[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                   THE EFFECT OF THE LEHMAN BROTHERS
                        BANKRUPTCY ON STATE AND
                           LOCAL GOVERNMENTS

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 5, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-26




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel











                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 5, 2009..................................................     1
Appendix:
    May 5, 2009..................................................    45

                               WITNESSES
                          Tuesday, May 5, 2009

Eshoo, Hon. Anna G., a Representative in Congress from the State 
  of California..................................................     9
Galatolo, Ron, Chancellor, San Mateo County Community College 
  District.......................................................    18
Gordon, Hon. Richard S., Supervisor, San Mateo County Board of 
  Supervisors, California........................................    19
Hullinghorst, Hon. Robert, Treasurer, Boulder County, Colorado...    20
Rushing, Hon. Karen E., Clerk of the Circuit Court and County 
  Comptroller, Sarasota County, Florida..........................    17
Speier, Hon. Jackie, a Representative in Congress from the State 
  of California..................................................     7
Street, Hon. Chriss W., Treasurer, Orange County, California.....    23
Thornberg, Christopher, Economist, Beacon Economics..............    21

                                APPENDIX

Prepared statements:
    Eshoo, Hon. Anna G...........................................    46
    Speier, Hon. Jackie..........................................    49
    Church, Mark.................................................    53
    Galatolo, Ron................................................    56
    Gordon, Hon. Richard S.......................................    58
    Hullinghorst, Hon. Robert....................................    62
    Rushing, Hon. Karen E........................................    64
    Street, Hon. Chriss W........................................    66
    Thornberg, Christopher.......................................    72

 
                   THE EFFECT OF THE LEHMAN BROTHERS
                        BANKRUPTCY ON STATE AND
                           LOCAL GOVERNMENTS

                              ----------                              


                          Tuesday, May 5, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Moore of Kansas, 
Clay, McCarthy of New York, Baca, Lynch, Scott, Green, Cleaver, 
Hodes, Ellison, Klein, Perlmutter, Donnelly, Carson, Speier, 
Kosmas; Bachus, Royce, Manzullo, Biggert, Hensarling, Garrett, 
Neugebauer, Price, Campbell, Posey, Jenkins, Paulsen, and 
Lance.
    The Chairman. The hearing will come to order.
    This hearing is called at the request of two Members of the 
House: one is a member of this committee, the gentlewoman from 
California, Ms. Speier; and the other is the gentlewoman from 
California, Ms. Eshoo. They share representation of San Mateo 
County, which was one of the victims of the collapse of Lehman 
Brothers and the inability of Lehman Brothers to make any 
payments on the debt it owed.
    They made the entirely reasonable request that we begin the 
process of examining what we can do for public entities that 
have lost funding in these situations. We will get to the 
specific question of the Lehman Brothers failure. But there are 
a couple of points that I think this illustrates in a broader 
way that we want to talk about.
    As is often the case, we find it I think easier to figure 
out what to do to prevent a recurrence of something unfortunate 
than to undo the consequences of it. This, to me, is a clear 
example of why there needs to be in the Federal Government the 
power to unwind nonbanks.
    We have, through the FDIC, the power to deal with 
situations where a bank is unable to meet its obligations. We 
are in that situation because of deposit insurance. But it 
became clear last year that there are problems that occur when 
nonbanks are unable to meet their obligations.
    Now there are several things we should be doing about that. 
One, I am confident that before the end of the year, we will 
have signed by the President legislation that makes it much 
less likely that these institutions will become indebted to the 
point where they cannot pay off their debts. There are 
restrictions that should be imposed that are not now in 
existence to deal with that. But no system will be fail-safe. 
And therefore, there needs to be a method of genuine failure.
    When banks fail, it is disruptive, but not to the degree 
that it is when nonbanks have failed. Wachovia, Washington 
Mutual, several banks failed. We had a mechanism in place for 
dealing with them. But the failure of nonbanks, we have had 
three different results that I can think of, none of them even 
close to satisfactory.
    First came the failure of Lehman Brothers. When Lehman 
Brothers failed, the Bush Administration tried to find some way 
to deal with the indebtedness and was unable to do so. There 
had been a prior successful effort on their part, as they saw 
it, to do that with regard to Bear Stearns, and they got the 
Federal Reserve to pick up some of the obligation, although it 
feels it is well collateralized here, and they got JPMorgan 
Chase to take the rest. They could find no better institution 
ready to do that for Lehman Brothers.
    There was some hope at the time that Barclays Bank would do 
it. There was some resistance, I am told, on behalf of the 
British authorities. At any rate, Lehman Brothers failed, and 
nobody stepped in. It was very soon the conviction of people in 
the Bush Administration that the failure of Lehman Brothers 
with no alleviation, no effort to pay off any of its creditors, 
was the single worst thing that happened in the economy in 2008 
and moved from pretty bad to God-awful.
    As a consequence, when AIG faced the same situation, the 
decision of the Bush Administration was to prevent any failure. 
So, whereas in Lehman Brothers, nobody got paid off; in AIG, 
the decision of the Bush Administration was to pay everybody 
off. That has also not been the best received decision in the 
history of the Republic.
    Then we had the Merrill Lynch example, another nonbank that 
was failing. And there the Administration encouraged, in 2008, 
Bank of America to buy it, similar to what had been done with 
JPMorgan Chase and Bear Stearns.
    Later in the year, last year, Bank of America discovered 
that Merrill Lynch was in worse shape than it had thought. So 
it indicated that it wanted to let it drop. Once again, the 
Bush Administration, having seen the cataclysmic effects in 
their minds of Lehman Brothers, said, no, you can't do that. So 
they--and this is now being debated--encouraged, insisted, 
cajoled, bribed, whatever because the TARP money was involved. 
At any rate, as a consequence of these discussions between the 
Bush Administration and Bank of America, Bank of America bought 
Merrill Lynch or continued with the purchase.
    So we have had three approaches to failed nonbanks: Lehman 
Brothers, where nothing happened; AIG, where everything 
happened; and Merrill Lynch, which was Bank of America buying 
it. In no case did we receive a satisfactory outcome. That 
strongly argues to us later this year to have in place what 
Secretary Paulson had called for, what the Obama Administration 
calls for using the bankruptcy power under the Constitution to 
tailor a statute that empowers some combination of Federal 
authorities to resolve an institution, and that allows 
differential levels of payment.
    We see this in the Chrysler bankruptcy. There will be an 
effort to, because it is bankruptcy, do that. But that does not 
resolve the problem for the current creditors, and that is what 
we would be talking about. So I do note that this underlines 
the importance of a method of resolving institutions, and we do 
have undeniably a situation where this public entity, San Mateo 
County, can say, gee, we made a terrible mistake. We invested 
with Lehman Brothers when it went bust. We should have done it 
with AIG, because if we had been AIG creditors, we would have 
gotten paid. It is only Lehman Brothers creditors that were not 
paid.
    There is no principle of any sort that can justify that 
result, and our job is to try and see if it can be dealt with.
    The gentleman from Alabama is now recognized for 4 minutes
    Mr. Bachus. I thank the chairman.
    Mr. Chairman, you have pointed out what I think is obvious 
to everyone, and that is that the Federal Government, the 
regulators did take different approaches. They let Lehman fail. 
They did not in the case of AIG. And this created winners and 
losers. You have argued that the worst thing that the Federal 
Government did was to let Lehman fail.
    The Chairman. If the gentleman would yield. I have made no 
such argument. I was quoting the Bush Administration. It was 
the Bush Administration, as I tried to make clear, the Bush 
Administration's conclusion that this was a terrible thing. I 
did not express an opinion.
    Mr. Bachus. I was thinking you were acknowledging that.
    For any institution to fail, it is a bad thing. However, I 
think what was the worst thing, and you did point it out, is 
that there was one approach taken for AIG, and one approach 
taken for Lehman. And it certainly doesn't appear equitable or 
right.
    However, I think the mistake was not that they should have 
bailed everybody out, but that they shouldn't have bailed 
anybody out.
    I know some of the witnesses, it is predictable, and 
Congresswoman Eshoo, I have great respect for you.
    And I can say, as a result of when you do something for one 
company and its bondholders and investors, you don't for 
another; it obviously creates an environment where someone 
steps up and says, why don't we make the municipal investors in 
Lehman whole?
    But I think it was a mistake to intervene and make the AIG 
investors, people who had invested in that, whole, and I think 
it would be a mistake to do this in Lehman's case.
    But I respect your opinion.
    Bottom line, I think the American people are in a state of 
bailout fatigue. The U.S. Government has committed over $9 
trillion to bailouts or interventions. And I think most 
American people want to know, when does it end? And while I do 
see the reasoning behind H.R. 467, you know, it just again 
commits the American taxpayer to yet another costly obligation, 
because it requires the Treasury Secretary to pay any 
municipality holding Lehman debt as of September 15, 2008, and 
I believe in the full face value of the bond. And that is an 
obligation that the taxpayers would have to take up.
    The taxpayers have been, I think, saddled with too many 
obligations on investment decisions gone bad. And while I do 
see the unfairness of doing something for one and not the 
other, I personally am opposed to more taxpayer-funded 
guarantees and bailouts.
    The municipalities did suffer considerable losses after the 
collapse of Lehman. I think, had we avoided the first 
intervention, we wouldn't be here today. And I think, had we 
not bailed out AIG, you wouldn't be here today with this bill.
    As I said, and I am just going to close, I think that 
Lehman was really what we should have done, in that we should 
not have bailed out--we shouldn't have ``too-big-to-fail.'' And 
we do need a resolution authority. We do need a systemic 
regulator.
    But I think what we do with those is we have an orderly 
resolution and probably in bankruptcy or bankruptcy-like 
provision. And without any guarantee on the part of the 
taxpayers, I think that is the key, that we are not going to 
obligate the taxpayers, we are not going to have the government 
in the intervention business. And I am afraid that what this 
legislation would do, it would just be another step down the 
road that we shouldn't be on, not something that started with 
Lehman but something that I must oppose.
    Thank you.
    The Chairman. The gentleman from New Hampshire is 
recognized.
    Mr. Hodes. Thank you, Mr. Chairman.
    And thanks for holding this very important hearing about 
the collapse of Lehman Brothers and its effect on State and 
local governments.
    Many communities across the country, including in my home 
State of New Hampshire, of Nashua, Manchester, and others, have 
been very hard hit by the failure of our capital markets.
    In February of this year, Mr. Chairman, we wrote a letter 
to Chairman Bernanke and Secretary Geithner asking them to 
provide assistance to States and localities that have been hurt 
by the economic downturn. Clearly, the inability to issue bonds 
has severely limited the ability for towns to raise capital in 
the ordinary course in order to fund the kinds of projects that 
they used to fund all the time: roads; sewers; and other public 
works.
    As this hearing focusing on the impact of the Lehman 
Brothers collapse will no doubt demonstrate, further liquidity 
is needed for States and localities across the country. Many 
are still waiting for the short-term liquidity market to be 
active again. And hopefully, while we may debate 
interventionist or noninterventionist policies, while we make 
talk about whether it is AIG or Lehman Brothers that was the 
worst part of all this, it is up to us in Congress to find a 
way to help our community.
    So I welcome my colleagues here today and look forward to 
discussing what solutions Congress can offer the American 
people.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman from California is recognized 
for 2 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I would like to welcome Mr. Street from Orange County, 
California, who is going to be testifying on the second panel. 
By all accounts, I think Lehman Brothers was and is today a 
failed institution. The firm was very highly leveraged. It had 
significant exposure to the mortgage market, including the 
subprime sector. It had over $6 billion in subprime. It even 
owned a subprime mortgage originator, and institutions ignored 
those risks.
    I am afraid we are moving away from personal and 
institutional responsibility on a massive scale. I voted 
against TARP because of this, and I have opposed other 
government bailouts because I am becoming increasingly 
concerned with the Federal Government's new role as savior of 
all things failed.
    The Federal Government must get out of the business of 
picking winners and losers. There have been other 
municipalities that took significant losses on failed 
investments over the years without receiving government 
assistance. Orange County, California, took a hit in the 
1990's, and a lesson was learned that it was a dangerous 
endeavor for county treasurers to use taxpayer funds to invest 
in products local governments do not understand.
    I am afraid our incessant desire to reward those poor 
investment decisions will inevitably weaken, if not erase, 
market discipline. The strength of your ties to the Federal 
Government should not be more important than counterparty due 
diligence in your ability to make prudent investments. 
Unfortunately, Congress has repeatedly signaled the opposite in 
recent months.
    I yield back the balance of my time, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Hensarling, for 
2 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Bailouts beget bailouts which beget more bailouts. As 
Members of Congress, we have to ask ourselves the question, how 
many more bailouts can the taxpayers in future generations 
bear?
    Last week an economic plan, a budget was adopted that will 
triple the national debt in 10 years, more debt in the next 10 
years than in the previous 220, leading to a debt burden of 
$148,926 per household.
    Now stocks are down. People have lost $11 trillion since 
the peak in the market, $11 trillion. Pension funds have lost. 
Charities have lost. Families have lost. Small businesses have 
lost, and yes, municipalities in State governments have lost as 
well.
    The question I have, Mr. Chairman, is, who hasn't lost? And 
who isn't hurting in this economy? So if everyone who lost 
money in the market is to bail out everyone else who lost money 
in the market, are we truly better off? I think not.
    How about the States and municipalities that lost money in 
Circuit City? Where is their bailout? How about the Washington 
State Investment Board that lost millions and millions in WaMu? 
Where is their bailout? How about the State of North Carolina 
State Pension Fund? They are down $17 billion. Where is their 
bailout? And a couple near and dear to my heart, small 
businesses in the Fifth District of Texas, United Rentals, 
Mineola Mercantile. They went out of business. Where is their 
bailout?
    Once you absolve people of responsibility, you will beget 
more irresponsible behavior. We will also end up with firms 
that only invest in the largest firms that are perceived to be 
too-big-to-fail. This is a bad idea, and I do not believe we 
should go down this road for taxpayers and for future 
generations.
    I yield back the balance of my time.
    The Chairman. The gentleman from Georgia, Mr. Scott, for 2 
minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    I congratulate you on having this hearing. I think that the 
fundamental question we have before us now is, what do we do 
going forward that is in the best interest of the taxpayers?
    Lehman Brothers in this situation presents us with a unique 
set of circumstances because, as a double whammy hit here on 
the taxpayers, as we know, when AIG was bailed out and others 
because of a ``too-big-to-fail,'' Lehman was left out. And here 
is what happened. Millions of taxpayers' dollars were lost, but 
those dollars didn't just evaporate. They had been invested by 
cities and counties and State agencies, and many of these 
moneys were invested in a pool arrangement where millions were 
put into bond revenues for new construction projects at their 
new community colleges, at schools, community clinics, etc.
    So the question now before us is, is it fair for these 
taxpayers who will be paying off the bonds for years to come to 
have nothing to show for it? And is there not some rationale 
for Treasury to be able to come in and be able, not to rescue 
Lehman now--that is off the books. The question is, is it 
proper for the Treasury Department to come in and rescue the 
taxpayers? I think that is the question before us today.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman from Georgia, Mr. Price, for 2 
minutes.
    Mr. Price. Thank you, Mr. Chairman.
    It is extremely important for us to be discussing the 
Lehman Brothers bankruptcy in the context of the full 
committee. But I would also suggest and like to draw attention 
to the fact that we still haven't had a hearing on the collapse 
of Bear Stearns, which undeniably shaped the public 
expectations for the government bailout of Lehman Brothers.
    On April 7, 2008, Ranking Member Bachus and 16 members of 
this committee sent a letter to the chairman requesting a 
hearing specifically on Bear Stearns, which has not yet 
occurred. We have not had a hearing focused specifically on the 
events that led to the Lehman bankruptcy, derivatives, or the 
SEC's now defunct Consolidated Supervised Entities Program, 
which supervised Lehman and the four other investment banks.
    In the wake of Bear Stearns, and leading up to the 
bankruptcy of Lehman, many investors continued to purchase 
bonds or commercial paper issued by Lehman Brothers. In a 
normal functioning market, without suspicion of government 
backing or bailouts, investors would have likely been much more 
cautious, investing elsewhere and spreading their risk. 
Protecting risk seems to be the primary issue that has brought 
us here today.
    Our Nation has a system that, though painful, works 
extremely well in times of great challenge. It is the 
bankruptcy system. And I would suggest that the Lehman 
bankruptcy actually unfolded relatively smoothly. While many 
would like to attribute this unprecedented event to the 
inadequacies of the bankruptcy system, the more accurate 
culprit is the government's unpredictable meddling in the 
market. This certainly contributed more than any 
insufficiencies within the Bankruptcy Code.
    The situation with Lehman Brothers, the government created 
an unreasonable expectation that led to increased economic 
turmoil. Part of getting this country back on track is getting 
the government out of the market and out of the business of 
eliminating risk. Investments involve risk and reward. If we 
take away all the risk, there will be no reward for anyone, no 
opportunity for anyone, and no reason to invest in the future. 
We should look at that.
    The Chairman. The committee will now begin the hearing, and 
we will hear from our two colleagues.
    First, we will hear from the committee member, the 
gentlewoman from California, Ms. Speier.

