Dirty Sub Prime Deeds

We don't need to escalate
You see, war is not the answer
For only love can conquer hate
You know we've got to find a way
--What's Going On, Marvin Gaye

I see the bad moon arising
I see trouble on the way
I see earthquakes and lightnin'
I see bad times today
--Bad Moon Rising,
Creedence Clearwater Revival

Fasten your seatbelts, it's going to be a bumpy night!
--Bette Davis, All About Eve (1950)

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For another perspective on how the sub prime mortgage debacle is shaking out, Bloomberg offers this investigative piece today on the financial straits our pathetic Florida school system faces following some poor investments propped up by now junk subprime notes (Florida Got Lehman Help Before Run on School's Funds). A tantalizing subplot involves former Florida governor "No Child Left Behind" Jeb Bush, whose firm is a new consultant at Lehman Bros.

These notes were bought on the advice of Coleman Stipanovich, newly-resigned former executive director of the State Board of Administration. Until November, the Board oversaw the largest public money market fund in the U.S., holding cash for about 1,000 school districts, towns and local agencies in Florida.

Lehman Brothers offloaded the largest amount of the tainted debt into these Florida funds at a time when those assets were plummeting in value. And surprise, surprise -- former Florida Governor Jeb Bush, President George Bush's brother, who incorporated Jeb Bush & Associates in February 2007, a month after completing his second term, had been hired as a consultant to Lehman Brothers in June. All three members of the board overseeing the fund, including current Governor Charlie Crist, are mum on the matter.

"The subprime meltdown made front-page news in June, when Bear Stearns Cos. disclosed that two of its hedge funds were collapsing because they were stuffed with subprime collateral. During the next two months, Wall Street firms were quietly peddling mortgage-backed securities to the states.

"And the states, eager for higher returns, were buying them."

"Joseph Mason, a former U.S. Treasury official and now a finance professor at Drexel University in Philadelphia, says Wall Street had few takers for its subprime-tainted debt. 'When they couldn't sell it to more-sophisticated investors, they found less-sophisticated investors like local government investment pools,' he says."

Someone like JEB! (Brother Bush) would be uniquely poised to direct Lehmen Bros. to just the right local yokels, like the uber-less-sophisticated Jefferson County School Board, for one. Bloomberg writes, "Pool investors like the Jefferson County School District in Florida, which kept more than $4 million of cash in the state fund, were left scrambling to pay their teachers."

"Hal Wilson, the school board's chief financial officer, stopped checks to vendors to ensure the district's 220 employees would be able to cash their paychecks. 'It has been stolen from our local taxpayers because we entrusted their money with the state and our elected officials assured us it was safe,' Wilson says."

"States and counties run pools similar to money market funds to hold cash for school districts and local agencies. Most states require fund managers to make only short-term investments in debt such as U.S. Treasuries, certificates of deposit and corporate commercial paper, or short-term loans.

"Florida and other states have strayed from those guidelines in recent years, buying commercial paper from collateralized debt obligations, or CDOs, and structured investment vehicles, or SIVs. These investments are bundles of securitized loans, often loaded with subprime debt, which is why they offer higher returns than Treasuries.

"They also hold greater risk of default. Banks and other firms create these 'structured finance' packages and put them into a company, usually registered offshore.

Bad Day in Black Rock

"On Nov. 30, state officials hired New York-based investment management firm BlackRock Inc. to study the fund's holdings and recommend a plan. On Dec. 4, BlackRock reported that about $2 billion of the pool's holdings were in default or had significant credit risk." Dec. 4 was the day Stipanovich quit.

Stipanovich failed to tell his boss, Florida Chief Financial Officer Alex Sink, that the firm he was consulting with --Lehman Brothers -- was the same firm that had sold the state fund $842 million of mortgage-backed debt in July and August. Those securities defaulted within four months, and totaled more failing debt than any other bank sold the state, Florida records show. "At the time, I never knew it was Lehman Brothers that actually sold us these investments," Sink says.

Sink also was unaware of former Florida Governor Jeb Bush's affiliation, via Jeb Bush & Associates as a consultant to Lehman Brothers.

While Lehman Bros. denies any Bush involvement with the sale of the bad debt to Florida, Craig Holman, of Washington-based nonprofit public interest group Public Citizen, disputes Lehman Brothers' view.

"'That defies credibility,' says Holman, who lobbies for ethics in government. 'It's a clear conflict of interest. Bush is a consultant to the company selling bad investments to the same agency on which he served as a trustee until January.''' This sort of graft is nothing new to Florida, but the possible involvement of another Bush family profiteer makes it especially gross.

It is a deal right out of a Carl Hiaasen mystery, and it's smellier than the red tide-infested waters off our coast.

New state motto: Children and Teachers Left Behind.