AIG. And this created winners and
losers. You have argued that the worst thing that the Federal
Government did was to let Lehman fail.
The Chairman. If the gentleman would yield. I have made no
such argument. I was quoting the Bush Administration. It was
the Bush Administration, as I tried to make clear, the Bush
Administration's conclusion that this was a terrible thing. I
did not express an opinion.
Mr. Bachus. I was thinking you were acknowledging that.
For any institution to fail, it is a bad thing. However, I
think what was the worst thing, and you did point it out, is
that there was one approach taken for AIG, and one approach
taken for Lehman. And it certainly doesn't appear equitable or
right.
However, I think the mistake was not that they should have
bailed everybody out, but that they shouldn't have bailed
anybody out.
I know some of the witnesses, it is predictable, and
Congresswoman Eshoo, I have great respect for you.
And I can say, as a result of when you do something for one
company and its bondholders and investors, you don't for
another; it obviously creates an environment where someone
steps up and says, why don't we make the municipal investors in
Lehman whole?
But I think it was a mistake to intervene and make the AIG
investors, people who had invested in that, whole, and I think
it would be a mistake to do this in Lehman's case.
But I respect your opinion.
Bottom line, I think the American people are in a state of
bailout fatigue. The U.S. Government has committed over $9
trillion to bailouts or interventions. And I think most
American people want to know, when does it end? And while I do
see the reasoning behind H.R. 467, you know, it just again
commits the American taxpayer to yet another costly obligation,
because it requires the Treasury Secretary to pay any
municipality holding Lehman debt as of September 15, 2008, and
I believe in the full face value of the bond. And that is an
obligation that the taxpayers would have to take up.
The taxpayers have been, I think, saddled with too many
obligations on investment decisions gone bad. And while I do
see the unfairness of doing something for one and not the
other, I personally am opposed to more taxpayer-funded
guarantees and bailouts.
The municipalities did suffer considerable losses after the
collapse of Lehman. I think, had we avoided the first
intervention, we wouldn't be here today. And I think, had we
not bailed out AIG, you wouldn't be here today with this bill.
As I said, and I am just going to close, I think that
Lehman was really what we should have done, in that we should
not have bailed out--we shouldn't have ``too-big-to-fail.'' And
we do need a resolution authority. We do need a systemic
regulator.
But I think what we do with those is we have an orderly
resolution and probably in bankruptcy or bankruptcy-like
provision. And without any guarantee on the part of the
taxpayers, I think that is the key, that we are not going to
obligate the taxpayers, we are not going to have the government
in the intervention business. And I am afraid that what this
legislation would do, it would just be another step down the
road that we shouldn't be on, not something that started with
Lehman but something that I must oppose.
Thank you.
The Chairman. The gentleman from New Hampshire is
recognized.
Mr. Hodes. Thank you, Mr. Chairman.
And thanks for holding this very important hearing about
the collapse of Lehman Brothers and its effect on State and
local governments.
Many communities across the country, including in my home
State of New Hampshire, of Nashua, Manchester, and others, have
been very hard hit by the failure of our capital markets.
In February of this year, Mr. Chairman, we wrote a letter
to Chairman Bernanke and Secretary Geithner asking them to
provide assistance to States and localities that have been hurt
by the economic downturn. Clearly, the inability to issue bonds
has severely limited the ability for towns to raise capital in
the ordinary course in order to fund the kinds of projects that
they used to fund all the time: roads; sewers; and other public
works.
As this hearing focusing on the impact of the Lehman
Brothers collapse will no doubt demonstrate, further liquidity
is needed for States and localities across the country. Many
are still waiting for the short-term liquidity market to be
active again. And hopefully, while we may debate
interventionist or noninterventionist policies, while we make
talk about whether it is AIG or Lehman Brothers that was the
worst part of all this, it is up to us in Congress to find a
way to help our community.
So I welcome my colleagues here today and look forward to
discussing what solutions Congress can offer the American
people.
Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from California is recognized
for 2 minutes.
Mr. Royce. Thank you, Mr. Chairman.
I would like to welcome Mr. Street from Orange County,
California, who is going to be testifying on the second panel.
By all accounts, I think Lehman Brothers was and is today a
failed institution. The firm was very highly leveraged. It had
significant exposure to the mortgage market, including the
subprime sector. It had over $6 billion in subprime. It even
owned a subprime mortgage originator, and institutions ignored
those risks.
I am afraid we are moving away from personal and
institutional responsibility on a massive scale. I voted
against TARP because of this, and I have opposed other
government bailouts because I am becoming increasingly
concerned with the Federal Government's new role as savior of
all things failed.
The Federal Government must get out of the business of
picking winners and losers. There have been other
municipalities that took significant losses on failed
investments over the years without receiving government
assistance. Orange County, California, took a hit in the
1990's, and a lesson was learned that it was a dangerous
endeavor for county treasurers to use taxpayer funds to invest
in products local governments do not understand.
I am afraid our incessant desire to reward those poor
investment decisions will inevitably weaken, if not erase,
market discipline. The strength of your ties to the Federal
Government should not be more important than counterparty due
diligence in your ability to make prudent investments.
Unfortunately, Congress has repeatedly signaled the opposite in
recent months.
I yield back the balance of my time, Mr. Chairman.
The Chairman. The gentleman from Texas, Mr. Hensarling, for
2 minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
Bailouts beget bailouts which beget more bailouts. As
Members of Congress, we have to ask ourselves the question, how
many more bailouts can the taxpayers in future generations
bear?
Last week an economic plan, a budget was adopted that will
triple the national debt in 10 years, more debt in the next 10
years than in the previous 220, leading to a debt burden of
$148,926 per household.
Now stocks are down. People have lost $11 trillion since
the peak in the market, $11 trillion. Pension funds have lost.
Charities have lost. Families have lost. Small businesses have
lost, and yes, municipalities in State governments have lost as
well.
The question I have, Mr. Chairman, is, who hasn't lost? And
who isn't hurting in this economy? So if everyone who lost
money in the market is to bail out everyone else who lost money
in the market, are we truly better off? I think not.
How about the States and municipalities that lost money in
Circuit City? Where is their bailout? How about the Washington
State Investment Board that lost millions and millions in WaMu?
Where is their bailout? How about the State of North Carolina
State Pension Fund? They are down $17 billion. Where is their
bailout? And a couple near and dear to my heart, small
businesses in the Fifth District of Texas, United Rentals,
Mineola Mercantile. They went out of business. Where is their
bailout?
Once you absolve people of responsibility, you will beget
more irresponsible behavior. We will also end up with firms
that only invest in the largest firms that are perceived to be
too-big-to-fail. This is a bad idea, and I do not believe we
should go down this road for taxpayers and for future
generations.
I yield back the balance of my time.
The Chairman. The gentleman from Georgia, Mr. Scott, for 2
minutes.
Mr. Scott. Thank you, Mr. Chairman.
I congratulate you on having this hearing. I think that the
fundamental question we have before us now is, what do we do
going forward that is in the best interest of the taxpayers?
Lehman Brothers in this situation presents us with a unique
set of circumstances because, as a double whammy hit here on
the taxpayers, as we know, when AIG was bailed out and others
because of a ``too-big-to-fail,'' Lehman was left out. And here
is what happened. Millions of taxpayers' dollars were lost, but
those dollars didn't just evaporate. They had been invested by
cities and counties and State agencies, and many of these
moneys were invested in a pool arrangement where millions were
put into bond revenues for new construction projects at their
new community colleges, at schools, community clinics, etc.
So the question now before us is, is it fair for these
taxpayers who will be paying off the bonds for years to come to
have nothing to show for it? And is there not some rationale
for Treasury to be able to come in and be able, not to rescue
Lehman now--that is off the books. The question is, is it
proper for the Treasury Department to come in and rescue the
taxpayers? I think that is the question before us today.
I yield back, Mr. Chairman.
The Chairman. The gentleman from Georgia, Mr. Price, for 2
minutes.
Mr. Price. Thank you, Mr. Chairman.
It is extremely important for us to be discussing the
Lehman Brothers bankruptcy in the context of the full
committee. But I would also suggest and like to draw attention
to the fact that we still haven't had a hearing on the collapse
of Bear Stearns, which undeniably shaped the public
expectations for the government bailout of Lehman Brothers.
On April 7, 2008, Ranking Member Bachus and 16 members of
this committee sent a letter to the chairman requesting a
hearing specifically on Bear Stearns, which has not yet
occurred. We have not had a hearing focused specifically on the
events that led to the Lehman bankruptcy, derivatives, or the
SEC's now defunct Consolidated Supervised Entities Program,
which supervised Lehman and the four other investment banks.
In the wake of Bear Stearns, and leading up to the
bankruptcy of Lehman, many investors continued to purchase
bonds or commercial paper issued by Lehman Brothers. In a
normal functioning market, without suspicion of government
backing or bailouts, investors would have likely been much more
cautious, investing elsewhere and spreading their risk.
Protecting risk seems to be the primary issue that has brought
us here today.
Our Nation has a system that, though painful, works
extremely well in times of great challenge. It is the
bankruptcy system. And I would suggest that the Lehman
bankruptcy actually unfolded relatively smoothly. While many
would like to attribute this unprecedented event to the
inadequacies of the bankruptcy system, the more accurate
culprit is the government's unpredictable meddling in the
market. This certainly contributed more than any
insufficiencies within the Bankruptcy Code.
The situation with Lehman Brothers, the government created
an unreasonable expectation that led to increased economic
turmoil. Part of getting this country back on track is getting
the government out of the market and out of the business of
eliminating risk. Investments involve risk and reward. If we
take away all the risk, there will be no reward for anyone, no
opportunity for anyone, and no reason to invest in the future.
We should look at that.
The Chairman. The committee will now begin the hearing, and
we will hear from our two colleagues.
First, we will hear from the committee member, the
gentlewoman from California, Ms. Speier.
STATEMENT OF THE HONORABLE JACKIE SPEIER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Ms. Speier. Thank you, Mr. Chairman.
Thank you for convening this hearing today to examine the
devastating impact of the failure of Lehman Brothers as it
relates to State and local governments.
Although San Mateo County has been hit particularly hard,
this is truly a national problem, and I want to underscore
that, as you will hear from witnesses today from California,
Colorado, and Florida. There are affected communities in at
least 20 States, from Alaska to Washington to Massachusetts.
Some of the losses are relatively small, but Minnesota lost
more than $56 million. Missouri lost $50 million. Oregon lost
$173 million. Washington lost $130 million, and Florida,
already hit hard by two natural disasters and a recession, lost
more than $465 million.
I would like, Mr. Chairman, to ask unanimous consent to
enter testimony from some other affected entities.
The Chairman. Without objection, it will be made a part of
the record.
Ms. Speier. At the beginning, let me just say that so much
of our taxpayer money in TARP and the bailouts of AIG and
others have gone to private institutions. We are asking here
that taxpayer money go to taxpayers in these local
jurisdictions.
So I would dispute what has been said by some that somehow
it is taxpayer money being used again in a fashion that is
inappropriate. This is actually money going back to the
taxpayers.
As you know, Congresswoman Eshoo and I have both introduced
a bill, H.R. 467, that would require the Treasury Department to
repurchase certain Lehman investments held by these government
entities at full face value using TARP funds. The Treasury
Department asserts it still has $135 billion left in its TARP
arsenal. It has used hundreds of billions of those taxpayer
funds to bail out Wall Street. We are asking that a mere $1.7
billion of taxpayer money be provided to save Main Street.
As we all know, Lehman's was the only major investment bank
the Federal Government did not prop up last September when Wall
Street went into a free fall seemingly overnight. Bear Stearns,
the first to be helped in being deemed too-big-to-fail, was
half the size of Lehman Brothers. Negotiations the weekend of
September 13th between the Treasury, the Fed, Lehman Brothers,
and Merrill Lynch resulted in Merrill, with Treasury's help,
being acquired by Bank of America; Goldman Sachs and Morgan
Stanley were each allowed to become bank holding companies.
Lehman's then was allowed to go into bankruptcy, the largest
bankruptcy in the history of this country.
In the words of Nobel Prize winner Paul Krugman, the
decision to let Lehman fail was the event that basically
brought the entire world's capital market down. The decision by
the Treasury and the Fed to allow Lehman to fail was arbitrary
and caught many taxpayer-funded agencies unprepared. They had
watched the takeover of Countrywide by Bank of America and the
bailout and takeover of Bear Stearns by JPMorgan and concluded,
like many others, that since in those cases, note holders had
been made whole, Lehman was unlikely to declare bankruptcy. But
Secretary Paulson did not offer Lehman the same guarantees that
it offered others. And if these local governments had chosen to
sell their Lehman investments prior to maturity, they would
have suffered a definite and substantial loss, negatively
affecting the whole investment pool.