 STATEMENT OF THE HONORABLE JACKIE SPEIER, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Speier. Thank you, Mr. Chairman.
    Thank you for convening this hearing today to examine the 
devastating impact of the failure of Lehman Brothers as it 
relates to State and local governments.
    Although San Mateo County has been hit particularly hard, 
this is truly a national problem, and I want to underscore 
that, as you will hear from witnesses today from California, 
Colorado, and Florida. There are affected communities in at 
least 20 States, from Alaska to Washington to Massachusetts. 
Some of the losses are relatively small, but Minnesota lost 
more than $56 million. Missouri lost $50 million. Oregon lost 
$173 million. Washington lost $130 million, and Florida, 
already hit hard by two natural disasters and a recession, lost 
more than $465 million.
    I would like, Mr. Chairman, to ask unanimous consent to 
enter testimony from some other affected entities.
    The Chairman. Without objection, it will be made a part of 
the record.
    Ms. Speier. At the beginning, let me just say that so much 
of our taxpayer money in TARP and the bailouts of AIG and 
others have gone to private institutions. We are asking here 
that taxpayer money go to taxpayers in these local 
jurisdictions.
    So I would dispute what has been said by some that somehow 
it is taxpayer money being used again in a fashion that is 
inappropriate. This is actually money going back to the 
taxpayers.
    As you know, Congresswoman Eshoo and I have both introduced 
a bill, H.R. 467, that would require the Treasury Department to 
repurchase certain Lehman investments held by these government 
entities at full face value using TARP funds. The Treasury 
Department asserts it still has $135 billion left in its TARP 
arsenal. It has used hundreds of billions of those taxpayer 
funds to bail out Wall Street. We are asking that a mere $1.7 
billion of taxpayer money be provided to save Main Street.
    As we all know, Lehman's was the only major investment bank 
the Federal Government did not prop up last September when Wall 
Street went into a free fall seemingly overnight. Bear Stearns, 
the first to be helped in being deemed too-big-to-fail, was 
half the size of Lehman Brothers. Negotiations the weekend of 
September 13th between the Treasury, the Fed, Lehman Brothers, 
and Merrill Lynch resulted in Merrill, with Treasury's help, 
being acquired by Bank of America; Goldman Sachs and Morgan 
Stanley were each allowed to become bank holding companies. 
Lehman's then was allowed to go into bankruptcy, the largest 
bankruptcy in the history of this country.
    In the words of Nobel Prize winner Paul Krugman, the 
decision to let Lehman fail was the event that basically 
brought the entire world's capital market down. The decision by 
the Treasury and the Fed to allow Lehman to fail was arbitrary 
and caught many taxpayer-funded agencies unprepared. They had 
watched the takeover of Countrywide by Bank of America and the 
bailout and takeover of Bear Stearns by JPMorgan and concluded, 
like many others, that since in those cases, note holders had 
been made whole, Lehman was unlikely to declare bankruptcy. But 
Secretary Paulson did not offer Lehman the same guarantees that 
it offered others. And if these local governments had chosen to 
sell their Lehman investments prior to maturity, they would 
have suffered a definite and substantial loss, negatively 
affecting the whole investment pool.
    It is not like these government bodies were using taxpayer 
funds to speculate in the market. The public agencies were all 
talking about investing in Lehman corporate bonds and notes as 
part of a strict, safe, and conservative investment strategy. 
In fact, most of the debt instruments in question were highly 
rated right up until the moment of Lehman's collapse.
    San Mateo County's pooled investment in Lehman's was rated 
A1 for the floating rate securities and A for its corporate 
bonds. That investment pool is prohibited under State law from 
investing in equities. And it is limited to conservative 
instruments, such as U.S. Treasury obligations, high-rated 
commercial paper, certificates of deposit, and the like.
    Preservation of principal is of primary importance to 
minimize credit risk while recognizing and controlling market 
risk, matching maturities with capital expenditures and other 
planned outlays. Diversification plays a big role in that 
effort. San Mateo County only invested 5.9 percent of its pool 
in Lehman as part of its diversification strategy. It also 
holds similar investments with Morgan Stanley.
    I believe that Treasury already has the power to do what we 
are asking. The language that Congresswoman Eshoo placed at ESA 
with the help of the chairman certainly instructs the Treasury 
Secretary to take into consideration the need to ensure 
stability for U.S. public instrumentalities, such as counties 
and cities, that may have suffered significant increased costs 
or losses in the current market turmoil. We requested that 
Secretary Paulson take such action last fall, and we have made 
the same request of Secretary Geithner in February, but have 
gotten no response.
    There seems to be no limit to the amount of assistance we 
are willing to provide to the likes of AIG, Citigroup, Bank of 
America, and Goldman Sachs, let alone foreign interests which 
speculative derivative deals have been fully paid through the 
taxpayer-funded bailout of AIG. Goldman not only has been the 
beneficiary of $10 billion of TARP money directly, but it has 
gotten another $13 billion through its credit default swaps 
with AIG, all while it has reported a $1.8 billion quarterly 
profit and is seeking to repay its $10 billion in TARP funds 
because it doesn't like the compensation strings that come with 
it.
    If AIG had been forced to declare bankruptcy, the financial 
institutions like Goldman doing business with it would have 
wound up in court, just like San Mateo County has had to do 
with Lehman's, fighting to get pennies on the dollar for their 
claims. I say, let Goldman repay its bailout and use that money 
where it is really needed, in our local communities.
    Restoring the value of these Lehman bonds is perhaps the 
fastest way to bring relief to communities across America, 
allowing them to pay their employees, maintain current levels 
of service, and immediately put shovels in the ground on 
already approved projects. Maybe in the grand scheme of things, 
$1.7 billion is just not seen as a big enough problem. To the 
local governments, school districts, sanitation and water 
districts, and the communities they serve across the country, 
these losses are devastating. How ironic that they should be 
left wishing they had invested in credit default swaps with 
AIG. If they had, we wouldn't be here today.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Speier can be found on page 
49 of the appendix.]
    The Chairman. We will now turn to Congresswoman Eshoo.
    But by way of introduction, I did want to share with people 
here a very important fact, which I learned from the 
publication CQ Today, and I call people's attention to page 12 
where it says, when Representative Anna G. Eshoo was in high 
school in Connecticut, President Harry Truman gave her a ride 
home from school. It seemed to me that that information ought 
to be shared.
    And we are glad that you made your way from Connecticut to 
California and are here today to represent your district. 
Please go forward.

