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Daniel Roland/AP
A worker holding a box leaves the Lehman Brothers headquarters at Canary Wharf in
London in September of 2008.

Lehman Brothers’ Demise Hurts Public Entities, University Endowments

May 11, 2009 07:30 AM
by Anne Szustek
Nearly eight months after the bankruptcy of long-time investment bank Lehman Brothers, its legacy is emerging in budget crunches across America.

Lehman Fallout Hits Home

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During its 158 years, investment bank Lehman Brothers had a storied history that inspired trust. Founded in the 1850s by Bavarian immigrants taking their cotton trading enterprise to what seemed to them to be the next logical step, a financial trading enterprise, it helped fund America’s westward expansion by backing the U.S. railway system. It emerged from the Great Depression relatively unscathed, thanks to its focus on venture capital—in effect, helping other companies survive the rough-and-tumble economic conditions of the day.

So when state and local governments sought a safe place to tuck away public coffers, Lehman seemed to be a good bet. But now, with Lehman gone the way of a 14,000-point Dow, local governments are in court trying to squeeze money from their dried-up Lehman securities, heading on Tuesday to Washington, D.C., to plead their cause. Several public officials testified in front of the House Financial Services Committee to ask them to support legislation to tap into the $700 billion bailout bill, known formally as the Troubled Assets Relief Program, or TARP, to revive Lehman investments purchased by governments.
As of last September, when Lehman went bankrupt, Florida had some $300 million in Lehman investments, $40 million of that held by Sarasota County, according to statistics supplied by the Associated Press and the Miami Herald. The Sunshine State’s Lehman-related losses now exceed $465 million. Sarasota County comptroller Karen Rushing told the Congressional committee that because of its loss, the county has had to put off a new fire station and parks and scale back available resources for transit systems and libraries, resulting in less infrastructure spending and fewer jobs.

San Mateo County in California lost some $155 million in relation to Lehman investments; Minnesota, more than $65 million; Missouri, $50 million, Arizona, $61 million and Oregon, $173 million. Rushing estimates that every $10 million in losses equates to the loss of 95 employment positions. From a financial risk perspective, government representatives argue that they were investing in high-rated bonds, as opposed to speculative investments. But some Congress members are looking askance at the bailout requests. Rep. John Campbell, R-Calif., was quoted as saying by the Miami Herald, “You guys were chasing yield … with that comes risk.”

Private entities have also felt Lehman’s fallout. Boston University had Lehman as its investment banker and AIG as its bond insurer. Despite moving its assets into secure government securities, BU’s endowment went down to $840 million from $1.2 billion last year, marking a year-on-year decrease of 30 percent, meaning potentially less money for financial aid, staffing and campus development projects.

Background: The end of Lehman Brothers, U.S. investment banks

On Sept. 14, Lehman Brothers filed for Chapter 11 bankruptcy, officially ending the investment bank’s 158-year run. Two days later, British bank Barclays announced that it had agreed to take over most of Lehman, sparing its bad debt.

Lehman was more than $613 billion in debt, much of it on the back of subprime mortgage losses. Lehman closed its subprime lender BNC Mortgage in June 2007. Earlier that summer, Lehman rolled together its nonprime lending unit Aurora Loan Services, which concentrated on Alt-A loans, into BNC. Because Lehman was formally classified as an investment bank, it was unable to take deposits.

Fearing for their survival, Morgan Stanley and Goldman Sachs, the remaining two U.S. investment banks, converted to “holding companies,” which allowed them to take deposits, considered a more dependable stream of capital. As a result, their governmental oversight now comes under the Federal Reserve and the FDIC, rather than the Securities and Exchange Commission as before. More poignantly, the two financial organizations’ change in status spelled the end of Wall Street’s investment banking era.

Related Topic: Was naked short selling the means to Lehman’s end?

Bloomberg’s Gary Matsumoto wrote an article published on March 19 arguing that the sale of Lehman Brothers stock that failed to deliver constitutes naked short selling, was an illegal act of market manipulation in which stock that might not exist is sold. He reported that “as many as 32.8 million shares in [Lehman Brothers] were sold and not delivered to buyers on time.”

But Matsumoto’s argument has its share of detractors. Among them is financial journalist Gary Weiss, who said in an IM interview with Condé Nast Portfolio magazine that the Bloomberg piece that there are many reasons for fails to deliver on stock. He argued that automatically blaming naked short selling amounts to “stock market conspiracy theories.”
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