It is not like these government bodies were using taxpayer
funds to speculate in the market. The public agencies were all
talking about investing in Lehman corporate bonds and notes as
part of a strict, safe, and conservative investment strategy.
In fact, most of the debt instruments in question were highly
rated right up until the moment of Lehman's collapse.
San Mateo County's pooled investment in Lehman's was rated
A1 for the floating rate securities and A for its corporate
bonds. That investment pool is prohibited under State law from
investing in equities. And it is limited to conservative
instruments, such as U.S. Treasury obligations, high-rated
commercial paper, certificates of deposit, and the like.
Preservation of principal is of primary importance to
minimize credit risk while recognizing and controlling market
risk, matching maturities with capital expenditures and other
planned outlays. Diversification plays a big role in that
effort. San Mateo County only invested 5.9 percent of its pool
in Lehman as part of its diversification strategy. It also
holds similar investments with Morgan Stanley.
I believe that Treasury already has the power to do what we
are asking. The language that Congresswoman Eshoo placed at ESA
with the help of the chairman certainly instructs the Treasury
Secretary to take into consideration the need to ensure
stability for U.S. public instrumentalities, such as counties
and cities, that may have suffered significant increased costs
or losses in the current market turmoil. We requested that
Secretary Paulson take such action last fall, and we have made
the same request of Secretary Geithner in February, but have
gotten no response.
There seems to be no limit to the amount of assistance we
are willing to provide to the likes of AIG, Citigroup, Bank of
America, and Goldman Sachs, let alone foreign interests which
speculative derivative deals have been fully paid through the
taxpayer-funded bailout of AIG. Goldman not only has been the
beneficiary of $10 billion of TARP money directly, but it has
gotten another $13 billion through its credit default swaps
with AIG, all while it has reported a $1.8 billion quarterly
profit and is seeking to repay its $10 billion in TARP funds
because it doesn't like the compensation strings that come with
it.
If AIG had been forced to declare bankruptcy, the financial
institutions like Goldman doing business with it would have
wound up in court, just like San Mateo County has had to do
with Lehman's, fighting to get pennies on the dollar for their
claims. I say, let Goldman repay its bailout and use that money
where it is really needed, in our local communities.
Restoring the value of these Lehman bonds is perhaps the
fastest way to bring relief to communities across America,
allowing them to pay their employees, maintain current levels
of service, and immediately put shovels in the ground on
already approved projects. Maybe in the grand scheme of things,
$1.7 billion is just not seen as a big enough problem. To the
local governments, school districts, sanitation and water
districts, and the communities they serve across the country,
these losses are devastating. How ironic that they should be
left wishing they had invested in credit default swaps with
AIG. If they had, we wouldn't be here today.
Thank you, Mr. Chairman.
[The prepared statement of Ms. Speier can be found on page
49 of the appendix.]
The Chairman. We will now turn to Congresswoman Eshoo.
But by way of introduction, I did want to share with people
here a very important fact, which I learned from the
publication CQ Today, and I call people's attention to page 12
where it says, when Representative Anna G. Eshoo was in high
school in Connecticut, President Harry Truman gave her a ride
home from school. It seemed to me that that information ought
to be shared.
And we are glad that you made your way from Connecticut to
California and are here today to represent your district.
Please go forward.
STATEMENT OF THE HONORABLE ANNA G. ESHOO, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Ms. Eshoo. Thank you, Mr. Chairman, for that wonderful
added note to you, to Ranking Member--
The Chairman. Was it the President himself or was it the
Secret Service? Did the Secret Service drive, or did he drive?
Ms. Eshoo. No. He was sitting in the back seat of the car.
There was very little security. Police officers on motorcycles
in front of the car and behind it, flags on the car. And I was
walking home from school. I was at a four-way stop and he said,
``Where are you going, little girl?'' And I said, ``I am going
home.''
The Chairman. And no one told you not to take a ride from
strangers at that time?
Ms. Eshoo. Well, it gave me confidence because there were
police officers. And we all had the admonition from our
mothers, but there were police officers on motorcycles and
flags on the car. So he gave me a ride home. So thank you.
Thank you, Mr. Chairman, for calling this hearing.
To Ranking Member Bachus, to Mr. Neugebauer, and to all of
the members and friends who are members of this committee, it
is very special for me to be here today to testify before you
about a matter of really critical importance to local
communities, not only from our shared San Mateo County in
California, parts of our congressional district, but for local
communities around the country.
I think the hearing is necessary so that any discussion
concerning the financial losses of the public entity victims of
the Lehman bankruptcy can be put into appropriate context.
Chairman Frank rightly called these public entities, ``the
unfair victims of this financial crisis.''
On September 15, 2008, as Congresswoman Speier noted, after
150 years of continuous operation, Lehman Brothers declared
bankruptcy. The Lehman bankruptcy was the largest in our
Nation's history with nearly $700 billion in reported debt. And
it is described as triggering an event for the resulting
international financial crisis.
Following the collapse of Lehman, the Executive and the
Legislative Branches of our government responded rapidly and
aggressively in order to prevent any further failures of other
major institutions by adopting the Emergency Economic
Stabilization Act of 2008. As we all know, the Act was signed
into law by President Bush on October 3rd of last year, and it
created the Troubled Asset Relief Program (TARP).
It gave the Secretary of the Treasury both the authority
and the responsibility to provide financial assistance to
institutions through the purchase of ``troubled assets'' on
such terms and conditions as may be appropriate.
In exercising this authority, the Secretary is required to
take a number of factors into consideration, including, ``the
need to ensure stability for United States public
instrumentalities, such as counties and cities, that may have
suffered significant increased costs or losses in the current
market turmoil.'' That is section 1037.
I proposed this language, and it was added to the bill with
the support of the leadership and the assistance of the
chairman of this committee, Chairman Frank, and his very able
staff, as well as the support of Speaker Pelosi.
Since adoption of the Act, the Treasury Secretary committed
to provide financial assistance in the approximate amount of
$590 billion to more than 535 financial institutions. This
assistance includes approximately $45 billion to Bank of
America; $50 billion to Citigroup; $40 billion to insurance
giant AIG; and $24.8 billion to automakers.
To date, no assistance under the Act has been provided to
any United States public instrumentality. It has been said that
some banks are too-big-to-fail. It can also be said that
counties, school districts, and cities are too-small-to-be-
noticed. Their losses represent one-quarter of 1 percent of
TARP funding. The fact that TARP was intended to and should
assist local public instrumentalities is clear.
Chairman Frank and I had a colloquy on the Floor of the
House on January 15th of this year, and in response to my
questions on the Floor, he reinforced that the Act is intended
to provide financial assistance to local government entities
which were significantly impacted by the Lehman bankruptcy; and
that the Act expressly provides authority for the Secretary of
the Treasury to provide that kind of relief.
In fact, Mr. Chairman, I think you said it best when you
indicated that it was important, ``not simply to confirm that
the authority is there but to say that we expect it to be used
and to demand that if it is not used, we get a written
explanation as to why not.''
On November 8, 2008, I wrote to Secretary Paulson
requesting that he exercise his authority under section 1037 of
the Act to purchase the troubled assets held by local
governments. He called me on November 21st, and reiterated his
decision not to include local governments in the TARP.
On November 25, 2008, I wrote to the Presidential
transition team spelling out the case and urging them to take
action where the Bush Administration had not. I urged them to
use the authority that was in the law.
On February 13th, together with Congresswoman Speier, we
wrote to Secretary Geithner. Almost 30 of our House colleagues
joined us. We again requested that he exercise the authority
under the law. And I ask that these letters as well as our
colloquy--
The Chairman. Without objection, they will all be made a
part of the record.
Ms. Eshoo. Thank you.
The Treasury's decision to let Lehman fail is causing
catastrophic losses to many localities, resulting in job
losses, termination of ongoing construction projects, and
elimination or reduction in critical services. Hospitals are
reducing services and staff. Schools are laying-off teachers.
Police and fire departments are reducing patrols and limiting
services.
And what wrongs are these school districts, counties, and
cities guilty of? They invested in highly rated conservative
instruments in Lehman Brothers. That is the sin that they
committed. And those are taxpayer dollars that should be put to
work in our local communities gone when Lehman Brothers went
down.
If we want our national economy to rebound, our local
economies cannot be left behind. And this is not just a
California problem. It includes public entities from Florida,
Colorado, Arizona, Michigan, Massachusetts, Missouri, Oregon,
Washington State, and the list goes on.
We need to return these dollars to them. We have a law that
is clear. We have a case that is clear. What we need is clear,
decisive action to right this wrong. Local taxpayers and
communities should not have to tolerate losing their most basic
services because the Federal Government allowed Lehman Brothers
to go down.
Thank you, Mr. Chairman.
And thank you to all the members.
[The prepared statement of Ms. Eshoo can be found on page
46 of the appendix.]
The Chairman. I thank you.
Are there any questions from any members of the committee
for the Members?
The gentleman from Illinois.
Mr. Manzullo. Congresswoman Eshoo, before the TARP bill was
passed, Lehman went under, and then Treasury--or the Fed
stepped in to infuse AIG. I am almost positive that the timing
is correct on that.
The Chairman. The gentleman is correct. It was Lehman
Brothers failing; AIG with money from the Fed; and then the
TARP proposal.
Mr. Manzullo. Okay. Thank you, Mr. Chairman.
And my understanding is that conversations actually went on
between the Fed and Lehman.
Anything that you can add to that, Congresswoman Eshoo, as
to why AIG was chosen and not Lehman Brothers?
Ms. Eshoo. Well, I think that is the $64,000 question.
In fact, when I spoke to Secretary Paulson on November
21st, I asked him that very question. I said, ``Why did you
allow Lehman to go down?'' And he said, ``That is a whole
different conversation that we will have to have at another
time.'' So he didn't offer any explanation for it.
Mr. Manzullo. Of course.
The Chairman. We were in the position then of being
informed, not consulted, until we came out with the TARP. The
information I got at the time was that there was an effort.
This always happens on weekends. We reached a point where I
wanted to cut my phone wire on Friday afternoon because I was
always getting bad news after the markets had closed for the
weekend, and there was an effort, I believe, by the American
Government to get Barclays Bank in England to take over Lehman
Brothers, and the British authorities didn't think that was a
great idea.
So there was an effort on the part of the Administration to
try and find someone to take over Lehman. Apparently, you know,
that is the information that I got.
It is the gentleman's time.
Mr. Manzullo. I will yield of course.
Mr. Garrett. Just to follow up with the chairman's comment,
and if recollection serves, and correct me if I am wrong, I
think part of the discussion with Barclays at that time was
they were looking for the same thing as they saw with Bear
Stearns; there has to be some kind of backstop on this. I think
at the time the Fed said, no, we are not going to be the
backstop. And of course, right after that, you had AIG where
you had a huge backstop. There is the irony in it.
I will yield back.
The Chairman. It is clear Secretary Paulson and Chairman
Bernanke were operating under enormous pressure. So I make no
criticism of them.
They were partly influenced, frankly, by some criticism
about Bear Stearns. So they didn't want--they were reluctant to
intervene too much, and then they were reluctant not to
intervene at all. But that was the answer--what I heard,
frankly, on Sunday, I was called and said, we are hoping to get
Barclays to do this, and then once Barclays said ``no,'' there
was nobody else.
Mr. Manzullo. And the second question is--could I ask the
chairman? He might know more than we do. Any idea as to the
dividend that will be paid in bankruptcy on these bonds?
Ms. Speier. It is estimated that these jurisdictions will
see anywhere from 7 to 20 cents on the dollar.
Mr. Manzullo. Thank you.
The Chairman. Any further questions?
If not, the gentleman from New Hampshire, and then the
gentleman from Colorado.
Mr. Hodes. Congresswoman Eshoo, I note, in your written
testimony, that you say on November 7th, you wrote to Secretary
Paulson requesting that he exercise the authority that he
clearly had to help municipalities. That is right?
Ms. Eshoo. Yes.
Mr. Hodes. He called you back?
Ms. Eshoo. I spoke to him. He called me on, I believe,
November 21st.
Mr. Hodes. And you say that he reiterated his decision not
to include local governments in the TARP.
Ms. Eshoo. He really was not interested in it.
Mr. Hodes. Why? Did he tell you why?
Ms. Eshoo. I asked him why, and he said, ``What I said
stands.''
Mr. Hodes. But without any explanation?
Ms. Eshoo. Without any explanation, yes.
Mr. Hodes. Later, in February, you wrote to Secretary
Geithner with a number of Members of Congress, and you
requested that he exercise his authority under TARP to help
municipalities. Have you heard anything back from him?
Ms. Eshoo. Nothing in the mail pouch and no return phone
calls.
Mr. Hodes. Has anybody else from Treasury contacted you to
talk about this?
Ms. Eshoo. No, not at all. As a matter of fact, I said it
in my--I believe I said it in my testimony that, on the heels
of the election, I wrote to the transition team to point out
that this was something that needed to be dealt with; that it
hadn't been dealt with by the previous Administration. I looked
forward to working with them. And no response.