 STATEMENT OF THE HONORABLE ANNA G. ESHOO, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Eshoo. Thank you, Mr. Chairman, for that wonderful 
added note to you, to Ranking Member--
    The Chairman. Was it the President himself or was it the 
Secret Service? Did the Secret Service drive, or did he drive?
    Ms. Eshoo. No. He was sitting in the back seat of the car. 
There was very little security. Police officers on motorcycles 
in front of the car and behind it, flags on the car. And I was 
walking home from school. I was at a four-way stop and he said, 
``Where are you going, little girl?'' And I said, ``I am going 
home.''
    The Chairman. And no one told you not to take a ride from 
strangers at that time?
    Ms. Eshoo. Well, it gave me confidence because there were 
police officers. And we all had the admonition from our 
mothers, but there were police officers on motorcycles and 
flags on the car. So he gave me a ride home. So thank you.
    Thank you, Mr. Chairman, for calling this hearing.
    To Ranking Member Bachus, to Mr. Neugebauer, and to all of 
the members and friends who are members of this committee, it 
is very special for me to be here today to testify before you 
about a matter of really critical importance to local 
communities, not only from our shared San Mateo County in 
California, parts of our congressional district, but for local 
communities around the country.
    I think the hearing is necessary so that any discussion 
concerning the financial losses of the public entity victims of 
the Lehman bankruptcy can be put into appropriate context.
    Chairman Frank rightly called these public entities, ``the 
unfair victims of this financial crisis.''
    On September 15, 2008, as Congresswoman Speier noted, after 
150 years of continuous operation, Lehman Brothers declared 
bankruptcy. The Lehman bankruptcy was the largest in our 
Nation's history with nearly $700 billion in reported debt. And 
it is described as triggering an event for the resulting 
international financial crisis.
    Following the collapse of Lehman, the Executive and the 
Legislative Branches of our government responded rapidly and 
aggressively in order to prevent any further failures of other 
major institutions by adopting the Emergency Economic 
Stabilization Act of 2008. As we all know, the Act was signed 
into law by President Bush on October 3rd of last year, and it 
created the Troubled Asset Relief Program (TARP).
    It gave the Secretary of the Treasury both the authority 
and the responsibility to provide financial assistance to 
institutions through the purchase of ``troubled assets'' on 
such terms and conditions as may be appropriate.
    In exercising this authority, the Secretary is required to 
take a number of factors into consideration, including, ``the 
need to ensure stability for United States public 
instrumentalities, such as counties and cities, that may have 
suffered significant increased costs or losses in the current 
market turmoil.'' That is section 1037.
    I proposed this language, and it was added to the bill with 
the support of the leadership and the assistance of the 
chairman of this committee, Chairman Frank, and his very able 
staff, as well as the support of Speaker Pelosi.
    Since adoption of the Act, the Treasury Secretary committed 
to provide financial assistance in the approximate amount of 
$590 billion to more than 535 financial institutions. This 
assistance includes approximately $45 billion to Bank of 
America; $50 billion to Citigroup; $40 billion to insurance 
giant AIG; and $24.8 billion to automakers.
    To date, no assistance under the Act has been provided to 
any United States public instrumentality. It has been said that 
some banks are too-big-to-fail. It can also be said that 
counties, school districts, and cities are too-small-to-be-
noticed. Their losses represent one-quarter of 1 percent of 
TARP funding. The fact that TARP was intended to and should 
assist local public instrumentalities is clear.
    Chairman Frank and I had a colloquy on the Floor of the 
House on January 15th of this year, and in response to my 
questions on the Floor, he reinforced that the Act is intended 
to provide financial assistance to local government entities 
which were significantly impacted by the Lehman bankruptcy; and 
that the Act expressly provides authority for the Secretary of 
the Treasury to provide that kind of relief.
    In fact, Mr. Chairman, I think you said it best when you 
indicated that it was important, ``not simply to confirm that 
the authority is there but to say that we expect it to be used 
and to demand that if it is not used, we get a written 
explanation as to why not.''
    On November 8, 2008, I wrote to Secretary Paulson 
requesting that he exercise his authority under section 1037 of 
the Act to purchase the troubled assets held by local 
governments. He called me on November 21st, and reiterated his 
decision not to include local governments in the TARP.
    On November 25, 2008, I wrote to the Presidential 
transition team spelling out the case and urging them to take 
action where the Bush Administration had not. I urged them to 
use the authority that was in the law.
    On February 13th, together with Congresswoman Speier, we 
wrote to Secretary Geithner. Almost 30 of our House colleagues 
joined us. We again requested that he exercise the authority 
under the law. And I ask that these letters as well as our 
colloquy--
    The Chairman. Without objection, they will all be made a 
part of the record.
    Ms. Eshoo. Thank you.
    The Treasury's decision to let Lehman fail is causing 
catastrophic losses to many localities, resulting in job 
losses, termination of ongoing construction projects, and 
elimination or reduction in critical services. Hospitals are 
reducing services and staff. Schools are laying-off teachers. 
Police and fire departments are reducing patrols and limiting 
services.
    And what wrongs are these school districts, counties, and 
cities guilty of? They invested in highly rated conservative 
instruments in Lehman Brothers. That is the sin that they 
committed. And those are taxpayer dollars that should be put to 
work in our local communities gone when Lehman Brothers went 
down.
    If we want our national economy to rebound, our local 
economies cannot be left behind. And this is not just a 
California problem. It includes public entities from Florida, 
Colorado, Arizona, Michigan, Massachusetts, Missouri, Oregon, 
Washington State, and the list goes on.
    We need to return these dollars to them. We have a law that 
is clear. We have a case that is clear. What we need is clear, 
decisive action to right this wrong. Local taxpayers and 
communities should not have to tolerate losing their most basic 
services because the Federal Government allowed Lehman Brothers 
to go down.
    Thank you, Mr. Chairman.
    And thank you to all the members.
    [The prepared statement of Ms. Eshoo can be found on page 
46 of the appendix.]
    The Chairman. I thank you.
    Are there any questions from any members of the committee 
for the Members?
    The gentleman from Illinois.
    Mr. Manzullo. Congresswoman Eshoo, before the TARP bill was 
passed, Lehman went under, and then Treasury--or the Fed 
stepped in to infuse AIG. I am almost positive that the timing 
is correct on that.
    The Chairman. The gentleman is correct. It was Lehman 
Brothers failing; AIG with money from the Fed; and then the 
TARP proposal.
    Mr. Manzullo. Okay. Thank you, Mr. Chairman.
    And my understanding is that conversations actually went on 
between the Fed and Lehman.
    Anything that you can add to that, Congresswoman Eshoo, as 
to why AIG was chosen and not Lehman Brothers?
    Ms. Eshoo. Well, I think that is the $64,000 question.
    In fact, when I spoke to Secretary Paulson on November 
21st, I asked him that very question. I said, ``Why did you 
allow Lehman to go down?'' And he said, ``That is a whole 
different conversation that we will have to have at another 
time.'' So he didn't offer any explanation for it.
    Mr. Manzullo. Of course.
    The Chairman. We were in the position then of being 
informed, not consulted, until we came out with the TARP. The 
information I got at the time was that there was an effort. 
This always happens on weekends. We reached a point where I 
wanted to cut my phone wire on Friday afternoon because I was 
always getting bad news after the markets had closed for the 
weekend, and there was an effort, I believe, by the American 
Government to get Barclays Bank in England to take over Lehman 
Brothers, and the British authorities didn't think that was a 
great idea.
    So there was an effort on the part of the Administration to 
try and find someone to take over Lehman. Apparently, you know, 
that is the information that I got.
    It is the gentleman's time.
    Mr. Manzullo. I will yield of course.
    Mr. Garrett. Just to follow up with the chairman's comment, 
and if recollection serves, and correct me if I am wrong, I 
think part of the discussion with Barclays at that time was 
they were looking for the same thing as they saw with Bear 
Stearns; there has to be some kind of backstop on this. I think 
at the time the Fed said, no, we are not going to be the 
backstop. And of course, right after that, you had AIG where 
you had a huge backstop. There is the irony in it.
    I will yield back.
    The Chairman. It is clear Secretary Paulson and Chairman 
Bernanke were operating under enormous pressure. So I make no 
criticism of them.
    They were partly influenced, frankly, by some criticism 
about Bear Stearns. So they didn't want--they were reluctant to 
intervene too much, and then they were reluctant not to 
intervene at all. But that was the answer--what I heard, 
frankly, on Sunday, I was called and said, we are hoping to get 
Barclays to do this, and then once Barclays said ``no,'' there 
was nobody else.
    Mr. Manzullo. And the second question is--could I ask the 
chairman? He might know more than we do. Any idea as to the 
dividend that will be paid in bankruptcy on these bonds?
    Ms. Speier. It is estimated that these jurisdictions will 
see anywhere from 7 to 20 cents on the dollar.
    Mr. Manzullo. Thank you.
    The Chairman. Any further questions?
    If not, the gentleman from New Hampshire, and then the 
gentleman from Colorado.
    Mr. Hodes. Congresswoman Eshoo, I note, in your written 
testimony, that you say on November 7th, you wrote to Secretary 
Paulson requesting that he exercise the authority that he 
clearly had to help municipalities. That is right?
    Ms. Eshoo. Yes.
    Mr. Hodes. He called you back?
    Ms. Eshoo. I spoke to him. He called me on, I believe, 
November 21st.
    Mr. Hodes. And you say that he reiterated his decision not 
to include local governments in the TARP.
    Ms. Eshoo. He really was not interested in it.
    Mr. Hodes. Why? Did he tell you why?
    Ms. Eshoo. I asked him why, and he said, ``What I said 
stands.''
    Mr. Hodes. But without any explanation?
    Ms. Eshoo. Without any explanation, yes.
    Mr. Hodes. Later, in February, you wrote to Secretary 
Geithner with a number of Members of Congress, and you 
requested that he exercise his authority under TARP to help 
municipalities. Have you heard anything back from him?
