Treasurer: Lehman brothers bankruptcy 'perfect storm'

The bankruptcy of Lehman Brothers Holdings — the Wall Street investment firm whose downfall siphoned $150 million from local coffers — was a "perfect storm” which could not have been foreseen or staved off, County Treasurer Lee Buffington told county supervisors Tuesday morning.

Buffington, the elected official whose office oversees the County Investment Fund which had money in Lehman Brothers, conceded he could have reacted better to the devastating loss instead of leaving investors feeling stonewalled in the first days.

"The pool members have the right to expect we communicate promptly and completely,” Buffington said. "We were lacking in communication at first and I take full responsibility.”

However, Buffington said noteholders were made whole by previous buyouts such as the takeover of Countrywide by Bank of America. He believes the same would happen with Lehman Brothers which helped steer the decision not to sell off the holdings at a definite $30 million loss before the complete bankruptcy.

The Lehman situation was "a perfect storm” that "came at a very abrupt point,” Buffington said. "It came very quickly and it just doesn’t happen ... nobody’s every lost money prior to this point,” Buffington said.

The County Investment Fund involves 1,050 different accounts with some cities and districts having more than one fund invested. The fund had 5.9 percent of its $2.6 billion in Lehman Brothers, leading to a loss of just more than $150 million for investors. County schools, which must invest money in the fund, will lose $37.3 million while Peninsula cities’ losses range from the hundreds of thousands of dollars to more than $1 million.

The Board of Supervisors called Buffington to Tuesday’s meeting to explain publicly how the fund works and the sequence of events before and after the bankruptcy.

Lehman was historically considered a safe investment but the county began looking at potential problems as other firms fell on hard times, Buffington said.

Since the bankruptcy, Buffington wrote the loss down to zero which he said helps the other pool participants. At a Finance and Operations Committee meeting yesterday afternoon, some questioned the move and asked for a survey of investors to see if they’d prefer to take 9 to 12 cents on the dollar.

The subcommittee is floating the idea of changing the investment policy, including greater diversification and limited investments to 2 percent of any one entity.

Buffington does not agree with the proposal, saying everything in the portfolio was under 5 percent and never approached the current 10 percent maximum. Diversity, too, he added will double the number of items the Treasurer’s Office will need to track daily.

The committee made no decisions on the policy change proposals but supervisors Mark Church and Richard Gordon, the co-chairs, estimated action in January or February.

Redwood City Mayor Rosanne Foust asked them to consider more immediate steps on behalf of schools such as those in the Belmont-Redwood Shores School District. The new elementary school is set to open in September 2009 but is in jeopardy with $1.1 million directly affected by the Lehman Brothers losses.

The Board of Supervisors did agree to put on the request for proposal for a third-party consultant to review the loss and the fund as a whole. Jean Holbrook, county superintendent of education, emphasized how the fund loss coupled with other budget hits from the state and property tax refunds, threaten to push some schools to below the mandated 3 percent reserve level.

"We are in crisis,” she said.

The district has retained its own forensics experts to investigate the finances and expect findings by the end of December.

Michelle Durand can be reached by e-mail: michelle@smdailyjournal.com or by phone: (650) 344-5200 ext. 102.