Mr. Hodes. And setting aside for a moment the broader
issues of the plight of our municipalities, just focussing on
the Lehman collapse aspect, we are talking about $1.7 billion.
Is that about--
Ms. Eshoo. Approximately that. It represents about one-
quarter of 1 percent of all of the TARP funding.
Mr. Hodes. And we know, at least according to Treasury,
that there is $130 billion-plus still left in TARP, and nobody
from Treasury has contacted you to talk about this issue?
Ms. Eshoo. Not yet. But I have remained hopeful.
Mr. Hodes. Thank you.
Mr. Chairman, just before yielding back, I would like to
hear from Treasury as to--I would like to get a response from
them, and any effort that we can make on this committee to get
Treasury to respond to this issue, I think, is really
important.
Thank you. I yield back.
The Chairman. The gentleman from Colorado.
Mr. Perlmutter. Thank you, Mr. Chairman.
I want to compliment Congresswoman Speier on dealing with
this issue. You were one of the first to raise this on the
effect on local governments, whether they were hospital
districts or school districts or whatever.
And I appreciate both of you taking this on.
We have a witness, Mr. Hullinghorst, who is our treasurer
from Boulder County, who will be one of the panelists in the
next group, and he is going to be speaking about some of the
losses Colorado jurisdictions have suffered.
And to complicate it a little more, my question to you is--
let me step back. There were indirect losses, too, by other
government agencies in Colorado who had put a lot of money into
a major money market with the reserve fund, and the primary
fund, which invested all of its money--or a bunch of its money
with Lehman Brothers, and then that has caused, as a secondary
effect, losses to Colorado jurisdictions.
In your bill, do you deal just with direct investment in
Lehman Brothers, or is there a potential for assistance to
secondary losses?
Ms. Speier. The bill deals just directly with losses
incurred because of the Lehman investments.
Mr. Perlmutter. And to my friend from Illinois, I think the
testimony that we did hear in another committee about Lehman
Brothers was that the Treasury had asked Mr. Fuld from really
the time that Bear Stearns was merged on to look for a partner.
And apparently, Lehman--at least the Treasury would say they
tried to encourage a partnership earlier on in the year than
when everything came down in September.
With that, I yield back.
The Chairman. The gentleman from New Jersey.
Mr. Garrett. Just one closing question, I apologize. You
know how it is; you come in and out of the hearings.
The Chairman. Sometimes even while you are sitting here, I
find.
Mr. Garrett. You are alluding to yourself, not to me?
The Chairman. Yes.
Mr. Garrett. I will take a question that I assume that my
colleague from Texas--I didn't hear his testimony. But I think
I know what his testimony was. The question being,
understanding the concerns that you have, and we have the same
concerns in the State of New Jersey--I am from New Jersey, and
you may know there is $118 million at question right now--is
the old question of line drawing, and that is to say, if we do
it for this class of investors, will we hear from other classes
of investors? And to answer that question, sure, we will be
hearing from seniors who have their pensions in this, or you
will hear from unions that have pension funds, and businesses
that have their pension funds or other seniors and retirees and
the like. So how was that it you made the delineation that
public institutions would get the bailout, but seniors and
union workers and businesses would not?
Ms. Speier. The distinction that is being made is that
these are taxpayer funds that were invested in A1 and A
instrumentalities, both notes and bonds, and that these
taxpayers should be repaid. We are not talking about
investments made by individuals. We are talking only and
exclusively about taxpayer funds invested for the purposes of
holding onto money needed for the conducting of business and
construction of projects. So that is the distinction we are
making.
Ms. Eshoo. And the language is reflected in the TARP bill
as such. Many don't realize that that language is now the law,
and it is very specific. It is section 1037. So these are
public moneys that were--as I said, the only sin that the local
governments and the school districts and the counties committed
was to invest in highly conservative, highly rated instruments.
And those tax dollars are gone, and the local jurisdictions are
left holding the bag. So it is not about individuals, as
Congresswoman Speier said.
Mr. Garrett. You can both appreciate the fact that if all
of this goes forward, that all of our offices probably will
hear from individuals on this because they will say, okay, New
Jersey's teacher pension fund, for example, now has been bailed
out or the State union funds have been bailed out but my fund,
meaning the union that I work in or my employment, is not
bailed out. And so you can appreciate that is going to happen.
Ms. Speier. If I could, we specifically don't deal with
pension funds. So it is not our intention to see pension funds
reimbursed. It is only local jurisdictions that had money in
these types of instrumentalities for purposes of operating
local government or doing local construction.
Mr. Garrett. Which is why that other area--all those other
areas are going to come up. The other issue, of course, is the
moral hazard that is being created here as far as--as the
chairman brings up--
Ms. Eshoo. Did you say moral hazard?
Mr. Garrett. Moral hazard going forward as far as the due
diligence that is necessary that people should be making that,
now in the future, they are looking to say, well, the Federal
Government--well, at least for this class, not for pension
funds and not for individuals, the government will step in and
bail them out.
Now the State of New Jersey, somewhere on my desk here is a
New York Times article with reference to the fact of who
actually served in New Jersey--and I don't know any more about
it than what is in the New York Times--about who actually
served on the investment council who made the decisions. And
coincidentally or not, three of the investment counselors were
former Lehman employees and a wife of a Lehman employee. So I
am sure there are all sorts of questions that people back in my
home State are going to be asking--what sort of decisionmaking
went into and what sort of due diligence was made in that case?
And I guess that is the larger question going forward, is the
proper due diligence--
Ms. Eshoo. I think it is a fair question. I have always
adhered to the following, and that is that life is not tidy.
Let me say this, and that is that these were very
conservative investments, and these public entities are
required by law to spread out their portfolios and have a very
safe place to hold the taxpayers' money. And they adhere to
that. They were not high flyers. They were not high risk in any
way, shape, or form. So they adhere to the law, to the laws
that apply.
But it was singularly because of the big decision to let
Lehman go down, and so that is why the language that became law
passed a scrutiny test around here and the bill that
Congresswoman Speier introduced, and I am proud to be an
original cosponsor of, is very direct. And it is really quite
surgical. I mean, it is very precise, and I am very pleased
that we have been able to present the case to you today. You
have asked very good questions.
The Chairman. The gentleman from Missouri.
Mr. Cleaver. Thank you, Mr. Chairman.
Let me just commend Ms. Eshoo and Ms. Speier for
introducing this legislation, bringing it to our attention.
As a former mayor, I can tell you that municipalities can
only make safe investments, probably the safest investments of
anybody who goes into the market. And that is why you will find
mayors angry over the rating agencies because the corporations
generally will get a more favorable rating than the
municipalities, and we have not had a municipality go into
default in almost 25 years.
The other reason that I appreciate you bringing this up is
that municipalities have been devastated. There is a dramatic
difference between what you are talking about and somebody
coming up, saying, well, we want to be in line next.
Everybody in here lives in a city. Everybody in here lives
in a municipality. And the municipalities are hamstrung now.
They can't do revenue bonds because of the foreclosures,
because when you have foreclosures, you are beginning to slice
on the tax base, the municipal tax base. And so you can't do
revenue bonds. The only thing you can do right now is to watch
your infrastructure crumble.
And I am hoping that we can do something to rescue these
cities because if we don't, we are going to find that--well,
first of all, I mean, cities don't have a Fed. There is no
municipal Fed where they can print money. So there is nothing
they can do except wait this thing out and then try to make a
comeback, and they are going to be further behind. I was trying
to find a question here. Am I right?
Ms. Speier. You are right.
Ms. Eshoo. You are right. You are 100 percent right.
Mr. Cleaver. Thank you.
The Chairman. I thank the witnesses.
We will now move to our next panel.
I am going to recognize the gentleman from Colorado, who
wanted to make an introduction of one of the witnesses.
Mr. Perlmutter. Thank you, Mr. Chairman.
I would like to introduce my friend Bob Hullinghorst, who
is the treasurer of Boulder County. He and his wife Vicky Lee
have been friends of mine for many, many years. He has
experience in the private sector as a cash manager, has dealt
with financial issues his whole life, and is now treasurer of
the county.
I don't represent Boulder County. I am just south of that.
But its experience is the same as many other jurisdictions
across the country. And I think Bob will be a good witness to
describe the safe kinds of deposits they made, yet now have
lost substantial money that is hurting all sorts of things.
So with that, I would just offer him as one of our
witnesses.
The Chairman. Thank you.
And we will now begin.
We will just go in order with Karen Rushing, who is clerk
of the Circuit Court and county comptroller of Sarasota County,
Florida.
Any material that any witnesses wish to submit will, with
unanimous consent, be submitted, so there is no need to ask for
that. You can present your oral testimony, and anything you
want to accompany it will be made a part of the record.
STATEMENT OF THE HONORABLE KAREN E. RUSHING, CLERK OF THE
CIRCUIT COURT AND COUNTY COMPTROLLER, SARASOTA COUNTY, FLORIDA
Ms. Rushing. Thank you, Mr. Chairman, for the opportunity
to address you and the committee today.
I am here to ask you for your assistance and support. As
you will hear and have heard, State and local governments are
faced with significant problems caused by the decision to allow
Lehman Brothers to collapse. The money collected in the form of
taxes and fees by the State and local governments is invested
daily in highly rated quality investments with the objective of
preservation of principal and adequate liquidity for paying
daily obligations.
The rules governing investments are generally proscribed by
law and in Sarasota County in particular. In addition to State
law requirements, there is a local ordinance that describes the
limitations and objectives of the investment policy. The
objectives are the preservation of principal, and adequate
liquidity through the purchase of highly rated investment
instruments.
The collapse of Lehman Brothers caused highly rated debt
instruments with adequate liquidity to become virtually
worthless. Now the reason governments purchased bonds rather
than equities is, with a buy-and-hold practice, a bond
purchaser knows that, after the time of maturity of a bond, you
will receive your principal and interest back.
The turn of events that directly affected the ability of
governments to deliver services that are aimed at protecting
the health and welfare of those we serve was caused by the
failure of Lehman Brothers. Florida in particular is navigating
very difficult times. High job loss, high foreclosure rate, a
housing crash, and an insurance crisis are all affecting our
ability to withstand the consequences of the collapse of Lehman
Brothers.
It is my understanding that the current rules governing
TARP provide for assisting State and local governments.
My written testimony outlines the services in Sarasota
County that have been cut and the jobs that have been lost
directly related to the Lehman Brothers collapse.
Although I am not prepared today to speak to the specific
nuances regarding the losses in Florida State government and
the local cities, I do want you to know that the problem is not
unique to Sarasota County in Florida, that it is affecting all
of our levels of government, and your assistance is requested.
Mr. Chairman, thank you for the time you have devoted to
this hearing, and we appreciate your attention.
[The prepared statement of Ms. Rushing can be found on page
64 of the appendix.]
The Chairman. Next, and I apologize if I mispronounce it,
Mr. Ron Galatolo, the chancellor of the San Mateo County
Community College District.
STATEMENT OF RON GALATOLO, CHANCELLOR, SAN MATEO COUNTY
COMMUNITY COLLEGE DISTRICT
Mr. Galatolo. That is correct, Mr. Chairman. Chairman
Frank, Ranking Member Bachus, and members of the committee, my
name is Ron Galatolo. I am the chancellor for the San Mateo
County Community College District and I am also a certified
public accountant. Thank you also for adding my written
testimony as part of the record.
What I would like to share with you today are the
consequences that we have experienced, both the academic
programs and services that we have at our colleges, as well as
the financial hardship as a result of the Lehman collapse.
Our district has three colleges, and it sits equal distance
between San Francisco and San Jose on the peninsula, and we
serve about 45,000 students there a year. It is a fairly large
institution, and many think of community colleges as a locale
that essentially serve the needs of students who want to
transfer to the university. And I will tell you that actually a
large portion, and a part of our core mission, is to provide
occupational skills, including dislocated workers for reentry
into the workforce.
Our county's unemployment is the highest it has been in
decades. At a time when unemployment is the highest in decades
is actually when our unemployed workers need to come in to us
and retrain and prepare themselves for the jobs they want to
attain in our county.
Our loss as a result of the Lehman collapse was significant
and exacerbated by the multibillion-dollar financial crisis we
face right now in the State of California. When our Lehman
instruments became worthless, they essentially wiped out
operating reserves. Subsequently, when our State reduced our
operating revenue, we had no viable option other than to reduce
teachers and support staff, along with elimination of programs
and services, again at a time when our community needs us most.
More specifically, last year we experienced about a 10
percent reduction to our budget and anticipate another 8
percent to our operating budget again this year. When all is
said and done, we may have to shed the equivalent of about 11
percent of our full-time faculty and staff, with a devastating
effect to teaching and learning at our 3 colleges.