    Ms. Eshoo. Nothing in the mail pouch and no return phone 
calls.
    Mr. Hodes. Has anybody else from Treasury contacted you to 
talk about this?
    Ms. Eshoo. No, not at all. As a matter of fact, I said it 
in my--I believe I said it in my testimony that, on the heels 
of the election, I wrote to the transition team to point out 
that this was something that needed to be dealt with; that it 
hadn't been dealt with by the previous Administration. I looked 
forward to working with them. And no response.
    Mr. Hodes. And setting aside for a moment the broader 
issues of the plight of our municipalities, just focussing on 
the Lehman collapse aspect, we are talking about $1.7 billion. 
Is that about--
    Ms. Eshoo. Approximately that. It represents about one-
quarter of 1 percent of all of the TARP funding.
    Mr. Hodes. And we know, at least according to Treasury, 
that there is $130 billion-plus still left in TARP, and nobody 
from Treasury has contacted you to talk about this issue?
    Ms. Eshoo. Not yet. But I have remained hopeful.
    Mr. Hodes. Thank you.
    Mr. Chairman, just before yielding back, I would like to 
hear from Treasury as to--I would like to get a response from 
them, and any effort that we can make on this committee to get 
Treasury to respond to this issue, I think, is really 
important.
    Thank you. I yield back.
    The Chairman. The gentleman from Colorado.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    I want to compliment Congresswoman Speier on dealing with 
this issue. You were one of the first to raise this on the 
effect on local governments, whether they were hospital 
districts or school districts or whatever.
    And I appreciate both of you taking this on.
    We have a witness, Mr. Hullinghorst, who is our treasurer 
from Boulder County, who will be one of the panelists in the 
next group, and he is going to be speaking about some of the 
losses Colorado jurisdictions have suffered.
    And to complicate it a little more, my question to you is--
let me step back. There were indirect losses, too, by other 
government agencies in Colorado who had put a lot of money into 
a major money market with the reserve fund, and the primary 
fund, which invested all of its money--or a bunch of its money 
with Lehman Brothers, and then that has caused, as a secondary 
effect, losses to Colorado jurisdictions.
    In your bill, do you deal just with direct investment in 
Lehman Brothers, or is there a potential for assistance to 
secondary losses?
    Ms. Speier. The bill deals just directly with losses 
incurred because of the Lehman investments.
    Mr. Perlmutter. And to my friend from Illinois, I think the 
testimony that we did hear in another committee about Lehman 
Brothers was that the Treasury had asked Mr. Fuld from really 
the time that Bear Stearns was merged on to look for a partner. 
And apparently, Lehman--at least the Treasury would say they 
tried to encourage a partnership earlier on in the year than 
when everything came down in September.
    With that, I yield back.
    The Chairman. The gentleman from New Jersey.
    Mr. Garrett. Just one closing question, I apologize. You 
know how it is; you come in and out of the hearings.
    The Chairman. Sometimes even while you are sitting here, I 
find.
    Mr. Garrett. You are alluding to yourself, not to me?
    The Chairman. Yes.
    Mr. Garrett. I will take a question that I assume that my 
colleague from Texas--I didn't hear his testimony. But I think 
I know what his testimony was. The question being, 
understanding the concerns that you have, and we have the same 
concerns in the State of New Jersey--I am from New Jersey, and 
you may know there is $118 million at question right now--is 
the old question of line drawing, and that is to say, if we do 
it for this class of investors, will we hear from other classes 
of investors? And to answer that question, sure, we will be 
hearing from seniors who have their pensions in this, or you 
will hear from unions that have pension funds, and businesses 
that have their pension funds or other seniors and retirees and 
the like. So how was that it you made the delineation that 
public institutions would get the bailout, but seniors and 
union workers and businesses would not?
    Ms. Speier. The distinction that is being made is that 
these are taxpayer funds that were invested in A1 and A 
instrumentalities, both notes and bonds, and that these 
taxpayers should be repaid. We are not talking about 
investments made by individuals. We are talking only and 
exclusively about taxpayer funds invested for the purposes of 
holding onto money needed for the conducting of business and 
construction of projects. So that is the distinction we are 
making.
    Ms. Eshoo. And the language is reflected in the TARP bill 
as such. Many don't realize that that language is now the law, 
and it is very specific. It is section 1037. So these are 
public moneys that were--as I said, the only sin that the local 
governments and the school districts and the counties committed 
was to invest in highly conservative, highly rated instruments. 
And those tax dollars are gone, and the local jurisdictions are 
left holding the bag. So it is not about individuals, as 
Congresswoman Speier said.
    Mr. Garrett. You can both appreciate the fact that if all 
of this goes forward, that all of our offices probably will 
hear from individuals on this because they will say, okay, New 
Jersey's teacher pension fund, for example, now has been bailed 
out or the State union funds have been bailed out but my fund, 
meaning the union that I work in or my employment, is not 
bailed out. And so you can appreciate that is going to happen.
    Ms. Speier. If I could, we specifically don't deal with 
pension funds. So it is not our intention to see pension funds 
reimbursed. It is only local jurisdictions that had money in 
these types of instrumentalities for purposes of operating 
local government or doing local construction.
    Mr. Garrett. Which is why that other area--all those other 
areas are going to come up. The other issue, of course, is the 
moral hazard that is being created here as far as--as the 
chairman brings up--
    Ms. Eshoo. Did you say moral hazard?
    Mr. Garrett. Moral hazard going forward as far as the due 
diligence that is necessary that people should be making that, 
now in the future, they are looking to say, well, the Federal 
Government--well, at least for this class, not for pension 
funds and not for individuals, the government will step in and 
bail them out.
    Now the State of New Jersey, somewhere on my desk here is a 
New York Times article with reference to the fact of who 
actually served in New Jersey--and I don't know any more about 
it than what is in the New York Times--about who actually 
served on the investment council who made the decisions. And 
coincidentally or not, three of the investment counselors were 
former Lehman employees and a wife of a Lehman employee. So I 
am sure there are all sorts of questions that people back in my 
home State are going to be asking--what sort of decisionmaking 
went into and what sort of due diligence was made in that case? 
And I guess that is the larger question going forward, is the 
proper due diligence--
    Ms. Eshoo. I think it is a fair question. I have always 
adhered to the following, and that is that life is not tidy.
    Let me say this, and that is that these were very 
conservative investments, and these public entities are 
required by law to spread out their portfolios and have a very 
safe place to hold the taxpayers' money. And they adhere to 
that. They were not high flyers. They were not high risk in any 
way, shape, or form. So they adhere to the law, to the laws 
that apply.
    But it was singularly because of the big decision to let 
Lehman go down, and so that is why the language that became law 
passed a scrutiny test around here and the bill that 
Congresswoman Speier introduced, and I am proud to be an 
original cosponsor of, is very direct. And it is really quite 
surgical. I mean, it is very precise, and I am very pleased 
that we have been able to present the case to you today. You 
have asked very good questions.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Let me just commend Ms. Eshoo and Ms. Speier for 
introducing this legislation, bringing it to our attention.
    As a former mayor, I can tell you that municipalities can 
only make safe investments, probably the safest investments of 
anybody who goes into the market. And that is why you will find 
mayors angry over the rating agencies because the corporations 
generally will get a more favorable rating than the 
municipalities, and we have not had a municipality go into 
default in almost 25 years.
    The other reason that I appreciate you bringing this up is 
that municipalities have been devastated. There is a dramatic 
difference between what you are talking about and somebody 
coming up, saying, well, we want to be in line next.
    Everybody in here lives in a city. Everybody in here lives 
in a municipality. And the municipalities are hamstrung now. 
They can't do revenue bonds because of the foreclosures, 
because when you have foreclosures, you are beginning to slice 
on the tax base, the municipal tax base. And so you can't do 
revenue bonds. The only thing you can do right now is to watch 
your infrastructure crumble.
    And I am hoping that we can do something to rescue these 
cities because if we don't, we are going to find that--well, 
first of all, I mean, cities don't have a Fed. There is no 
municipal Fed where they can print money. So there is nothing 
they can do except wait this thing out and then try to make a 
comeback, and they are going to be further behind. I was trying 
to find a question here. Am I right?
    Ms. Speier. You are right.
    Ms. Eshoo. You are right. You are 100 percent right.
    Mr. Cleaver. Thank you.
    The Chairman. I thank the witnesses.
    We will now move to our next panel.
    I am going to recognize the gentleman from Colorado, who 
wanted to make an introduction of one of the witnesses.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    I would like to introduce my friend Bob Hullinghorst, who 
is the treasurer of Boulder County. He and his wife Vicky Lee 
have been friends of mine for many, many years. He has 
experience in the private sector as a cash manager, has dealt 
with financial issues his whole life, and is now treasurer of 
the county.
    I don't represent Boulder County. I am just south of that. 
But its experience is the same as many other jurisdictions 
across the country. And I think Bob will be a good witness to 
describe the safe kinds of deposits they made, yet now have 
lost substantial money that is hurting all sorts of things.
    So with that, I would just offer him as one of our 
witnesses.
    The Chairman. Thank you.
    And we will now begin.
    We will just go in order with Karen Rushing, who is clerk 
of the Circuit Court and county comptroller of Sarasota County, 
Florida.
    Any material that any witnesses wish to submit will, with 
unanimous consent, be submitted, so there is no need to ask for 
that. You can present your oral testimony, and anything you 
want to accompany it will be made a part of the record.

