Jeb Bush was one of 3 people managing the investments of the Florida State Board of Administration. The SBA runs an investment pool of municipalities' cash and also the state's $170 billion pension fund. The SBA administrator appointed by Jeb is Coleman Stipanovich, brother of J.M. "Mac" Stipanovich who managed Jeb's campaign for governor and advises Katherine Harris.
The SBA investment pool is now frozen after $10 billion was withdrawn, and what's left is financial toxic waste. Hundreds of Florida cities, counties, school districts and fire departments are at risk of defaulting on salaries over a payroll weekend.
No salaries means no Christmas for Florida's civil servants. Thanks Jeb!
Below I go into the reasons to think that Jeb might have used the SBA to loot the municipalities and pensions of Florida on behalf of cronies for over $1.2 billion.
This month saw a run on the SBA investment pool, with over $10 billion withdrawn by nervous county treasurers from Orange, Miami-Dade and Broward counties after Bloomberg revealed $700 million in defaulted assets might compromise the fund. They were smart. The assets left are toxic waste with no market.
On Thursday the current SBA board Gov. Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum froze withdrawals from the SBA investment pool.
Their decision was over the objection of Stipanovich, who wanted to loot the $140 billion SBA pension fund to cover further withdrawals from the SBA investment fund.
But Sink, the board's lone Democrat, questioned the legality of pledging money that is intended for retired state employees, school teachers and county employees. Sink instead called for outside financial managers to evaluate the idea and report back to the board by next Tuesday.
When asked whether or not she was had lost faith in the board staff, Sink responded that cities and counties have had a ''crisis of confidence'' by withdrawing billions from the state run fund.
The SBA pool acts like a money market fund, as a place to park spare cash until it is spent by municipalities. Because the cash in the pool is cash which municipalities need to spend for routine things like salaries and expenses, the expectation is that the pool should only invest in liquid and safe assets like Treasury bills and certificates of deposit so that funds will always be available as needed.
But that's not how it works in a Bush-run Florida. The chart below from the SBA website brags about outperforming the market.
Hat tip Mish!
Treasurers in Florida wanting to chase an extra 0.1 or 0.2 percent yield may well have bankrupted their counties and cities by trusting Jeb and his gang. There is much less to the pool than meets the eye.
The SBA has a history of making unwise investments in Bush crony companies. It lost over $500 million investing in the stocks of Bush crony companies Enron and Edison Schools while Bush was governor. Now it has lost at least $700 million more.
So what are the latest losses and where was Jeb?
The run on the fund was triggered by worries that a percentage of the portfolio contained debt that had defaulted.
A majority of this paper was sold to SBA by Lehman Brothers. Bush, as the state's top elected official, served on a three-member board that oversaw the SBA until he retired as governor in January. In August, Bush was hired as a consultant to the bank. Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.
While SBA wouldn't confirm, Bloomberg reported the amount of debt in default is around $900 million.
Edward Siedle, a former Securities and Exchange Commission attorney who investigates money management wrongdoing and has worked on behalf of several Florida public pension funds, thinks this is just the tip of the iceberg. He expects problems with defaulting debt to crop up in public funds across the country, especially in states with disclosure laws weaker than Florida's.
So Jeb pushed a bunch of Lehman Brothers toxic waste sub-prime into the municipalities investment pool he ran as governor and then took a job with Lehman Brothers. Why am I not surprised?
What this means for Florida going forward is unclear as I write. It appears some cities and counties were able to sweep funds from other accounts to make payroll, but others probably weren't. If the payroll payments are not funded, they may not be paid.
The payroll instuctions are fully automated and went out before the crisis was determined by Thursday's freeze of withdrawals. Treasurers assumed they could fund the payroll from withdrawals on Friday as they customarily did. If they did not have cash elsewhere - and many used the SBA pool for all their cash - then it will be up to the banks whether to make the payroll against an overdraft or stop all payroll payments.
The Ledger:
Wayne Blanton, the executive director of the Florida School Boards Association, said the freeze's impact on school operations depends on whether any money can be withdrawn.
"If we can get payroll money out, we can delay paying the other issues for a few days," he said. "If you can't make your payroll, then you've got major problems tomorrow and this weekend."
As of today, Bloomberg reports the municipalities have formed an emergency advisory board to represent their case for 100 percent access to their money to the SBA. The SBA is looking for an advisor to give an independent view of what they should do, although they are having trouble finding anyone in American financial services without a conflict of interest due to the scale of the sub-prime crisis. In the meanwhile Standard & Poors wants to know whether it should downgrade all the bonds issued by municipalities with assets in the SBA fund given their compromised financial condition. This could roll into a major liquidity crisis for Florida, and if repeated elsewhere, all municipalities that depend on bond markets for finance and investment pools for cash management.
The video linked here from Bloomberg gives you an idea of the panic: Florida Stops Withdrawals.