When all is said and done, we have to abandon many
construction projects slated to renovate our three colleges,
causing a destimulus to our local economy. And based on our
calculations, we actually found there may be as many as 400
construction jobs that are lost as a result of this.
By this inaction, we are simply taking the shovel out of
the ground on these shovel-ready projects and causing a domino
effect on the local economy; again, a destimulus to our county.
We are not alone and, through no fault of our own, we
invested in what we believed and trusted to be highly rated,
low-risk investments. Many schools, colleges and universities
are in similar predicament to ours. To paraphrase Chairman
Frank and Congresswoman Speier, if we invested in AIG, let's
say, a guaranteed investment contract as opposed to invested in
these highly rated, low-risk Lehman securities, we would not be
before you today asking for your help. I feel it is highly
inequitable to use TARP funding to shore up banks and to bail
out failing corporations but fail to protect agencies' taxpayer
dollars, such as ours and the others who are testifying before
you here today.
I think it is important to note again something
Congresswoman Speier said, and that is when you look at what we
are asking for here, it is about $1.7 billion nationwide. When
that is the numerator over the denominator, $700 billion is
less than one-quarter of 1 percent of the TARP funding that is
available for these types of activities. Thank you for your
willingness to listen today.
[The prepared statement of Mr. Galatolo can be found on
page 56 of the appendix.]
The Chairman. Next, we will hear from Richard Gordon, a
supervisor on the San Mateo Board of Supervisors.
STATEMENT OF THE HONORABLE RICHARD S. GORDON, SUPERVISOR, SAN
MATEO COUNTY BOARD OF SUPERVISORS, CALIFORNIA
Mr. Gordon. Chairman Frank, Ranking Member Bachus, and
members of the committee, thank you for this opportunity to
testify and to place my written comments in the record. My name
is Rich Gordon and I am a member of San Mateo County Board of
Supervisors.
And Mr. Chairman, in full disclosure, I want to note that
at on at least one occasion, I have ridden in a car with
Congresswoman Anna Eshoo. I want to thank Jackie Speier and
also Senator Feinstein who, along with Chairman Frank, have
highlighted the national implications of the Lehman Brothers
bankruptcy on local governments and communities.
In excess of 200 jurisdictions in over 21 States lost $1.7
billion when Lehman was allowed to fail. The first question you
might ask is, why were local government funds invested with
Lehman? Why were these investments made? Local governments pay
as we go. We have to meet payroll every 2 weeks. Yet our income
is not on that same kind of regular stream. Our property tax
payments may come in twice a year, or quarterly. Our State
income tax payments often come once a year. Sales and use taxes
come on a varying cycle. So our expenses are regular, but our
income is not. And so we bank our income and we bank it for the
purpose of managing our cash flow. When we actually do these
investments, we will look to earn a modest interest, which
often covers the difference between the current tax receipts
and future expenditures, which are impacted by inflation. So it
allows us to use those tax dollars in a way that stays even.
Such investments are a common practice across the country.
These investments are governed by State and local policy.
Policies are usually fairly similar and fairly simple: to
protect principal; use safe investments; and diversify your
portfolio.
In California 11 years ago, when the County of Orange made
some risky investments and ended up in bankruptcy, State law
was changed. In fact in California, we have a very tight system
regarding where local governments can make their investments.
So the funds are invested to protect principal, and the
goal is not to generate wild profits. In San Mateo County, our
average rate of return over the last 5 years on our pool of
funds is 3.7 percent. These are safe investments. The
securities and corporate bonds were A-1 and A, and our funds
are diversified, which is one of the reasons that we were in
Lehman. Actually a significant portion of our funds were in
Treasurys or Federal agencies' securities, and Lehman
represented 5.9 percent of our funds.
These are local tax dollars used for operational purposes.
As you have heard, they fund construction projects to build
classrooms, they pay for teachers, they allow us to employ our
public safety personnel.
In San Mateo County, the absence of these funds will
definitely impact highway projects, because the Transportation
Fund Authority had money invested in this pool. Our schools are
impacted and funds for our county hospital have clearly have
been impacted. Our impacts are similar across the United
States. And so the question might well be: Why use TARP? Most
simply, because it is in the law.
As clarified in colloquy between Chairman Frank and
Congresswoman Eshoo in January, one of the purposes of TARP is
to help local governments, especially those impacted by the
decision to allow Lehman to collapse. TARP has helped our
private industries; it should also help our local communities.
This translates directly into jobs at the local level, and we
seek your help in seeing that the law is implemented to assist
local governments that were injured and became the victims of
the collapse of Lehman Brothers.
[The prepared statement of Mr. Gordon can be found on page
58 of the appendix. The prepared statement of Mr. Mark Church,
president of the San Mateo County Board of Supervisors, can be
found on page 53.]
Mr. Moore of Kansas. [presiding] Thank you, Mr. Gordon.
Mr. Hullinghorst?
STATEMENT OF THE HONORABLE ROBERT HULLINGHORST, TREASURER,
BOULDER COUNTY, COLORADO
Mr. Hullinghorst. Thank you. And Chairman Frank and
honorable members of the committee, I would really like to
thank you very much for this opportunity to explain why H.R.
467 is very important to my county and to the taxpayers of 61
other governments in Colorado.
First, I would like to thank Congressman Perlmutter for
those kind words, and to tell him from my wife, this is the
last day of the session in Colorado; I know you miss it. She
told me that she is sure she is having a lot more fun than you
are. And since we have known Congressman Perlmutter's father
since we came to Colorado, I am sure he rode in our car with us
when he was 10 years old.
My name is Bob Hullinghorst, and I am the treasurer of
Boulder County. We are located about 30 miles from Denver. Most
of you know where that is. And we are the home of the
University of Colorado. Someday we may even have a football
team.
We have a population of about 300,000. In my statement, I
point out how safely we try to invest these funds, and how
important it is that somehow we be able to recover the write-
offs that we have had to take. It has cost these governments in
Colorado $5 million. And in the case of Boulder County, we have
had to write off $700,000.
Now the State legislature that my wife sits on just reduced
the allocation for community health centers, who serve 10
percent of our population, the poorest of the poor. They have
had to reduce that allocation by a million-and-a-half dollars.
This $700,000 equates to roughly 20 nurses. That is absolutely
critical to us in a county of our size.
I want to go a little off my statement and point out that
Colorado and most of the other States in the Union have very
strict investment statutes. I brought along the 15 pages of
explanation of our investment statutes and I am going to offer
it for the record. And in that, I won't go into detail or try
to bring you up-to-date, but I do understand that your staff
and some members of the committee think that there is a moral
hazard here because we are investing imprudently. If I do, I
have a chance to go to jail. So I try to be very, very careful
about how I invest.
As a matter of fact, our legislation focuses around the
prudent man standard, investments made pursuant to this statute
must be made in accordance with a prudent man (person)
standard. This requirement states that fiduciaries, such as
officials and custodians who make investments or deposits for
local governments, are obligated to exercise the judgment and
care under the circumstances then prevailing, which men or
women of prudence, discretion, and intelligence exercise in the
management of the property of another. In other words, we are
required by law to treat our taxpayers' funds as a sacred
obligation to us, and we try to do that as best we can.
The investments that we made in Colorado by these 62
governments here, governments like Clear Creek County, a small
county along I-70: the city of Fruita, a small town over by
Grand Junction; the town of Kersey, a town that is populated
mostly by people who grow grain for this country. The people in
these towns rely on pooled investment trusts in order to be
able to invest their money safely.
I had the pleasure of being one of the organizers of a
pooled investment trust, and I can tell you from our experience
that we did everything that we could to try to make sure that
those funds were safe.
So I just want to thank the committee for having this
hearing and considering the support of H.R. 467. Thank you.
[The prepared statement of Mr. Hullinghorst can be found on
page 62 of the appendix.]
Mr. Moore of Kansas. Thank you Mr. Hullinghorst.
Next, Mr. Thornberg of Beacon Economics.
STATEMENT OF CHRISTOPHER THORNBERG, ECONOMIST, BEACON ECONOMICS
Mr. Thornberg. Mr. Chairman, committee members, San Mateo
County's public agencies lost approximately $155 million in
investments due to the bankruptcy of Lehman. These are today's
losses, these were not securities and pension funds or other
long-run securities. This money was being parked in Lehman in
what was identified as highly rated liquid securities, until
needed for their primary purpose, the near-term funding of
schools, local infrastructure projects including transport,
public transport, and new prisons, and of course the ongoing
operation of local economy, including local government schools
and so on.
I was asked by San Mateo County to calculate the economic
damage that has been created by these financial losses. My
results are such--these financial losses mean the loss of
approximately 1,660 local jobs, approximately one-half of 1
percent of the county's overall employment base. It will suffer
an overall loss of $216 million in output in the local economy,
including $100 million in worker income. Not to mention, of
course, the major delays in the completion of projects
necessary for the growth of the economy.
These losses are intensifying an already grim economic
situation in the State of California. Our employment in San
Mateo County has risen from under 4 percent to over 8 percent.
For the State overall, it is about 11 percent, with little sign
of abatement.
San Mateo County, as we have heard, is not alone in
suffering such losses. These losses, of course, stretch across
the United States from Florida to Colorado into California. It
is worth knowing that in recent months, the Federal Government
has aggressively responded to the economic crisis by working to
offset the problems by a variety of actions. These efforts
include large financial infusions into the banking sector to
keep our lending markets operational, expanding the money
supply to keep interest rates low, and embarking upon a variety
of fiscal spending initiatives to expand aggregate demand,
including tax cuts, rebates, and direct spending on a variety
of local projects.
In this last category, a substantial amount of funding has
been put aside to offset the problems that State and local
governments have been suffering due to a precipitous decline in
tax revenues being seen across the United States. To allow
State and local spending to shrink rapidly will only exacerbate
the current economic problems and delay economic recovery that
much further.
When the primary criticism of this spending program has
been the time lag involved, the task of finding what you might
call shovel-ready projects that meet certain criteria is
challenging even at the best of times. And here we have one of
the simplest solutions. These are not shovel-ready projects,
these are shovel-stopped projects.
I would offer that by backfilling the financial losses
being suffered by these local governments as a result of Lehman
bankruptcy, the Federal Government really moves to accomplish
two very important goals.
First is an almost immediate fiscal impact upon the
economy. These are funds that will be directly translated into
economic output and economic jobs to help sustain the economy
through this tough time. As much as I appreciate the issues of
moral hazard as an economist, it all works to level the playing
field; because, in many ways, there was a critical policy
decision that bailed out Bear Stearns and bailed out AIG and
bailed out Merrill Lynch, yet allowed Lehman to fail. Why do we
punish those local governments who made simply the unwise
decision of choosing the one bank that was allowed to fail?
Thank you very much.
[The prepared statement of Mr. Thornberg can be found on
page 72 of the appendix.]
Mr. Moore of Kansas. Mr. Street?
STATEMENT OF THE HONORABLE CHRISS W. STREET, TREASURER, ORANGE
COUNTY, CALIFORNIA
Mr. Street. Chairman Frank and honorable members of the
committee, I am Chriss Street, Orange County Treasurer.
Together, as we tackle the challenges that confront the Nation
and navigate the financial sinkholes that have created
uncertainty and instability, it is important to remember that
each and every one of our actions will have consequences both
intended and unintended, anticipated and unforeseen.
Whatever we do, it should be reasoned and rational. I, more
than most, understand what the local officials who are
testifying here today are facing: angry constituents; an
uncertain future; and the paralyzing fear of facing a seemingly
insurmountable fiscal black hole.
Fifteen years ago, bad investments forced Orange County,
California into bankruptcy. In one of the Nation's most
affluent communities, taxpayers remain on the hook for $1
billion of bankruptcy debt. I stood in the shoes of these local
leaders. But as a result of directly facing these challenges,
Orange County came together to solve the problems and overcome
the obstacles that financial collapse posed. Labor and
management, conservatives and liberals, businesses and unions,
the entire community, pulled together and solved our problems
without government intervening to cover our investment losses.
Today, because of compromise and teamwork, Orange County
holds the prestigious AAAM rating from Standard & Poor's, the
highest rating in the Nation, and is the only county in America
to have achieved this recognition.
The pleas that you hear today are heart-wrenching but the
actions these people are asking you to take are nonetheless
wrong. We, as State and locally elected officials, must live
with the intended and unintended consequences of our decisions.
If we do not live with the decision and accept those
consequences, we are shirking our responsibility as leaders. We
must not look to someone else to blame for our current
condition or solve our current problems.
Bailouts will not instill the virtue of fiscal
responsibility at the local level. A bailout simply masks the
problems and permits leaders to avoid the consequences of
financial mismanagement. We must meet today's challenges today,
not push them down the road to our children.