   STATEMENT OF THE HONORABLE KAREN E. RUSHING, CLERK OF THE 
 CIRCUIT COURT AND COUNTY COMPTROLLER, SARASOTA COUNTY, FLORIDA

    Ms. Rushing. Thank you, Mr. Chairman, for the opportunity 
to address you and the committee today.
    I am here to ask you for your assistance and support. As 
you will hear and have heard, State and local governments are 
faced with significant problems caused by the decision to allow 
Lehman Brothers to collapse. The money collected in the form of 
taxes and fees by the State and local governments is invested 
daily in highly rated quality investments with the objective of 
preservation of principal and adequate liquidity for paying 
daily obligations.
    The rules governing investments are generally proscribed by 
law and in Sarasota County in particular. In addition to State 
law requirements, there is a local ordinance that describes the 
limitations and objectives of the investment policy. The 
objectives are the preservation of principal, and adequate 
liquidity through the purchase of highly rated investment 
instruments.
    The collapse of Lehman Brothers caused highly rated debt 
instruments with adequate liquidity to become virtually 
worthless. Now the reason governments purchased bonds rather 
than equities is, with a buy-and-hold practice, a bond 
purchaser knows that, after the time of maturity of a bond, you 
will receive your principal and interest back.
    The turn of events that directly affected the ability of 
governments to deliver services that are aimed at protecting 
the health and welfare of those we serve was caused by the 
failure of Lehman Brothers. Florida in particular is navigating 
very difficult times. High job loss, high foreclosure rate, a 
housing crash, and an insurance crisis are all affecting our 
ability to withstand the consequences of the collapse of Lehman 
Brothers.
    It is my understanding that the current rules governing 
TARP provide for assisting State and local governments.
    My written testimony outlines the services in Sarasota 
County that have been cut and the jobs that have been lost 
directly related to the Lehman Brothers collapse.
    Although I am not prepared today to speak to the specific 
nuances regarding the losses in Florida State government and 
the local cities, I do want you to know that the problem is not 
unique to Sarasota County in Florida, that it is affecting all 
of our levels of government, and your assistance is requested.
    Mr. Chairman, thank you for the time you have devoted to 
this hearing, and we appreciate your attention.
    [The prepared statement of Ms. Rushing can be found on page 
64 of the appendix.]
    The Chairman. Next, and I apologize if I mispronounce it, 
Mr. Ron Galatolo, the chancellor of the San Mateo County 
Community College District.

    STATEMENT OF RON GALATOLO, CHANCELLOR, SAN MATEO COUNTY 
                   COMMUNITY COLLEGE DISTRICT

    Mr. Galatolo. That is correct, Mr. Chairman. Chairman 
Frank, Ranking Member Bachus, and members of the committee, my 
name is Ron Galatolo. I am the chancellor for the San Mateo 
County Community College District and I am also a certified 
public accountant. Thank you also for adding my written 
testimony as part of the record.
    What I would like to share with you today are the 
consequences that we have experienced, both the academic 
programs and services that we have at our colleges, as well as 
the financial hardship as a result of the Lehman collapse.
    Our district has three colleges, and it sits equal distance 
between San Francisco and San Jose on the peninsula, and we 
serve about 45,000 students there a year. It is a fairly large 
institution, and many think of community colleges as a locale 
that essentially serve the needs of students who want to 
transfer to the university. And I will tell you that actually a 
large portion, and a part of our core mission, is to provide 
occupational skills, including dislocated workers for reentry 
into the workforce.
    Our county's unemployment is the highest it has been in 
decades. At a time when unemployment is the highest in decades 
is actually when our unemployed workers need to come in to us 
and retrain and prepare themselves for the jobs they want to 
attain in our county.
    Our loss as a result of the Lehman collapse was significant 
and exacerbated by the multibillion-dollar financial crisis we 
face right now in the State of California. When our Lehman 
instruments became worthless, they essentially wiped out 
operating reserves. Subsequently, when our State reduced our 
operating revenue, we had no viable option other than to reduce 
teachers and support staff, along with elimination of programs 
and services, again at a time when our community needs us most.
    More specifically, last year we experienced about a 10 
percent reduction to our budget and anticipate another 8 
percent to our operating budget again this year. When all is 
said and done, we may have to shed the equivalent of about 11 
percent of our full-time faculty and staff, with a devastating 
effect to teaching and learning at our 3 colleges.
    When all is said and done, we have to abandon many 
construction projects slated to renovate our three colleges, 
causing a destimulus to our local economy. And based on our 
calculations, we actually found there may be as many as 400 
construction jobs that are lost as a result of this.
    By this inaction, we are simply taking the shovel out of 
the ground on these shovel-ready projects and causing a domino 
effect on the local economy; again, a destimulus to our county.
    We are not alone and, through no fault of our own, we 
invested in what we believed and trusted to be highly rated, 
low-risk investments. Many schools, colleges and universities 
are in similar predicament to ours. To paraphrase Chairman 
Frank and Congresswoman Speier, if we invested in AIG, let's 
say, a guaranteed investment contract as opposed to invested in 
these highly rated, low-risk Lehman securities, we would not be 
before you today asking for your help. I feel it is highly 
inequitable to use TARP funding to shore up banks and to bail 
out failing corporations but fail to protect agencies' taxpayer 
dollars, such as ours and the others who are testifying before 
you here today.
    I think it is important to note again something 
Congresswoman Speier said, and that is when you look at what we 
are asking for here, it is about $1.7 billion nationwide. When 
that is the numerator over the denominator, $700 billion is 
less than one-quarter of 1 percent of the TARP funding that is 
available for these types of activities. Thank you for your 
willingness to listen today.
    [The prepared statement of Mr. Galatolo can be found on 
page 56 of the appendix.]
    The Chairman. Next, we will hear from Richard Gordon, a 
supervisor on the San Mateo Board of Supervisors.

