WASHINGTON — Rep. Anna Eshoo will soon introduce legislation requiring the Treasury Department to use some of the profits it obtains from the sale of troubled assets under the TARP program to provide relief to local governments that lost money from the September 2008 Lehman Brothers collapse.
The California Democrat disclosed her plans in written testimony provided to the House Financial Services Committee during a hearing.
Though the hearing was supposed to focus on the policy issues raised by Lehman’s collapse, it kept degenerating into partisan bickering over the need for pending financial regulatory reform legislation.
Treasury Secretary Timothy Geithner has repeatedly insisted the Treasury has no intention of using Troubled Asset Relief Program funds to purchase Lehman securities from state and local governments. He said during the hearing that if Congress takes up and passes such legislation, he will abide by it.
Geithner said he realizes municipalities have “suffered an enormous amount” from the financial crisis. But he added that the Treasury does not have authority under TARP to compensate them for their Lehman-related losses. That is why the administration supported the American Recovery and Reinvestment Act, which provided funds and other assistance to state and local governments, he said.
When Rep. Jackie Speier, D-Calif., a committee member, asked Geithner if he would use TARP-related funds for local governments if authorized to do so by Congress, he replied, “If Congress writes me that authority, of course I would do that.”
Speier is expected to co-sponsor Eshoo’s bill. She introduced similar legislation in January 2009, with Eshoo as a co-sponsor, but it never moved past the House Financial Services Committee.
In her written testimony, Eshoo suggested it is time to revisit the issue because the federal government is receiving billions of dollars from dividends, interest, and the sale of bank stock from banks to which they provided assistance during the financial crisis.
“At a time when saving those institutions, which were deemed 'too big to fail,’ we shouldn’t overlook those who are being treated as though they are too small to help,” she said.
San Mateo County, Calif., lost $155 million of investments from Lehman’s collapse and is “now reeling financially” and suffering from teacher layoffs, school construction plans halted, and the cancellation of transportation projects, Eshoo said. More than 40 local governments across the nation lost almost $1.7 billion from the firm’s collapse, she added.
Rep. Ed Perlmutter, D-Colo., another committee member, said Lehman’s bankruptcy filing rocked many school districts and local governments in his state. A group of 63 localities invested in Lehman commercial paper through a local government investment pool called the Colorado Diversified Trust Pool, he said. After Lehman went under, the CDT was disbanded and the localities’ $5 million investment is illiquid.
The backdrop for the hearing was a report by Anton R. Valukas, the court-appointed examiner of Lehman’s bankruptcy. Valukas found that the Securities and Exchange Commission and Federal Reserve Bank of New York knew in 2007 that Lehman had far less liquidity than it had disclosed and were concerned about the firm’s financial condition, but took little action.
Lehman used an accounting device known as Repo 105, the only purpose of which was to temporarily remove $50 billion of balance-sheet assets to artificially reduce the firm’s reported net leverage in quarterly financial filings, he said.
SEC chairman Mary Schapiro, who took over the commission after Lehman’s collapse, said that at that time, “the SEC didn’t have the staff, the resources, and, to be honest, the mindset” to be a prudential regulator under a Consolidated Supervised Entity program that was designed to monitor banks at the holding-company level. The program, which is now defunct, was “flawed in its design and never adequately resourced,” she said.
“The SEC is determined to become a more effective regulator,” Schapiro said. She noted that the SEC has asked major financial institutions for detailed information about their use of repos and that the staff is currently reviewing their responses against the firms’ periodic financial statements. The responses will be made public at some point.
But the hearing was rife with partisan bickering, with Republicans claiming the Lehman collapse shows federal agencies did not use the authority they had at the time and that, as a result, it is ridiculous to provide them with new regulatory powers. Democrats countered, warning the firm’s demise shows that the regulators did not have sufficient powers and that there were regulatory gaps that will be remedied by the pending reform legislation.