And what are the known and unknown consequences if we cover
municipal losses? Realistically, just how much more debt can
the United States of America assume without threatening the AAA
full faith and credit of our Nation? If the cost of the Federal
Government for issuing debt increases dramatically due to a
downgrade in our credit rating, all the assumptions upon which
the anticipated recovery are based will be rendered irrelevant
and moot.
In the last few weeks alone, the 10-year Treasury bond
yields, despite billions of dollars of Fed purchases, have
climbed to 3.2 percent. That is a 25 percent increase in a very
short period of time. Rising obligations reinforce the market's
concerns about the solvency of the debt of the United States of
America. To add billions more in commitments could be the
tipping point that crushes the fragile and embryonic recovery.
If we are going to shelter local leaders from consequences
of their investment in Lehman Brothers, how can we stop there?
Why not reimburse cities and counties for the mistaken bond and
stock investments in Chrysler, General Motors, AIG, Washington
Mutual, and others? And why stop at government entities? Why
shouldn't we cover the losses of our own citizens who have seen
their 401(k)s decimated and retirement dreams destroyed by the
economic tsunami. How do we determine which constituencies
merit a government bailout?
When we create laws, no matter our good intentions, to
exempt individuals from the consequences of their actions, we
eliminate responsibility and promote irresponsibility.
Bailouts, no matter how lofty the original goal, encourage bad
behavior. Pain, however uncomfortable and difficult, is part of
the healing process. From experience, I can say that living
through it and managing short-term pain gave Orange County the
resolve and fortitude to bring about financial rehabilitation
and community healing.
I caution you as our Nation's leaders to be deliberate in
evaluating the legislation before you today and mindful of
potential unintended consequences. I urge you to vote ``no'' on
this legislation.
[The prepared statement of Mr. Street can be found on page
66 of the appendix.]
The Chairman. I have one question, We have some municipal
finance officials here. This actually flipped. This hearing was
going to be laid over--we were going to have a hearing on the
whole question of municipal bonds.
Let me ask--Moody's, for instance, recently issued a
statement for a general downgrading of municipal bonds. Let me
ask particularly those in the municipal finance area, are you
satisfied with the current rating system as it affects
municipal bonds? Mr. Hullinghorst?
Mr. Hullinghorst. Mr. Chairman, as a matter of fact,
Boulder County is planning on going into the municipal market
in about 15 days, and we anticipate getting a fairly good rate.
This is an interesting revenue issue that is based upon our
actually creating a special district, and residents of the
district will be able to use municipal bond financing to get
solar installations on their house, based on legislation that
has been passed by our State legislature and is authorized
under congressional act. So it is a very, very tricky issue,
and we anticipate still being able to do it and get good rates.
And I hope we do, because I am going to be the county treasurer
collecting the income to pay those bonds.
The Chairman. Mr. Street?
Mr. Street. I can say Moody's is just really a guideline;
we use it as a tool in our investments. And of course, as our
county, we have come all the way back up to a double A rating.
So, no system is perfect. I have great respect for the efforts
of Moody's, but I think when you look at the challenges we
face, Moody's is a good tool.
The Chairman. Anyone else who is in the--those are the
treasurers.
Mr. Bachus.
Mr. Bachus. Thank you. Let me say this: These did appear to
be safe investments. I understand there was some indication
that Lehman was in trouble, but Bear had been bailed out at
that time.
There is a section that Ms. Eshoo added to the TARP bill
and I think, Chairman Frank, you engaged here in a colloquy
which added, as one of the purposes of TARP, the need to ensure
stability for U.S. public instrument penalties, such as
counties and cities that may have suffered significantly
increased cost or losses in the current market turmoil. I can
certainly see how that fits your description.
I am wondering, though, as Mr. Street said, there are a lot
of other entities, with WaMu dead and others. Has anyone made
an estimate of what those total? If you add WaMu and some of
these other failures, what we are talking about? Mr. Thornberg,
do you know?
Mr. Thornberg. I don't have a specific number on that, sir.
I think the key point here is--again, I want to focus. These
were short-run funds, not long-run investments for pension
funds. In most of these cases, these are funds that are tied to
spending that is going to occur within the next 12 to 24 months
as opposed to over the next 20 or 30 years.
Again, I want to emphasize that the problem suffered by
many of these local governments is due specifically to choosing
Lehman as opposed to Bear or Merrill. That can't be
underestimated.
In the context of Orange County, I don't believe the
failure, the bankruptcy of Orange County, has any relevance in
this particular situation; because in the case of Orange
County, there were very specific investments made in very,
very, risky products and that county individually suffered as a
result of that. That was not the sort of a situation that was
common across many places.
Mr. Bachus. I see. I do appreciate your testimony. And
these were, I guess, like liquid cash accounts I guess, which
were highly rated. When we passed that bill, obviously the
government had various options as to what they were going to do
with the money. And as we have all witnessed, most of it has
gone to a few large corporations, and then they have even
distinguished between financial companies and car companies, so
they are certainly making a lot of judgment calls.
I think in fairness to all, I don't know that there is
anybody on this panel who could justify the decisions they have
made. I know these do cause real problems for your candidates.
And I, for one, know that you have availed yourself of your
Members of Congress, and I think that is part of the democratic
system. In the case of your Representatives, they have
apparently--at least in the law, they have set up a provision
which at least makes you eligible, so you do have grounds for
your request. Thank you.
The Chairman. The gentleman from Kansas.
Mr. Moore of Kansas. As over 5 million Americans have lost
their jobs, and thousands of people have lost their homes, and
our economy struggles through this recession, our local and
State governments are dealing with large budget deficits where
painful choices have to be made.
Today, we are focused on State and local governments that
were adversely affected when Lehman Brothers declared
bankruptcy, but I am curious how widespread the problem is.
A list of local agencies that had investments with Lehman
Brothers does not appear to list any city or county governments
in Kansas. I would like to ask the county officials here,
starting with Ms. Rushing, why did you decide to invest in
Lehman Brothers in the first place? And were you able to recoup
any of your losses in bankruptcies? And I would ask the same
question of the other county officials.
Ms. Rushing. Sarasota County has a portfolio of about $900
million, and the objective is to have a well-diversified
portfolio. We were invested in mortgages in Fannie Mae and
Freddie Mac. Thank goodness, those agencies were taken care of.
The decision was to have a well-diversified portfolio with
highly rated instruments with very little risk. That was the
objective. And we have taken an unrealized loss on our
accounting books, but we have not sold those instruments, so
have the bonds still. And so we don't have a realized loss,
unless we sell them, and of course we are holding them right
now, trying to determine what to do next.
Mr. Gordon. Congressman, in San Mateo County, by law we are
first of all required to diversify. So we had the maximum
amount in Treasurys and Federal agency securities. The Lehman
represented 5.9 percent of our pooled fund, a very small
amount, actually, in terms of the total amount invested. But it
was also exceedingly safe. We are not allowed to invest in
equities, and we have to choose conservative instruments, by
law. We had floating rate securities in Lehman that were rated
A-1 and we had one corporate bond that was rated A.
In Bankruptcy Court, where we are at the moment, we are
told that anywhere from 7 cents to perhaps 15 cents on the
dollar. The result of Bankruptcy Court will not be known to us
for many months. And so we believe and continue to believe that
the law that was implemented providing for TARP does provide
for mechanism for local governments.
Mr. Moore of Kansas. Mr. Hullinghorst?
Mr. Hullinghorst. Yes. Boulder County invested through a
State pool. The State pool purchased the Lehman commercial
paper, roughly 5 months before the bankruptcy. It was a 6-month
paper. It was basically due to mature and pay within the week
after bankruptcy. When it was purchased by the pool, it was a
1P1 paper, which is as good as you can get. And the underlying
credit of Lehman Brothers at that time was A or AA. So it was
an extremely safe investment in a pooled investment.
Now, I can tell you from experience that if you don't have
pooled investments around the country, and there are a total of
151 of them authorized and regulated in 45 different States and
they invest over $200 billion--probably closer to $300 billion
before the Lehman Brothers bankruptcy--if you don't provide an
avenue for liquidity in these State pools, they will probably
cease to exist. At least one of the things that is certain,
they will never buy anymore commercial paper, and that will not
help.
The commercial paper market is so incredibly important to
this country because, thanks to people in the Wharton School
and whatever, that is the avenue that corporations are using to
provide their working capital. And the bankruptcy of Lehman,
the reason it is so critical is it cut the heart out of the
commercial paper market. So your providing this support to us
is one indication that the government understands how important
this market is.
Mr. Moore of Kansas. Mr. Street?
Mr. Street. Orange County manages about $7 billion of cash,
about three-quarters of those securities are in government
securities. We have an investment policy statement. We did not
own Lehman Brothers.
Mr. Moore of Kansas. Thank you, Mr. Chairman. I think my
time is up, so I yield back.
The Chairman. The gentleman from Texas.
Mr. Neugebauer. Thank you, Mr. Chairman. One of the
questions I was going to ask the group, I notice that you had
diversified portfolios and you had minimums and maximums that
you can allocate. Isn't that the whole purpose, though, of the
mixing and blending and pooling is that if there is a bobble in
the portfolio, you don't have all of your eggs in one basket.
And so if there is an event like this where there is a default,
then have you not exposed your entire investment portfolio to
that?
The question I would have for Mrs. Rushing is, what
percentage of Lehman assets did you say you had in yours?
Ms. Rushing. It is a little less than 5 percent.
Mr. Neugebauer. A little less than 5 percent. That was an
A-rated paper; is that correct?
Ms. Rushing. Yes.
Mr. Neugebauer. Is there any reason you didn't pick double
A or some triple A, other alternatives in your portfolio?
Ms. Rushing. Well, we did. And this particular investment
was purchased through our investment advisor through our
banking arrangement.
Mr. Neugebauer. Who was your investment advisor?
Ms. Rushing. Wachovia.
Mr. Neugebauer. So you had opportunities. You could have
invested in double A and triple A investments. Why would you
choose the A-rated over the double A and triple A?
Ms. Rushing. It was just a part of the diversified
portfolio.
Mr. Neugebauer. But if you could buy triple A, why would
you buy an A?
Ms. Rushing. The only response I can give you is that the
portfolio was diversified, that we had commercial paper, that
we had mortgages--as I said, Fannie Mae, Freddie Mac--and there
was some portion of the portfolio that included corporate debt
that was highly rated.
Mr. Neugebauer. Thank you.
Mr. Hullinghorst?
Mr. Hullinghorst. I know it is a hard name.
Mr. Neugebauer. Mine is kind of hard too.
Mr. Hullinghorst. It took my wife 3 years to learn how to
spell Bob.
There are two points that I would like to make in response
to your question. There are very few issues rated triple A that
are available among the United States corporations, unless you
go to governments. And there are very few short-term
governments except for Treasurys. And in some markets you don't
get anything in investing in Treasurys.
Now, the second point I would like to make is that the
reason for the State pools in large part is to allow small
municipalities to buy anything. You cannot go to Wall Street or
to a representative in a brokerage firm and get any sort of a
price if you only have $50- to $100,000 to invest at any one
time. And so these State pools are there to provide smaller
entities, or even entities like myself, who are buying smaller
increments to get in at a decent rate in a well-managed pool.
If you really want to see a debacle, you will not support
the State pools and you will leave investing up to all of these
little entities.
I came to Washington a little over a year ago to try to
talk to some of our congressional delegation and to the SEC
about what I call criminalizing the sale of illegal investments
to local officials. There was no interest at that time. I think
there might be a little more interest now. But what I found was
that, in fact, the SEC had the authority through their
examination process to make sure that their brokerage firms
were not treating us as qualified investors. Most governmental
investors in any place in the country need to be treated as
investors whose interests need to be protected. Almost every
one of us is covered by State legislation that we are not
allowed to go beyond. But we could not get a single brokerage
firm--in my case, we could not get a single brokerage firm on
Wall Street to sign an agreement that they would only sell us
investments that qualified under our State law. Thank you.
Mr. Neugebauer. My time is up.
The Chairman. Does the gentleman yield? The hearing that
this was switched with, because of some concern on the part of
the Administration--they couldn't make it today. We will have
that hearing on May 17th. It is a package of bills, one of
which would call for the registration of finance providers. We
do not, as members of this committee, have the jurisdiction to
criminalize, because that is under the jurisdiction of the
Judiciary Committee. But we do have a bill that would propose a
fiduciary standard for advisors. Obviously, that will be up to
the committee. So we will be dealing with that subject to the
extent that it is our jurisdiction. Criminal jurisdiction is,
of course, with the Judiciary Committee.
Mr. Bachus. That pay-for-play and things of that nature?
The Chairman. Yes, I think that would be covered by that.
Yes, exactly. So it is, I think, directly relevant. We will
have a hearing on that on the 17th of May.
Mr. Bachus. Mr. Hullinghorst, I think you wife is going to
have the whole football team meet you at the airport.
The Chairman. The gentleman from Missouri.