 STATEMENT OF THE HONORABLE RICHARD S. GORDON, SUPERVISOR, SAN 
         MATEO COUNTY BOARD OF SUPERVISORS, CALIFORNIA

    Mr. Gordon. Chairman Frank, Ranking Member Bachus, and 
members of the committee, thank you for this opportunity to 
testify and to place my written comments in the record. My name 
is Rich Gordon and I am a member of San Mateo County Board of 
Supervisors.
    And Mr. Chairman, in full disclosure, I want to note that 
at on at least one occasion, I have ridden in a car with 
Congresswoman Anna Eshoo. I want to thank Jackie Speier and 
also Senator Feinstein who, along with Chairman Frank, have 
highlighted the national implications of the Lehman Brothers 
bankruptcy on local governments and communities.
    In excess of 200 jurisdictions in over 21 States lost $1.7 
billion when Lehman was allowed to fail. The first question you 
might ask is, why were local government funds invested with 
Lehman? Why were these investments made? Local governments pay 
as we go. We have to meet payroll every 2 weeks. Yet our income 
is not on that same kind of regular stream. Our property tax 
payments may come in twice a year, or quarterly. Our State 
income tax payments often come once a year. Sales and use taxes 
come on a varying cycle. So our expenses are regular, but our 
income is not. And so we bank our income and we bank it for the 
purpose of managing our cash flow. When we actually do these 
investments, we will look to earn a modest interest, which 
often covers the difference between the current tax receipts 
and future expenditures, which are impacted by inflation. So it 
allows us to use those tax dollars in a way that stays even.
    Such investments are a common practice across the country. 
These investments are governed by State and local policy. 
Policies are usually fairly similar and fairly simple: to 
protect principal; use safe investments; and diversify your 
portfolio.
    In California 11 years ago, when the County of Orange made 
some risky investments and ended up in bankruptcy, State law 
was changed. In fact in California, we have a very tight system 
regarding where local governments can make their investments.
    So the funds are invested to protect principal, and the 
goal is not to generate wild profits. In San Mateo County, our 
average rate of return over the last 5 years on our pool of 
funds is 3.7 percent. These are safe investments. The 
securities and corporate bonds were A-1 and A, and our funds 
are diversified, which is one of the reasons that we were in 
Lehman. Actually a significant portion of our funds were in 
Treasurys or Federal agencies' securities, and Lehman 
represented 5.9 percent of our funds.
    These are local tax dollars used for operational purposes. 
As you have heard, they fund construction projects to build 
classrooms, they pay for teachers, they allow us to employ our 
public safety personnel.
    In San Mateo County, the absence of these funds will 
definitely impact highway projects, because the Transportation 
Fund Authority had money invested in this pool. Our schools are 
impacted and funds for our county hospital have clearly have 
been impacted. Our impacts are similar across the United 
States. And so the question might well be: Why use TARP? Most 
simply, because it is in the law.
    As clarified in colloquy between Chairman Frank and 
Congresswoman Eshoo in January, one of the purposes of TARP is 
to help local governments, especially those impacted by the 
decision to allow Lehman to collapse. TARP has helped our 
private industries; it should also help our local communities. 
This translates directly into jobs at the local level, and we 
seek your help in seeing that the law is implemented to assist 
local governments that were injured and became the victims of 
the collapse of Lehman Brothers.
    [The prepared statement of Mr. Gordon can be found on page 
58 of the appendix. The prepared statement of Mr. Mark Church, 
president of the San Mateo County Board of Supervisors, can be 
found on page 53.]
    Mr. Moore of Kansas. [presiding] Thank you, Mr. Gordon.
    Mr. Hullinghorst?

  STATEMENT OF THE HONORABLE ROBERT HULLINGHORST, TREASURER, 
                    BOULDER COUNTY, COLORADO

    Mr. Hullinghorst. Thank you. And Chairman Frank and 
honorable members of the committee, I would really like to 
thank you very much for this opportunity to explain why H.R. 
467 is very important to my county and to the taxpayers of 61 
other governments in Colorado.
    First, I would like to thank Congressman Perlmutter for 
those kind words, and to tell him from my wife, this is the 
last day of the session in Colorado; I know you miss it. She 
told me that she is sure she is having a lot more fun than you 
are. And since we have known Congressman Perlmutter's father 
since we came to Colorado, I am sure he rode in our car with us 
when he was 10 years old.
    My name is Bob Hullinghorst, and I am the treasurer of 
Boulder County. We are located about 30 miles from Denver. Most 
of you know where that is. And we are the home of the 
University of Colorado. Someday we may even have a football 
team.
    We have a population of about 300,000. In my statement, I 
point out how safely we try to invest these funds, and how 
important it is that somehow we be able to recover the write-
offs that we have had to take. It has cost these governments in 
Colorado $5 million. And in the case of Boulder County, we have 
had to write off $700,000.
    Now the State legislature that my wife sits on just reduced 
the allocation for community health centers, who serve 10 
percent of our population, the poorest of the poor. They have 
had to reduce that allocation by a million-and-a-half dollars. 
This $700,000 equates to roughly 20 nurses. That is absolutely 
critical to us in a county of our size.
    I want to go a little off my statement and point out that 
Colorado and most of the other States in the Union have very 
strict investment statutes. I brought along the 15 pages of 
explanation of our investment statutes and I am going to offer 
it for the record. And in that, I won't go into detail or try 
to bring you up-to-date, but I do understand that your staff 
and some members of the committee think that there is a moral 
hazard here because we are investing imprudently. If I do, I 
have a chance to go to jail. So I try to be very, very careful 
about how I invest.
    As a matter of fact, our legislation focuses around the 
prudent man standard, investments made pursuant to this statute 
must be made in accordance with a prudent man (person) 
standard. This requirement states that fiduciaries, such as 
officials and custodians who make investments or deposits for 
local governments, are obligated to exercise the judgment and 
care under the circumstances then prevailing, which men or 
women of prudence, discretion, and intelligence exercise in the 
management of the property of another. In other words, we are 
required by law to treat our taxpayers' funds as a sacred 
obligation to us, and we try to do that as best we can.
    The investments that we made in Colorado by these 62 
governments here, governments like Clear Creek County, a small 
county along I-70: the city of Fruita, a small town over by 
Grand Junction; the town of Kersey, a town that is populated 
mostly by people who grow grain for this country. The people in 
these towns rely on pooled investment trusts in order to be 
able to invest their money safely.
    I had the pleasure of being one of the organizers of a 
pooled investment trust, and I can tell you from our experience 
that we did everything that we could to try to make sure that 
those funds were safe.
    So I just want to thank the committee for having this 
hearing and considering the support of H.R. 467. Thank you.
    [The prepared statement of Mr. Hullinghorst can be found on 
page 62 of the appendix.]
    Mr. Moore of Kansas. Thank you Mr. Hullinghorst.
    Next, Mr. Thornberg of Beacon Economics.

STATEMENT OF CHRISTOPHER THORNBERG, ECONOMIST, BEACON ECONOMICS

    Mr. Thornberg. Mr. Chairman, committee members, San Mateo 
County's public agencies lost approximately $155 million in 
investments due to the bankruptcy of Lehman. These are today's 
losses, these were not securities and pension funds or other 
long-run securities. This money was being parked in Lehman in 
what was identified as highly rated liquid securities, until 
needed for their primary purpose, the near-term funding of 
schools, local infrastructure projects including transport, 
public transport, and new prisons, and of course the ongoing 
operation of local economy, including local government schools 
and so on.
    I was asked by San Mateo County to calculate the economic 
damage that has been created by these financial losses. My 
results are such--these financial losses mean the loss of 
approximately 1,660 local jobs, approximately one-half of 1 
percent of the county's overall employment base. It will suffer 
an overall loss of $216 million in output in the local economy, 
including $100 million in worker income. Not to mention, of 
course, the major delays in the completion of projects 
necessary for the growth of the economy.
    These losses are intensifying an already grim economic 
situation in the State of California. Our employment in San 
Mateo County has risen from under 4 percent to over 8 percent. 
For the State overall, it is about 11 percent, with little sign 
of abatement.
    San Mateo County, as we have heard, is not alone in 
suffering such losses. These losses, of course, stretch across 
the United States from Florida to Colorado into California. It 
is worth knowing that in recent months, the Federal Government 
has aggressively responded to the economic crisis by working to 
offset the problems by a variety of actions. These efforts 
include large financial infusions into the banking sector to 
keep our lending markets operational, expanding the money 
supply to keep interest rates low, and embarking upon a variety 
of fiscal spending initiatives to expand aggregate demand, 
including tax cuts, rebates, and direct spending on a variety 
of local projects.
    In this last category, a substantial amount of funding has 
been put aside to offset the problems that State and local 
governments have been suffering due to a precipitous decline in 
tax revenues being seen across the United States. To allow 
State and local spending to shrink rapidly will only exacerbate 
the current economic problems and delay economic recovery that 
much further.
    When the primary criticism of this spending program has 
been the time lag involved, the task of finding what you might 
call shovel-ready projects that meet certain criteria is 
challenging even at the best of times. And here we have one of 
the simplest solutions. These are not shovel-ready projects, 
these are shovel-stopped projects.
    I would offer that by backfilling the financial losses 
being suffered by these local governments as a result of Lehman 
bankruptcy, the Federal Government really moves to accomplish 
two very important goals.
    First is an almost immediate fiscal impact upon the 
economy. These are funds that will be directly translated into 
economic output and economic jobs to help sustain the economy 
through this tough time. As much as I appreciate the issues of 
moral hazard as an economist, it all works to level the playing 
field; because, in many ways, there was a critical policy 
decision that bailed out Bear Stearns and bailed out AIG and 
bailed out Merrill Lynch, yet allowed Lehman to fail. Why do we 
punish those local governments who made simply the unwise 
decision of choosing the one bank that was allowed to fail? 
Thank you very much.
    [The prepared statement of Mr. Thornberg can be found on 
page 72 of the appendix.]
    Mr. Moore of Kansas. Mr. Street?

