It may surprise you but when Wall Street firm Lehman Bros went bankrupt in 2008, three of the biggest losers were municipalities in Florida. They are Sarasota County, Port St. Lucie and St. Petersburg. In fact, Sarasota County was the second biggest loser among all counties affected by Lehman Bros while Port St. Lucie was fifth and little St. Petersburg was in an unenviable sixth place. They each lost $40 million, $18 million and $16 million respectively. Just goes to show how far-reaching Wall Street firms’ influences can stretch and the dangers of cities getting involved in complex financial transactions just to earn a bit of extra income.
St. Petersburg fell victim to the Lehman collapse because they held Lehman Bros bonds or other securities. Today two years on, the Floridian municipality is still feeling the pinch. In total, dozens of counties and cities across the US have lost about $1.7 billion when Lehman Bros went bankrupt, in particular those in California and Florida, the two states that had the greatest exposure.
In many cases, the counties and cities got themselves into trouble because of a practice called ‘securities lending’. This is a practice where the city acts as a bank and lends out its investments for a short period of time and makes a small profit in the process. St. Petersburg has been practicing securities lending since 2001.
However in 2007, the bank handling the securities lending, Wanchovia Bank made significant deviations from the rules set up to govern these transactions. These deviations put the city’s loans at greater risk than normal resulting in a loss to the city of more than $15 million. When Lehman Bros folded, the city could not claim anything from the collateral it held because they had become almost worthless.
Did the St. Petersburg seek redress from the bank, Wanchovia? Apparently it did contemplate initiating legal action early last year but the move somehow never took off the ground. It was conveniently forgotten when one mayor, Rick Baker ended his term and another one, Bill Foster started his.
Another key personnel change is St. Petersburg’s long standing financial director, Jeff Spies. He will be retiring in May but that doesn’t mean the city’s losses would be recouped by then.
What about soliciting help from the federal government? At this point in time, it seems unlikely as the Obama administration and specifically, Timothy Geithner, the Treasury secretary has declined to use funds from the government’s Troubled Asset Relief Program, or TARP, to bail out municipalities.