Mr. Clay. Thank you, Mr. Chairman. Thank you for holding
this hearing. In Missouri, as in many other States across the
country, we have had adverse impacts because of the collapse of
Lehman Brothers. I am also concerned that TARP funds have been
denied from local governments, although provisions were made in
the legislation for this. I also noted that in Representative
Eshoo's statement that she mentions Missouri as a State that
has public entities with problems.
I will start with Mr. Hullinghorst, and anyone else can
chime in, do you think H.R. 467 will have enough teeth, if it
is to pass, to effect a change in the present thrust of TARP
funds? Will this be sufficient to restore these local entities
to where they would have been financially?
Mr. Hullinghorst. Thank you for the question, Congressman.
The legislation as it is written, I believe, will help cover 95
percent of the problem. Just during these discussions over the
last 2 days, I have been made aware of the fact that there are
State pools who invested in money market funds.
The TARP money has been used to bail out the money market
funds. You are probably familiar with Prime. The trouble is
that Prime was given money, was bailed out; but in fact, cause
of the way it was bailed out by the previous Administration,
the moneys haven't flowed through. There is a substantial
amount that is being reserved.
Now, most of the losses in those money market funds like
Prime were losses because of Lehman Brothers. And so it is
probably important to look at how this legislation can get the
public pooled money that is in those money market funds
extracted. So that is my answer, is that I think that this will
solve 95 percent of the problem. And I am sure that a
modification could help the other pooled investment trusts that
have experienced losses because of the commercial money market.
Mr. Clay. Thank you for that.
Anyone else on the panel?
Mr. Gordon. If I could, thank you Congressman. We believe
that local government could be made whole now if the Secretary
of the Treasury would implement the language that is in TARP.
What H.R. 467 does is direct him to do that, but we think he
has the capacity now. In either case, there is a capacity to
make local governments whole through either of these venues.
Mr. Clay. Thank you.
Mr. Street, you mentioned personal responsibility in your
comments about, I guess, 401(k)s, and maybe you can elaborate
more. I don't know how an individual with a 401(k) could have
been more responsible as far as the hit they took. When you
look at, on average, that the 401(k)s lost about 30 percent,
what is your response to that? I mean, they really were victims
when you think about it.
Mr. Street. I agree the losses are just heart-wrenching, I
think the challenge of this bill is how do you separate a poor
person who lost money in their 401(k) from a government entity
who lost money in their short-term investments? It is how do
you make that decision and how do you pick the winner and the
loser in this game of allocation?
Mr. Clay. Priority-wise, should we go back and try to make
those individuals whole who were really banking on those
401(k)s as far as retirement? And some are already retired who
have lost a significant amount of the value of those 401(k)s.
Do we first go after them to make them whole?
Mr. Street. You have a challenge here as our leaders to
make these kind of decisions. For me, I would be concerned that
if you make one small decision, you would make a second and a
third. I am just very afraid that someday, on the front page of
the Wall Street Journal, we will see, ``United States of
America downgraded to double A.''
Mr. Clay. Thank you, I yield back.
Mr. Thornberg. If I may make a comment on that. The losses
in the financials across-the-board are enormous, there is no
doubt about it. And in many ways, the reason for that is if you
looked at the trend over the last 20 years in the U.S. economy,
you saw an amazing appreciation in asset classes across the
board: real estate, commercial real estate, all sorts of
different types of funds. The levels were unrealistic and now
those levels are collapsing back.
There is very little that can be done about that. We can't
create wealth where wealth didn't exist in the first place. The
issue here I think before us is a little different, and that
has to do with the fact that the local governments are being
forced to curtail current spending as a result of these short-
run financial losses. That is exacerbating the business cycle.
I don't think we need to look at this as making someone whole
or someone not. We should view this more as part of the fiscal
stimulus package to help and turn the economy around.
When you think San Mateo County has to stop construction on
buildings at a community college, on a public transit project,
on this jail, these have all created a loss of jobs and a loss
of incomes at a time when we as a Nation cannot afford these
losses. And so excuse me--
The Chairman. Just one thing. I would just say personally,
if it comes to the point where they downgrade U.S. paper to
double A, and the interest we have to pay goes up accordingly,
I want to announce now I will be a heavy buyer, because the
likelihood that this body would ever walk out with default is
so negligible. I hope that day never comes, but if it does, I
will make money off it personally.
The gentleman from California.
Mr. Royce. Thank you, Mr. Chairman. I want to thank Mr.
Street and ask him a question. I made the observation that
Lehman was highly leveraged; it had a significant exposure to
the mortgage market. I think it was as late as 2008 that it had
$6 billion in subprime exposure, and it even owned a subprime
originator, B&C Mortgage.
You know Orange County as I remember, I think it was about
1994, and I think you were around there at that time, Orange
County took a hit. And I think a lesson was learned that it was
a dangerous, dangerous endeavor for a county treasurer to use
taxpayer funds to invest in products that the local governments
did not understand. And maybe you can tell us and discuss the
extent to which the county took responsibility for those losses
and what did the county do to restructure during that period?
Mr. Street. I think the first thing we did to restructure
was work closely with our staff and closely with all the
community leaders. It was a very difficult time at first with
people, lots of recriminations. Fortunately, we got over that
and down to the issues of really dealing with reality. We
worked together. We tried to use efficiency. Unfortunately,
there were some layoffs, but over time we were able to bring
back our credit rating and bring back our community.
Mr. Royce. Also one of the things that changed was a policy
from taking risk to one that was far more prudent.
Mr. Street. That is correct.
Mr. Royce. What do you believe the impact on market
discipline will be if Congress awards these municipalities TARP
funding, thereby making them whole on the investments on the
bankruptcy of Lehman Brothers?
Mr. Street. I am concerned, quite frankly. It encourages
people to take that little bit extra risk and little bit extra
yield, and the results you see today are quite challenging.
Mr. Royce. Several of our municipalities across the country
lost money on Washington Mutual. Should Congress make these
municipalities whole as well? And where should we draw the
line, then, if we start down that road?
Mr. Street. Congressman Royce, I think you ought to set the
line where it is right now, that we have to take personal
responsibility, and that is what I am encouraging the committee
to do today.
Mr. Royce. Maybe you could discuss a little bit some
observations you have about market discipline and the role it
would play. Going back to 1994, back to the decision-making
process and the treasurer's office back far before you were
treasurer of the county; maybe some of the observations about
why those risks were taken at that time.
Mr. Street. I think it was a challenging time in
government. In 1993, as many will remember, there was a real
estate recession and times were hard. I think people were
trying just a little bit harder and the treasurer had been very
successful for a long period of time doing just a little bit
more, and he tried just a little bit more, and finally one day
we missed payroll.
Mr. Royce. Yes, it was very highly leveraged derivatives,
actually, at the time.
Mr. Street. Correct. He was leveraged about 6:1. In fact, I
think one of the greatest shocks to Wall Street was the fact
that Orange County was highly rated. We were double A at the
time. What Bob Citron, our treasurer, was doing was very
transparent. People knew what he was doing, Wall Street knew
what he was doing, and one day the whole house of cards came
down.
Mr. Royce. Now, you saw the investments, the $6 billion in
subprime exposure by Lehman; you saw the fact that they owned a
subprime mortgage originator, B&C Mortgage. Is there a reason
specifically why Orange County was not, after its experience in
1994, not investing in Lehman or not utilizing Lehman in 2008?
Mr. Street. We have an in-house research capability. We
also use this tool, Standard & Poors and Moody's, and we chose
not to have Lehman Brothers on our investment list.
Mr. Royce. Thank you, Mr. Street.
Ms. Speier. [presiding] I am going to take you down memory
lane with Mr. Citron a little bit. If I recall correctly, in
1994 there was $7.6 billion that was invested in Orange County
for about 200 municipalities in special districts; is that
right, Mr. Street?
Mr. Street. About 7.6 billion, I believe, is about right.
He had a portfolio of about $26 billion. It was essentially
leveraged up from that point.
Ms. Speier. If I recall correctly, the investments that
were being made in Orange County would not be defined as
prudent; is that correct?
Mr. Street. In fact, most of it would be defined as
extremely prudent as far as the instrument he bought. He bought
5-year U.S. Government agencies. He simply leveraged them. He
had some number of derivatives, but 90 percent of Mr. Citron's
investment philosophy was leverage.
Ms. Speier. Well, he did invest in derivatives and inverse
and floaters; is that not true?
Mr. Street. A number of them, yes, about $4 billion worth.
Ms. Speier. And you heard testimony that none of these
jurisdictions have invested in derivatives or inverse floaters;
is that correct?
Mr. Street. That is correct.
Ms. Speier. So you are really trying to suggest that their
prudent activity was liked to Mr. Citron's very imprudent
investment policies.
Mr. Street. I can only speak for Orange County.
Ms. Speier. Well, I know. But you have attempted to
establish that somehow what happened to Orange County should
happen to these jurisdiction, when in fact they didn't engage
in anything like derivatives or inverse floaters. And
furthermore, as I understand it, he was so hooked on the fact
that he was getting 12 percent interest and that about 35
percent of the revenues for Orange County at the time were
coming from interest made on these very speculative
instruments, that he went out and borrowed money, did he not?
Mr. Street. That is correct.
Ms. Speier. So he borrowed money to invest it. So for every
dollar he borrowed, he was attempting to make $2 in an
investment; is that correct?
Mr. Street. I don't know the return at $2. I remember that
he was making about 8 percent on his investments. He was buying
instruments that yield at about 4\1/2\ percent and leveraged
them to an 8 percent yield.
Ms. Speier. As you heard from testimony here today by these
various local communities and jurisdictions, they weren't
playing the market; they were taking their money and what was
the equivalent of putting it in a savings account to be used,
appropriately, to build buildings, to make payroll. It was not
being used in any way that can be likened to what Mr. Citron
was doing in Orange County, correct?
Mr. Street. I have in no way said that the investments that
were made here were the challenge. The challenge today is that
the bill that is before you, I think, would set a bad precedent
and, in fact, be dangerous to the financial markets.
Mr. Royce. Would the gentlelady yield?
Ms. Speier. I am not a gentleman, but I will be happy to.
Mr. Royce. I said gentlelady. Excuse me, ma'am.
You know, I think the point he was making here, you made
the point it was a savings account that they were invested in.
No, they weren't investing in a savings account. They were
investing in a highly leveraged institution that was Lehman
Brothers, just as Orange County was highly leveraged in 1994.
And what we are talking about in terms of market discipline is
getting county treasurers away from the concept of leveraging
and investing in these institutions that are so highly
leveraged. I thought that was one of the underlying themes
here, so I just--
Ms. Speier. Would the gentleman yield?
Mr. Royce. Yes.
Ms. Speier. I did listen to his entire testimony, and my
interpretation was that he was suggesting that if Orange County
made some bad mistakes and they kind of swallowed hard and
dealt with it, then these jurisdictions should do the same
thing.
The only point I was trying to make is that it was very
different, what was happening in Orange County, than in these
specific jurisdictions.
Mr. Royce. And I understand that point. But in both cases
we are dealing with leverage. And that is, I think, the take-
away or the theme that he was trying to leave us with. But I
thank the gentlelady for yielding.
Ms. Speier. All right.
Mr. Street, if I could, I would just like to ask you one
other series of questions. And that is, based on what you have
said, I would interpret that you would not have supported the
TARP funding; is that correct?
Mr. Street. I think that once you started to bail out Bear
Stearns that it was only a matter of time before people would
take more risk and people would say things are too-big-to-fail,
and then you would have the situation we are dealing with
today.
Ms. Speier. I guess you didn't answer my question. Would
you have supported the TARP measure? Did you support it? Do you
support it?
Mr. Street. I think that there needed to be some form of
standby guarantee within the Fed. Is the TARP the correct
measure? That was really your decision.
Ms. Speier. So you, then, would not be opposed to having
TARP moneys being spent to bail out Wall Street companies, but
you have an objection to having TARP moneys used to bail out
local jurisdictions; is that correct?
Mr. Street. I think that we are talking here about really
replacing lost dollars. If that is what TARP money is going to
be used for, I think it would be a mistake.
Ms. Speier. You don't think the money has been used to help
AIG and that we are possibly not going to see any of that money
come back, or with some of the money we have given to Chrysler?
Mr. Street. I think those are the tough decisions you have
to make every day, and clearly those decisions keep coming.
Ms. Speier. All right, thank you.
Mr. Thornberg, I have one question for you. You indicated
that there were probably about 1,700 jobs lost in San Mateo,
about 1,658 jobs lost in San Mateo County as a result of the
money that had been invested in Lehman. If you would
extrapolate for the $1.7 billion that has been lost by
jurisdictions across this country, how many jobs do you think
have been lost as a result of Lehman's being allowed to failed?
Mr. Thornberg. It would be, of course, just a rough
estimate, but probably something on the order of 20- to 25,000
jobs in total.