STATEMENT OF THE HONORABLE CHRISS W. STREET, TREASURER, ORANGE 
                       COUNTY, CALIFORNIA

    Mr. Street. Chairman Frank and honorable members of the 
committee, I am Chriss Street, Orange County Treasurer. 
Together, as we tackle the challenges that confront the Nation 
and navigate the financial sinkholes that have created 
uncertainty and instability, it is important to remember that 
each and every one of our actions will have consequences both 
intended and unintended, anticipated and unforeseen.
    Whatever we do, it should be reasoned and rational. I, more 
than most, understand what the local officials who are 
testifying here today are facing: angry constituents; an 
uncertain future; and the paralyzing fear of facing a seemingly 
insurmountable fiscal black hole.
    Fifteen years ago, bad investments forced Orange County, 
California into bankruptcy. In one of the Nation's most 
affluent communities, taxpayers remain on the hook for $1 
billion of bankruptcy debt. I stood in the shoes of these local 
leaders. But as a result of directly facing these challenges, 
Orange County came together to solve the problems and overcome 
the obstacles that financial collapse posed. Labor and 
management, conservatives and liberals, businesses and unions, 
the entire community, pulled together and solved our problems 
without government intervening to cover our investment losses.
    Today, because of compromise and teamwork, Orange County 
holds the prestigious AAAM rating from Standard & Poor's, the 
highest rating in the Nation, and is the only county in America 
to have achieved this recognition.
    The pleas that you hear today are heart-wrenching but the 
actions these people are asking you to take are nonetheless 
wrong. We, as State and locally elected officials, must live 
with the intended and unintended consequences of our decisions. 
If we do not live with the decision and accept those 
consequences, we are shirking our responsibility as leaders. We 
must not look to someone else to blame for our current 
condition or solve our current problems.
    Bailouts will not instill the virtue of fiscal 
responsibility at the local level. A bailout simply masks the 
problems and permits leaders to avoid the consequences of 
financial mismanagement. We must meet today's challenges today, 
not push them down the road to our children.
    And what are the known and unknown consequences if we cover 
municipal losses? Realistically, just how much more debt can 
the United States of America assume without threatening the AAA 
full faith and credit of our Nation? If the cost of the Federal 
Government for issuing debt increases dramatically due to a 
downgrade in our credit rating, all the assumptions upon which 
the anticipated recovery are based will be rendered irrelevant 
and moot.
    In the last few weeks alone, the 10-year Treasury bond 
yields, despite billions of dollars of Fed purchases, have 
climbed to 3.2 percent. That is a 25 percent increase in a very 
short period of time. Rising obligations reinforce the market's 
concerns about the solvency of the debt of the United States of 
America. To add billions more in commitments could be the 
tipping point that crushes the fragile and embryonic recovery.
    If we are going to shelter local leaders from consequences 
of their investment in Lehman Brothers, how can we stop there? 
Why not reimburse cities and counties for the mistaken bond and 
stock investments in Chrysler, General Motors, AIG, Washington 
Mutual, and others? And why stop at government entities? Why 
shouldn't we cover the losses of our own citizens who have seen 
their 401(k)s decimated and retirement dreams destroyed by the 
economic tsunami. How do we determine which constituencies 
merit a government bailout?
    When we create laws, no matter our good intentions, to 
exempt individuals from the consequences of their actions, we 
eliminate responsibility and promote irresponsibility. 
Bailouts, no matter how lofty the original goal, encourage bad 
behavior. Pain, however uncomfortable and difficult, is part of 
the healing process. From experience, I can say that living 
through it and managing short-term pain gave Orange County the 
resolve and fortitude to bring about financial rehabilitation 
and community healing.
    I caution you as our Nation's leaders to be deliberate in 
evaluating the legislation before you today and mindful of 
potential unintended consequences. I urge you to vote ``no'' on 
this legislation.
    [The prepared statement of Mr. Street can be found on page 
66 of the appendix.]
    The Chairman. I have one question, We have some municipal 
finance officials here. This actually flipped. This hearing was 
going to be laid over--we were going to have a hearing on the 
whole question of municipal bonds.
    Let me ask--Moody's, for instance, recently issued a 
statement for a general downgrading of municipal bonds. Let me 
ask particularly those in the municipal finance area, are you 
satisfied with the current rating system as it affects 
municipal bonds? Mr. Hullinghorst?
    Mr. Hullinghorst. Mr. Chairman, as a matter of fact, 
Boulder County is planning on going into the municipal market 
in about 15 days, and we anticipate getting a fairly good rate. 
This is an interesting revenue issue that is based upon our 
actually creating a special district, and residents of the 
district will be able to use municipal bond financing to get 
solar installations on their house, based on legislation that 
has been passed by our State legislature and is authorized 
under congressional act. So it is a very, very tricky issue, 
and we anticipate still being able to do it and get good rates. 
And I hope we do, because I am going to be the county treasurer 
collecting the income to pay those bonds.
    The Chairman. Mr. Street?
    Mr. Street. I can say Moody's is just really a guideline; 
we use it as a tool in our investments. And of course, as our 
county, we have come all the way back up to a double A rating. 
So, no system is perfect. I have great respect for the efforts 
of Moody's, but I think when you look at the challenges we 
face, Moody's is a good tool.
    The Chairman. Anyone else who is in the--those are the 
treasurers.
    Mr. Bachus.
    Mr. Bachus. Thank you. Let me say this: These did appear to 
be safe investments. I understand there was some indication 
that Lehman was in trouble, but Bear had been bailed out at 
that time.
    There is a section that Ms. Eshoo added to the TARP bill 
and I think, Chairman Frank, you engaged here in a colloquy 
which added, as one of the purposes of TARP, the need to ensure 
stability for U.S. public instrument penalties, such as 
counties and cities that may have suffered significantly 
increased cost or losses in the current market turmoil. I can 
certainly see how that fits your description.
    I am wondering, though, as Mr. Street said, there are a lot 
of other entities, with WaMu dead and others. Has anyone made 
an estimate of what those total? If you add WaMu and some of 
these other failures, what we are talking about? Mr. Thornberg, 
do you know?
    Mr. Thornberg. I don't have a specific number on that, sir. 
I think the key point here is--again, I want to focus. These 
were short-run funds, not long-run investments for pension 
funds. In most of these cases, these are funds that are tied to 
spending that is going to occur within the next 12 to 24 months 
as opposed to over the next 20 or 30 years.
    Again, I want to emphasize that the problem suffered by 
many of these local governments is due specifically to choosing 
Lehman as opposed to Bear or Merrill. That can't be 
underestimated.
    In the context of Orange County, I don't believe the 
failure, the bankruptcy of Orange County, has any relevance in 
this particular situation; because in the case of Orange 
County, there were very specific investments made in very, 
very, risky products and that county individually suffered as a 
result of that. That was not the sort of a situation that was 
common across many places.
    Mr. Bachus. I see. I do appreciate your testimony. And 
these were, I guess, like liquid cash accounts I guess, which 
were highly rated. When we passed that bill, obviously the 
government had various options as to what they were going to do 
with the money. And as we have all witnessed, most of it has 
gone to a few large corporations, and then they have even 
distinguished between financial companies and car companies, so 
they are certainly making a lot of judgment calls.
    I think in fairness to all, I don't know that there is 
anybody on this panel who could justify the decisions they have 
made. I know these do cause real problems for your candidates. 
And I, for one, know that you have availed yourself of your 
Members of Congress, and I think that is part of the democratic 
system. In the case of your Representatives, they have 
apparently--at least in the law, they have set up a provision 
which at least makes you eligible, so you do have grounds for 
your request. Thank you.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. As over 5 million Americans have lost 
their jobs, and thousands of people have lost their homes, and 
our economy struggles through this recession, our local and 
State governments are dealing with large budget deficits where 
painful choices have to be made.
    Today, we are focused on State and local governments that 
were adversely affected when Lehman Brothers declared 
bankruptcy, but I am curious how widespread the problem is.
    A list of local agencies that had investments with Lehman 
Brothers does not appear to list any city or county governments 
in Kansas. I would like to ask the county officials here, 
starting with Ms. Rushing, why did you decide to invest in 
Lehman Brothers in the first place? And were you able to recoup 
any of your losses in bankruptcies? And I would ask the same 
question of the other county officials.
    Ms. Rushing. Sarasota County has a portfolio of about $900 
million, and the objective is to have a well-diversified 
portfolio. We were invested in mortgages in Fannie Mae and 
Freddie Mac. Thank goodness, those agencies were taken care of. 
The decision was to have a well-diversified portfolio with 
highly rated instruments with very little risk. That was the 
objective. And we have taken an unrealized loss on our 
accounting books, but we have not sold those instruments, so 
have the bonds still. And so we don't have a realized loss, 
unless we sell them, and of course we are holding them right 
now, trying to determine what to do next.
    Mr. Gordon. Congressman, in San Mateo County, by law we are 
first of all required to diversify. So we had the maximum 
amount in Treasurys and Federal agency securities. The Lehman 
represented 5.9 percent of our pooled fund, a very small 
amount, actually, in terms of the total amount invested. But it 
was also exceedingly safe. We are not allowed to invest in 
equities, and we have to choose conservative instruments, by 
law. We had floating rate securities in Lehman that were rated 
A-1 and we had one corporate bond that was rated A.
    In Bankruptcy Court, where we are at the moment, we are 
told that anywhere from 7 cents to perhaps 15 cents on the 
dollar. The result of Bankruptcy Court will not be known to us 
for many months. And so we believe and continue to believe that 
the law that was implemented providing for TARP does provide 
for mechanism for local governments.
    Mr. Moore of Kansas. Mr. Hullinghorst?
    Mr. Hullinghorst. Yes. Boulder County invested through a 
State pool. The State pool purchased the Lehman commercial 
paper, roughly 5 months before the bankruptcy. It was a 6-month 
paper. It was basically due to mature and pay within the week 
after bankruptcy. When it was purchased by the pool, it was a 
1P1 paper, which is as good as you can get. And the underlying 
credit of Lehman Brothers at that time was A or AA. So it was 
an extremely safe investment in a pooled investment.
    Now, I can tell you from experience that if you don't have 
pooled investments around the country, and there are a total of 
151 of them authorized and regulated in 45 different States and 
they invest over $200 billion--probably closer to $300 billion 
before the Lehman Brothers bankruptcy--if you don't provide an 
