The Wall Street Journal ran an article today entitled “Lehman’s Ghost”, which focused on the continuing fallout from the Lehman bankruptcy and how it is negatively impacting public agencies in San Mateo County. You may recall that, collectively, public agencies which were required to invest their funds in the County-run investment pool lost $155 million when Lehman went bankrupt. Courtesy of the fact that the County Treasurer’s office had almost 12% of the entire portfolio invested in Lehman paper shortly before Lehman declared bankruptcy.
While not a focus of the article (which is quite good, by the way), certain lines in it glossed over the role the Treasurer’s office played in the debacle, and the public reaction to that role.
Which prompted Seth Rosenblatt and me to write a letter to the editor of the Wall Street Journal.I don’t know if they’ll print it, but here it is in its entirety:
Dear Editor:
As trustees for an elementary school district in San Mateo County and former private‑sector chief financial officers, we read John Carreyrou’s recent article with great interest. We commend him for accurately portraying the continuing impact the Lehman bankruptcy is having on the County.
However, we are compelled to clarify one aspect of the article: while there is much anger in the County over local agencies being left to twist in the wind, there is also much anger over the way in which the County investment pool was managed. Mr. Buffington, the County Treasurer, may have stayed within the portfolio limits specified by law. But that hardly means the decisions of his office were reasonable or prudent. As one of our constituents, himself a portfolio manager of a similar fund at a major public company, put it, “If I ever allowed a single company position in my portfolio to exceed 2%, let alone approach 10%, I’d be fired.”
Yet that is precisely what Mr. Buffington’s office did. Their July 31, 2008 report showed, for example, that Lehman holdings were 11.8% of the total portfolio. Given the pool’s conservative nature, it is shocking Mr. Buffington thought it prudent to hold such a concentration of any single issuer. The same July report showed the pool having over 57% of its funds invested in the financial sector (84% if you include entities such as Fannie Mae and Freddie Mac). While essentially all the investments were in credit instruments, that’s hardly a diversified investment portfolio.
The fund’s stated investment goals at the time – in order of decreasing priority — were safety, liquidity, yield, avoiding leverage, and maintaining public trust. Yet our recollection is that the Treasurer’s office tended to focus on yield in its reports and communications. In fairness to Mr. Buffington, we suspect he was under pressure from some agencies to increase yield to compensate for California’s deteriorating public finances.
But his office has a duty to resist those pressures, so as to preserve and protect the funds of agencies such as our own, which operate with a small enough financial cushion that they cannot afford to lose the money they are required to invest with the County. In our opinion, he and his office failed in that duty, leaving public agencies throughout the County to deal with the consequences.
Very Truly Yours,
Mark Olbert and Seth Rosenblatt
Governing Board Members, San Carlos (CA) School District