Ms. Speier. Thank you.
Mr. Lance from New Jersey.
Mr. Lance. Thank you very much, Madam Chairwoman. Good
morning to you all.
I find this a very interesting issue, and as I view the
testimony, the State of New Jersey where I live may be in a
similar situation to the State of California. And I will direct
my questions to Mr. Street, but certainly there are other
experts on the panel as well.
In the State of California, is there a requirement,
constitutionally, that the State budget has to be balanced each
year; and can debt be issued for the general operating portions
of the State budget? Would you know that, sir?
Mr. Street. There is a requirement, constitutionally, that
the State has a balanced budget. Certain debt can be issued as
revenue anticipation notes to smooth out cash flow--
Mr. Lance. I am not concerned about that, but those are
merely short-term obligations. I am talking about the length of
the budget year.
Mr. Street. My understanding is it is illegal to basically
borrow money for operating outside the current fiscal year.
Mr. Lance. Your testimony indicates that issuance of debt
by California, as I understand your testimony, has increased a
yield from 4 percent to 6 percent in the last several months.
Am I reading your testimony correctly?
Mr. Street. That is correct. From the start of the year, I
think we started out at about 2 percent for short-term money
and went to 4 percent. Now the last issuance is longer-term
money; it is 6.2 percent, I believe.
Mr. Lance. We issued debt in New Jersey over the last
decade for the general operating portions of our State budget,
over my strong objection; I was the minority leader in the
State Senate before I came here. And a constitutional amendment
was passed last November in New Jersey, under my authorship, to
prohibit that in the future, because it has been so devastating
to our State. If you are not able to issue debt for the general
operating portions of the budget, is it your understanding,
sir, that the general operating portions of your State budget
are exclusively funded through ongoing revenues?
Mr. Street. Well, that is correct. Currently, the State of
California faces an inability even to sell short-term cash-flow
instruments and is anticipating selling what are called revenue
anticipation--
Mr. Lance. I see that in your testimony, yes.
Mr. Street. But these are really PAYGO. So California is
approaching PAYGO.
Mr. Lance. And am I reading your testimony right, sir, that
there is going to be a ballot initiative sometime later this
month regarding increasing taxes in California?
Mr. Street. That is right. There are six ballot
initiatives, I believe, four of which I think have revenue that
would add about $6 billion or $7 billion a year. Those four
revenue initiatives are currently failing in polls quite
heavily.
Mr. Lance. I see. Thank you.
This is certainly reminiscent of what is occurring in New
Jersey. We rely on an income tax that, in turn, relies on
upper-income New Jerseyans. You indicate in your testimony that
40 percent of your State income tax is derived from the top 1
percent of filers. That is also true in New Jersey. We have a
gross income tax, not an adjusted gross income tax, with very
few deductions. And I would be interested, and perhaps I will
ask the nonpartisan office here, to analyze the similarities
between California and New Jersey. I am struck by them in your
testimony.
I know this is not the main purpose of today's hearing,
Madam Chairwoman, but certainly it has piqued my interest.
I yield back the balance of my time. Thank you, Madam
Chairwoman.
Ms. Speier. Thank you.
The gentleman from Texas, Mr. Green?
Mr. Green. Thank you, Madam Chairwoman.
And I thank the witnesses for testifying, as well.
Mr. Street, I thank you for your line of logic, and I would
like to pursue it, if I may. Given your line of logic, would
you have allowed Bear Stearns to fail?
Mr. Street. Yes, I would.
Mr. Green. Would you have allowed AIG to fail?
Mr. Street. I think that AIG is probably a function of what
happened with Bear Stearns.
Mr. Green. May I take it that your answer is ``yes?''
Mr. Street. Yes.
Mr. Green. Would you have allowed Chrysler to fail?
Mr. Street. Chrysler failed once before. It got a loan. I
think it is currently failed and in bankruptcy, and we will see
how it goes.
Mr. Green. May I take it that your answer would be ``yes?''
Mr. Street. Perhaps.
Mr. Green. Would you allow GM to fail?
Mr. Street. I think GM is going to come back as a very
strong company, and I think it is going to go into bankruptcy.
Mr. Green. Would you allow the banks that received the
equity capital from the TARP--we purchased equity positions;
would you have purchased those equity positions?
Mr. Street. Would I have accepted that the Federal
Government should put money to back the banks?
Mr. Green. Yes.
Mr. Street. I would accept that the Federal Government
should put money to back the banks.
Mr. Green. The backing of the banks with the funds is not
something that we traditionally do. We have the FDIC, but what
we are doing with TARP is in addition to FDIC. Do you agree?
Mr. Street. It is going to a new level, yes.
Mr. Green. Just for my edification, what world do you see,
had you allowed all of the things that you would allow to take
place, how do you see the world today if these things had
occurred?
Mr. Street. I wrote an article, along with David Evans, in
Bloomberg magazine in July of 2007, which outlined all of the
problems that we are facing in the real estate markets--
Mr. Green. Because my time is somewhat limited, please, I
don't mean to be rude, but tell me about the world that you
would see today. What would unemployment be like in this world
today, had we pursued your line of logic?
Mr. Street. I think if we would have had failures and then
rehabilitations through bankruptcy we would be back in a better
shape today.
Mr. Green. Let's talk about today, and we are talking about
over the last year now all of these events were occurring. So
are you of the opinion that unemployment would be lower today
and that we would be better off today, had we allowed the
failure of Bear Stearns, AIG, possibly Chrysler and GM? We did
invest in them. Are you of the opinion that we would be better
off?
Mr. Street. I believe that if we had let Bear Stearns fail
of its own actions, we would be better off today and have less
unemployment.
Mr. Green. But not just--you see, we are not talking about
one; we are talking about a number of entities. Let's put them
all in the equation. If we had allowed all of the things to
occur that could have occurred but for action, are you of the
opinion we would be better off?
Mr. Street. Yes.
Mr. Green. Now, let's talk about something else, Mr.
Street. You asked, how do we pick winners and losers? I assume,
Mr. Street, that you don't pave all of your streets in Orange
County at one time. That is a fair statement, I assume.
Mr. Street. Yes.
Mr. Green. And, Mr. Street, if you don't pave all of your
streets at one time, somebody picks winners and losers.
Mr. Street. Yes.
Mr. Green. That is the job, sometimes, of government. It is
not a nice thing to have to do; no one relishes having to do
it. But there are times when you have to make hard decisions,
very difficult decisions, and you do the best that you can. You
may not get it right, you may not be perfect. But you do what
you can, the best that you can, to be of assistance.
Final question: All of these persons with you are here
because there is a law that they are trying to cause us to
implement as they see it appropriately. Had there been a law at
the time Orange County found itself in this dilemma that
connoted Orange County could receive some assistance, would you
have pursued receiving that assistance from the Federal
Government?
Mr. Street. No.
Mr. Green. You would have simply allowed Orange County to
do as it has done and not made a bid for Orange County to
benefit from what the law says Orange County may have been
entitled to?
Mr. Street. Yes.
Mr. Green. I thank you very much.
And I yield back the balance of my time.
Ms. Speier. The gentleman from California, Mr. Campbell?
Mr. Campbell. Thank you, Madam Chairwoman.
Mr. Street, when Bob Citron, the former treasurer of Orange
County, did what he did, he was trying to increase the yield
and increase return to the County of Orange, was he not?
Mr. Street. That is correct.
Mr. Campbell. So he was chasing yield, let's call it.
Mr. Street. He had a strategy to maximize.
Mr. Campbell. And because of the failure of those things,
the County of Orange went bankrupt, correct?
Mr. Street. That is correct.
Mr. Campbell. Okay.
And, Ms. Rushing or Mr. Galatolo, could either of you have
invested in something that was a higher-rated bond but gave a
lower yield instead of Lehman Brothers at the time?
Ms. Rushing. Absolutely.
Mr. Galatolo. In my situation, actually, I am required by
law to invest in the county commingled fund, so the answer is
no.
Mr. Campbell. You are required by law to invest in what?
Mr. Galatolo. Yes, the proceeds that we receive from our
general obligation bonds as well as all our property taxes in
addition to the State apportionment goes into the county
commingled fund, and, by law, it is invested on our behalf.
Mr. Campbell. You are required to invest in Lehman
Brothers?
Mr. Galatolo. We are required to invest in the county
commingled fund, in the San Mateo County commingled fund.
Mr. Campbell. Oh, all right. Then I should be asking the
question of who made the investment in the county commingled
fund, I guess.
Is that you, Mr. Gordon?
Mr. Gordon. The county treasurer made that choice.
Mr. Campbell. Okay. But he could have invested in Treasury
bills and had a lower yield.
Mr. Gordon. We were invested in Treasury bills.
Mr. Campbell. But he could have invested it all in Treasury
bills.
Mr. Gordon. But there are diversification rules in the
State of California. We were actually maximum on our
Treasuries. So--
Mr. Campbell. But you could have invested in other things
that gave a lower yield and a higher return and still met the
diversification rules.
Mr. Gordon. No--
Mr. Campbell. The point I am trying to make, which I am
sure you can all get, is that--well, let me ask, are either of
your counties in danger of going bankrupt purely and strictly
because of the Lehman failure?
Mr. Gordon. No, we are not in danger of going bankrupt.
And, you know, the State law--
Mr. Campbell. Ms. Rushing?
Ms. Rushing. To your question, no.
But I want to make sure I didn't misunderstand your prior
question. I thought you asked me if I could have invested in
instruments with higher yields.
Mr. Campbell. No, lower yield. Lower yield, but higher
rating.
Ms. Rushing. Okay. So then I would take, yes, I would--
Mr. Campbell. Would you have invested in Treasury bills
instead of that?
Ms. Rushing. We were.
Mr. Campbell. Could you have invested the Lehman money in
Treasury bills instead?
Ms. Rushing. Well, we have diversification limits.
Mr. Campbell. The point here is quite clear. Mr. Citron was
chasing yield. Now, he did it to an extreme degree, such that
the County of Orange failed and went bankrupt because he was
chasing yield.
The point I am simply trying to make is that you guys were
chasing yield, too. There is nothing the matter with that.
There is nothing wrong with that. But with yield comes risk.
And if there is no downside to that risk, then we all chase as
much yield as we can.
And so I would say, Madam Chairwoman, that although the
County of Orange is not equivalent because these people aren't
facing bankruptcy and the County of Orange was, that there is
an equivalency in the fact of chasing yield.
Ms. Speier. Would the gentleman yield?
Mr. Campbell. I will if you will give me a second, so I
don't run out of time. But go ahead.
Ms. Speier. Let us ask the treasurer from Orange whether or
not they are invested in Merrill, which was bailed out.
The point here is that everyone else was bailed out and
Lehman was not.
Mr. Campbell. Okay, reclaiming my time, Madam Chairwoman, I
go to the next question, which is, why are you all more worthy
of having your investment in Lehman than a pension fund that
someone is counting on for retirement who invested in Lehman,
or an individual who is living on a fixed income and this was
part of their fixed income and they now will have to completely
change their lifestyle, or some mutual fund that invested for a
vast amount of investors in Lehman?
Why are you more worthy than any of those? And so, if we
are going to bail out people who invested in Lehman, why not
bail out everybody who invested in Lehman?
Anyone can answer.
Ms. Rushing. I think we are here today because your
regulations allow for State and local governments to
participate in the TARP program. And that is why we are here
today, asking for your assistance.
Mr. Campbell. But then, shouldn't anyone who made this
same--other people in the private sector, obviously, made this
same investment and have suffered the same loss. Shouldn't they
also have an opportunity to recover their loss?
Mr. Galatolo. With all due respect, Congressman, I think it
is important to denote a very important difference here. And
that is that, when you are talking about the retirement funds,
these are moneys that will be invested for a long period of
time, actually have the time to potentially recover. The money
that we lost in our school district, actually, we lost
immediately. And it went to our operating fund, so it
immediately cut right into our ability to pay our faculty and
staff. So it resulted in lost--
Mr. Campbell. Well, except that most retirement funds are
paying out to people who are retired currently, and they hold
some for--you have some balance. And I realize my time is up.
But you have some balance of investments that you are carrying
at all times.
Mr. Galatolo. Retirement funds, too, obviously have a very
large investment pool. And when they are paying out, they are
paying out of a very small fraction of that investment pool at
any one point in time.
The money that we had actually went directly to paying
faculty salaries, staff salaries, and operating expenses. And
not being able to do that means that we have to eliminate
positions immediately, which really causes a destimulating
effect.
Ms. Speier. Mr. Campbell, I would like to answer your
question. And I think the difference is really quite clear. The
difference is these are taxpayer entities, and we want taxpayer
money to be returned to these taxpayer entities.
Some of the references you made are to individuals, and we
are not interested here in making individuals whole. We want to
make the local jurisdictions whole that are the beneficiaries
of the taxpayer money anyway.
Mr. Campbell. Would the gentlelady yield?
Ms. Speier. Yes.
Mr. Campbell. Taxpayers are individuals, as well.
Ms. Speier. I understand that. But this--you asked the
question about pension funds and others who invested in Lehman.
And my point is that we want to make those who were taxpayer
entities, local jurisdictions, be able to be made whole with
TARP money that all these other jurisdictions were
beneficiaries of.
Mr. Campbell. If the gentlelady would yield, I just don't
see the distinction between--I mean, I understand a public
entity has taxpayers, but pensions--which are individuals--
pensions has retirees, who are individuals; mutual funds have
investors, who are individuals. The impact on those individuals
is as severe, relatively, as it would be on municipalities. And
I just think it is unfair to do one and not the other.
Ms. Speier. All right.
The gentleman from Missouri, Mr. Cleaver?
Mr. Cleaver. Thank you, Madam Chairwoman.
Whew. I just need to editorially say that we approved, in
this committee, toxic asset removal. We were going to take all
the bad assets out of the markets so that people would feel
comfortable. We went home and found out that the money for
toxic asset removal was given to banks. And so I have some
irritation over the fact that, in the language of the bill, we
say that we can help municipalities. Now, we took the money,
gave it to banks.
Most of the people in America believe that Congress voted
to give money to the banks. When I go home and do town hall
meetings, people want to know, why did you vote to give money
to the banks? I never voted to give money to the banks. I voted
to give them to municipalities. And, as a former mayor, I
understand that is something that is desperately needed.
And I am going to calm down.
What I also need to raise--Mr. Street, would you read the
last paragraph of your statement? The statement that we have
here is different than what you were reading. Or maybe you were
just speaking off the cuff.
Mr. Street. On my written submission? You are asking me to
read the statement?
Mr. Cleaver. The last paragraph of your statement.
Mr. Street. ``I caution you, as our national leaders, to be
deliberate in evaluating the legislation before you today and
mindful of potentially unintended consequences. And I urge you
to vote `no' on this legislation.''
Mr. Cleaver. Okay. And I guess the paragraph earlier, you
said that--well, ``the consequences of your behavior and
the''--you said ``the bad behavior.'' It may have been in the
previous paragraph.
Mr. Street. Would you like me to read that paragraph?
Mr. Cleaver. Yes.
Mr. Street. ``When we create laws, no matter how good our
intentions, that exempt individuals from the consequences of
their actions, we eliminate responsibility and promote
irresponsibility.''
Mr. Cleaver. Okay.
Mr. Street. ``Bailouts, no matter how lofty the original
goal--''
Mr. Cleaver. I got it. Thank you, thank you.
I was trying to figure out how that related to the
municipalities, the counties.
Ms. Speier. Do you have an answer, Mr. Street?
Mr. Street. Is that a question, how this relates--
Mr. Cleaver. You say, is that a question? I am going to try
it again. Let's see. How does that relate to the counties? How
does that relate to the conversation?
Mr. Street. It is very challenging, being from Orange
County and suffered this pain, and I know their pain. On the
other hand, Orange County worked out its challenges without a
bailout, without an intervention.
Mr. Cleaver. Excuse me, sir. Excuse me. Okay, thank you.
How does what you say--I am going to try to say this really
clearly, because I know I am confusing you. How does what you
just read impact or relate to the counties, the municipalities?
Mr. Street. If you bail out certain investors in Lehman,
you are going to have to bail out others. And you are going to
have to bail out lots of them.
Mr. Cleaver. Madam Chairwoman, I surrender.
Ms. Speier. Mrs. Biggert from Illinois?
Mrs. Biggert. Thank you, Madam Chairwoman.
I would yield to the gentleman from California, Mr.
Campbell.
Mr. Campbell. I thank the gentlelady for yielding.
Just a couple more questions or points.
The original TARP money, what was happening at the time was
a systemic risk, that if various of these institutions failed,
the belief which--in fact, I was late to this hearing because I
was questioning Mr. Bernanke, the Chairman of the Federal
Reserve, in the Joint Economic Committee. And I asked him, you
know, what were we on the verge of? And he said we were on the
verge of a financial calamity, which could have resulted in
thousands of bank failures and literally would have touched
every segment of the economy, at every level, if we didn't do
that. That is his feeling, his opinion.
Is there an opinion that somehow there is some systemic
risk here if we do not reimburse municipalities for their
investment in Lehman Brothers?
Mr. Thornberg, do you want to take a crack at that one?
Mr. Thornberg. You mean is there going to be some sort of
cascade effect that will bring down the entire State of
California? No, absolutely not.
Mr. Campbell. How about a cascade effect that brings down
anything else?
Mr. Thornberg. Well, again, we are in a situation, of
course, where consumers have been pulling back dramatically on
spending, which is creating a lot of turmoil inside the
economy. To allow State and local governments to also pull back
dramatically on spending creates an even more vicious cycle.
Mr. Campbell. Okay. But, in theory, any use of TARP funds
to a private entity or a public entity that results in an
activity that creates jobs could do the same thing, correct?
Mr. Thornberg. Absolutely. I agree with that.
But let me also make the point that, I mean, one of the
advantages of using TARP money for this particular situation is
that, for example, you can immediately put people back to work
because these are shovel stop projects. I mean, so this would
have one of the most immediate impacts.
One of my largest concerns about some of the spending
bills, it is just that most of the spending takes place next
year, when it is not going to be relevant anymore.
Mr. Campbell. Right, but, I mean, clearly--all right, I
understand. And, I mean, I disagree, in that I think in the
private sector--and you and I have talked for years. There is a
bigger multiplier effect in the private sector, isn't there?
Mr. Thornberg. Well, I mean, obviously, much of this money
would go to the private sector. Don't forget, like, for
example, the construction projects, that is private sector. A
lot of this money would go to external contractors.
Mr. Campbell. Okay, but we don't know necessarily where it
will go. But there is no systemic issue here.
Mr. Thornberg. No.
Mr. Campbell. So it is really not akin to TARP, I mean, to
the original purpose of the original TARP.
Mr. Thornberg. No.
Mr. Campbell. The last thing is why--and if this question
has been asked, I apologize. But if a municipality adjacent to
any of yours, or whatever, has Chrysler debt or General Motors,
which was pretty highly rated at one time, or WaMu or whatever,
why should only Lehman investors be carved out, versus all of
the other failures that have happened or are yet to occur?
Mr. Thornberg. I will just weigh in very quickly on that.
Again, I think one of the primary points that I tried to
make in my presentation was that the money we are talking about
is strictly short-run investments; that long-run investments
should not be covered under this in any way, shape, or form.
Mr. Campbell. Well, I mean, I am just talking about the
bonds.
Mr. Thornberg. Well, but these are all short-run bonds used
for current expenditures. These were not long-run bonds wrapped
up in pension funds or anything like that. Those should not be
part of this process.
Mr. Campbell. Okay. Suppose someone was invested in
something overnight or invested in 30 days, whatever, invested
in something short-run for one of these other institutions, one
of these other bonds that has failed.
Okay. All right. I will yield back the balance of my time
to the gentlelady from Illinois. Thank you very much.
Mrs. Biggert. Thank you.
I yield back.
Ms. Speier. The gentleman from Colorado, Mr. Perlmutter?
Mr. Perlmutter. Thank you.
And I appreciate the conversation and Mr. Campbell's points
and some of the remarks that you have made, Mr. Street, but
let's just start from square one.
Orange County filed Chapter 9. That is, like, one in a
million counties that file Chapter 9, correct?
Mr. Street. There have been other counties that have filed
Chapter 9 or are about to file Chapter 9.
Mr. Perlmutter. But Orange County, back in the 1990's, was
the only county to file Chapter 9, wasn't it?
Mr. Street. I believe so.
Mr. Perlmutter. Okay. And Chapter 9 is a bankruptcy, very
unusual bankruptcy for a governmental entity, correct?
Mr. Street. Yes.
Mr. Perlmutter. Okay. So that is how Orange County dealt
with its financial problems, is it filed bankruptcy.
Mr. Street. Yes.
Mr. Perlmutter. It didn't get a bailout, but it utilized
the laws of the United States to file bankruptcy. So it made a
lot of very bad investment decisions. And Mr. Campbell is
right. You compare yield and risk, and the riskier you get,
maybe the higher yield you get and the more trouble you might
get into. And Orange County got into a lot of trouble. Other
counties didn't get into trouble, at that time.
Mr. Street. There were a lot of counties that got into
trouble, a lot of cities. You just didn't hear it in the form
of bankruptcies--
Mr. Perlmutter. I am a bankruptcy lawyer. I did Chapter--I
didn't do Chapter 9's, because we didn't have Chapter 9's going
in Colorado. But I am aware of Orange County. And, really, that
was the only one--that was the signature bankruptcy in the
1990's, for sure, and in this decade too. And so, to use that
as the highlight of comparison to these other folks who
invested in, more or less, money markets with a company that
had a high rating from a rating agency is absolutely
ridiculous.
So I do appreciate the comments that you made after that,
about the fact you have to watch every nickel, because at this
time in our Nation's history, every county and every individual
and every government has to watch how it is doing. So those
points are well-taken.
But, you know, as a lousy pun, to compare Orange County to
these other counties and districts is like comparing apples and
oranges; it just doesn't really apply. Your point about
watching money closely now is correct.
I think where I have a real problem with what Mr. Campbell
was saying--he says, well, to California, ``If you don't get
your share of TARP money, will the system fall apart? If not,
then you are not systemic.'' We provided TARP money because,
across the system, everybody needed assistance. We certainly
helped the banks; now, why aren't we helping Main Street?
You can't have an objection to that, can you, sir?
Mr. Street. I think that if you pass this bill, you will
encourage risk in the future. People will see the bailout as
allowing them to take greater amounts of risk and--
Mr. Perlmutter. You don't think we have already encouraged
that by assisting the banks?
Mr. Street. I think there has been a lot of punishment
taken out on some of the executives of the bank, and I think
America actually applauds that.
Mr. Perlmutter. Let me ask you this, and then I will turn
it over to the other panelists.
Mr. Hullinghorst described the purpose of investments in
something like a Lehman Brothers or other things. And I am sure
Orange County had investments in some other companies, and
Merrill Lynch or Citibank or JPMorgan Chase. The purpose was to
also bolster commercial paper lending. Everything is connected
to everything else in the financial sector. That certainly is
something we have found.
Now, do you object to taxpayer money coming in through
local governments being used to assist with commercial paper?
Mr. Street. Taxpayer money coming in to bail out local
governments' commercial paper? Absolutely.
Mr. Perlmutter. Okay. Do you object to local governments'
taxpayer money, their own taxes, being used to purchase
commercial paper that then goes to assist businesses across the
country?
Mr. Street. I think they have investment policy statements,
and they pursue those investment policies.
Mr. Perlmutter. Did you hear any of these individuals state
that they were outside of their investment policies or the laws
of their State?
Mr. Street. I did not.
Mr. Perlmutter. Okay.
Mr. Hullinghorst, what if you were all to pull back from,
you know, buying highly rated paper that then is used for--your
funds are used to assist other businesses across the country?
Mr. Hullinghorst. The amount of investment in commercial
paper by governments is probably less than 10 percent, maybe 20
percent of our entire portfolio. I would have to be speculating
on that. But there is at least $200 billion to $300 billion
invested in pools, pooled investment funds.
And so that is roughly $30 billion. It is not going to kill
the commercial paper market, but we are in the commercial paper
market because there are specific maturity dates that we need
to meet. Sometimes those maturity dates aren't available in
other paper, and commercial paper that is A1/P1 rated is
supposed to have a maturity that you can count on.
There are two things that are going to happen if we
continue down this road and don't support municipal
governments.
One is already happening, and that is that people are
pulling out of the pooled investment funds all over the
country. One in Colorado has already failed because of its
Lehman investments because it broke the buck. It wasn't a bad
investment pool; it is just that, by the rules of the game, if
you have more than a $1 loss in a pooled investment fund, you
close the doors and you liquidate.
There is another pool in Colorado that--
Mr. Perlmutter. My time is up, but I appreciate your
comments.
And I guess I am the last person, so I would yield back.
Ms. Speier. Thank you.
Ladies and gentlemen, this brings to a close our hearing
today. I want to thank the panelists for providing us with such
great testimony.
I want to thank all of you who joined who are staff to
these jurisdictions, who came the long distance to be here
today. Will all those who are the support to those who are at
the table like to stand up so we can say, ``thank you,'' as
well, for your great participation.
I would also like to clarify that the municipal finance
hearing will be on May 21st, not on May 17th, as earlier
mentioned. So May 21st will be the hearing on municipal
finance.
And, at this time, the committee stands adjourned.
[Whereupon, at 12:28 p.m., the hearing was adjourned.]
A P P E N D I X
May 5, 2009
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