avenue for liquidity in these State pools, they will probably 
cease to exist. At least one of the things that is certain, 
they will never buy anymore commercial paper, and that will not 
help.
    The commercial paper market is so incredibly important to 
this country because, thanks to people in the Wharton School 
and whatever, that is the avenue that corporations are using to 
provide their working capital. And the bankruptcy of Lehman, 
the reason it is so critical is it cut the heart out of the 
commercial paper market. So your providing this support to us 
is one indication that the government understands how important 
this market is.
    Mr. Moore of Kansas. Mr. Street?
    Mr. Street. Orange County manages about $7 billion of cash, 
about three-quarters of those securities are in government 
securities. We have an investment policy statement. We did not 
own Lehman Brothers.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. I think my 
time is up, so I yield back.
    The Chairman. The gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman. One of the 
questions I was going to ask the group, I notice that you had 
diversified portfolios and you had minimums and maximums that 
you can allocate. Isn't that the whole purpose, though, of the 
mixing and blending and pooling is that if there is a bobble in 
the portfolio, you don't have all of your eggs in one basket. 
And so if there is an event like this where there is a default, 
then have you not exposed your entire investment portfolio to 
that?
    The question I would have for Mrs. Rushing is, what 
percentage of Lehman assets did you say you had in yours?
    Ms. Rushing. It is a little less than 5 percent.
    Mr. Neugebauer. A little less than 5 percent. That was an 
A-rated paper; is that correct?
    Ms. Rushing. Yes.
    Mr. Neugebauer. Is there any reason you didn't pick double 
A or some triple A, other alternatives in your portfolio?
    Ms. Rushing. Well, we did. And this particular investment 
was purchased through our investment advisor through our 
banking arrangement.
    Mr. Neugebauer. Who was your investment advisor?
    Ms. Rushing. Wachovia.
    Mr. Neugebauer. So you had opportunities. You could have 
invested in double A and triple A investments. Why would you 
choose the A-rated over the double A and triple A?
    Ms. Rushing. It was just a part of the diversified 
portfolio.
    Mr. Neugebauer. But if you could buy triple A, why would 
you buy an A?
    Ms. Rushing. The only response I can give you is that the 
portfolio was diversified, that we had commercial paper, that 
we had mortgages--as I said, Fannie Mae, Freddie Mac--and there 
was some portion of the portfolio that included corporate debt 
that was highly rated.
    Mr. Neugebauer. Thank you.
    Mr. Hullinghorst?
    Mr. Hullinghorst. I know it is a hard name.
    Mr. Neugebauer. Mine is kind of hard too.
    Mr. Hullinghorst. It took my wife 3 years to learn how to 
spell Bob.
    There are two points that I would like to make in response 
to your question. There are very few issues rated triple A that 
are available among the United States corporations, unless you 
go to governments. And there are very few short-term 
governments except for Treasurys. And in some markets you don't 
get anything in investing in Treasurys.
    Now, the second point I would like to make is that the 
reason for the State pools in large part is to allow small 
municipalities to buy anything. You cannot go to Wall Street or 
to a representative in a brokerage firm and get any sort of a 
price if you only have $50- to $100,000 to invest at any one 
time. And so these State pools are there to provide smaller 
entities, or even entities like myself, who are buying smaller 
increments to get in at a decent rate in a well-managed pool.
    If you really want to see a debacle, you will not support 
the State pools and you will leave investing up to all of these 
little entities.
    I came to Washington a little over a year ago to try to 
talk to some of our congressional delegation and to the SEC 
about what I call criminalizing the sale of illegal investments 
to local officials. There was no interest at that time. I think 
there might be a little more interest now. But what I found was 
that, in fact, the SEC had the authority through their 
examination process to make sure that their brokerage firms 
were not treating us as qualified investors. Most governmental 
investors in any place in the country need to be treated as 
investors whose interests need to be protected. Almost every 
one of us is covered by State legislation that we are not 
allowed to go beyond. But we could not get a single brokerage 
firm--in my case, we could not get a single brokerage firm on 
Wall Street to sign an agreement that they would only sell us 
investments that qualified under our State law. Thank you.
    Mr. Neugebauer. My time is up.
    The Chairman. Does the gentleman yield? The hearing that 
this was switched with, because of some concern on the part of 
the Administration--they couldn't make it today. We will have 
that hearing on May 17th. It is a package of bills, one of 
which would call for the registration of finance providers. We 
do not, as members of this committee, have the jurisdiction to 
criminalize, because that is under the jurisdiction of the 
Judiciary Committee. But we do have a bill that would propose a 
fiduciary standard for advisors. Obviously, that will be up to 
the committee. So we will be dealing with that subject to the 
extent that it is our jurisdiction. Criminal jurisdiction is, 
of course, with the Judiciary Committee.
    Mr. Bachus. That pay-for-play and things of that nature?
    The Chairman. Yes, I think that would be covered by that. 
Yes, exactly. So it is, I think, directly relevant. We will 
have a hearing on that on the 17th of May.
    Mr. Bachus. Mr. Hullinghorst, I think you wife is going to 
have the whole football team meet you at the airport.
    The Chairman. The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman. Thank you for holding 
this hearing. In Missouri, as in many other States across the 
country, we have had adverse impacts because of the collapse of 
Lehman Brothers. I am also concerned that TARP funds have been 
denied from local governments, although provisions were made in 
the legislation for this. I also noted that in Representative 
Eshoo's statement that she mentions Missouri as a State that 
has public entities with problems.
    I will start with Mr. Hullinghorst, and anyone else can 
chime in, do you think H.R. 467 will have enough teeth, if it 
is to pass, to effect a change in the present thrust of TARP 
funds? Will this be sufficient to restore these local entities 
to where they would have been financially?
    Mr. Hullinghorst. Thank you for the question, Congressman. 
The legislation as it is written, I believe, will help cover 95 
percent of the problem. Just during these discussions over the 
last 2 days, I have been made aware of the fact that there are 
State pools who invested in money market funds.
    The TARP money has been used to bail out the money market 
funds. You are probably familiar with Prime. The trouble is 
that Prime was given money, was bailed out; but in fact, cause 
of the way it was bailed out by the previous Administration, 
the moneys haven't flowed through. There is a substantial 
amount that is being reserved.
    Now, most of the losses in those money market funds like 
Prime were losses because of Lehman Brothers. And so it is 
probably important to look at how this legislation can get the 
public pooled money that is in those money market funds 
extracted. So that is my answer, is that I think that this will 
solve 95 percent of the problem. And I am sure that a 
modification could help the other pooled investment trusts that 
have experienced losses because of the commercial money market.
    Mr. Clay. Thank you for that.
    Anyone else on the panel?
    Mr. Gordon. If I could, thank you Congressman. We believe 
that local government could be made whole now if the Secretary 
of the Treasury would implement the language that is in TARP. 
What H.R. 467 does is direct him to do that, but we think he 
has the capacity now. In either case, there is a capacity to 
make local governments whole through either of these venues.
    Mr. Clay. Thank you.
    Mr. Street, you mentioned personal responsibility in your 
comments about, I guess, 401(k)s, and maybe you can elaborate 
more. I don't know how an individual with a 401(k) could have 
been more responsible as far as the hit they took. When you 
look at, on average, that the 401(k)s lost about 30 percent, 
what is your response to that? I mean, they really were victims 
when you think about it.
    Mr. Street. I agree the losses are just heart-wrenching, I 
think the challenge of this bill is how do you separate a poor 
person who lost money in their 401(k) from a government entity 
who lost money in their short-term investments? It is how do 
you make that decision and how do you pick the winner and the 
loser in this game of allocation?
    Mr. Clay. Priority-wise, should we go back and try to make 
those individuals whole who were really banking on those 
401(k)s as far as retirement? And some are already retired who 
have lost a significant amount of the value of those 401(k)s. 
Do we first go after them to make them whole?
    Mr. Street. You have a challenge here as our leaders to 
make these kind of decisions. For me, I would be concerned that 
if you make one small decision, you would make a second and a 
third. I am just very afraid that someday, on the front page of 
the Wall Street Journal, we will see, ``United States of 
America downgraded to double A.''
    Mr. Clay. Thank you, I yield back.
    Mr. Thornberg. If I may make a comment on that. The losses 
in the financials across-the-board are enormous, there is no 
doubt about it. And in many ways, the reason for that is if you 
looked at the trend over the last 20 years in the U.S. economy, 
you saw an amazing appreciation in asset classes across the 
board: real estate, commercial real estate, all sorts of 
different types of funds. The levels were unrealistic and now 
those levels are collapsing back.
    There is very little that can be done about that. We can't 
create wealth where wealth didn't exist in the first place. The 
issue here I think before us is a little different, and that 
has to do with the fact that the local governments are being 
forced to curtail current spending as a result of these short-
run financial losses. That is exacerbating the business cycle. 
I don't think we need to look at this as making someone whole 
or someone not. We should view this more as part of the fiscal 
stimulus package to help and turn the economy around.
    When you think San Mateo County has to stop construction on 
buildings at a community college, on a public transit project, 
on this jail, these have all created a loss of jobs and a loss 
of incomes at a time when we as a Nation cannot afford these 
losses. And so excuse me--
    The Chairman. Just one thing. I would just say personally, 
if it comes to the point where they downgrade U.S. paper to 
double A, and the interest we have to pay goes up accordingly, 
I want to announce now I will be a heavy buyer, because the 
likelihood that this body would ever walk out with default is 
so negligible. I hope that day never comes, but if it does, I 
will make money off it personally.
    The gentleman from California.
    Mr. Royce. Thank you, Mr. Chairman. I want to thank Mr. 
Street and ask him a question. I made the observation that 
Lehman was highly leveraged; it had a significant exposure to 
the mortgage market. I think it was as late as 2008 that it had 
$6 billion in subprime exposure, and it even owned a subprime 
originator, B&C Mortgage.
    You know Orange County as I remember, I think it was about 
1994, and I think you were around there at that time, Orange 
County took a hit. And I think a lesson was learned that it was 
a dangerous, dangerous endeavor for a county treasurer to use 
taxpayer funds to invest in products that the local governments 
did not understand. And maybe you can tell us and discuss the 
extent to which the county took responsibility for those losses 
and what did the county do to restructure during that period?
    Mr. Street. I think the first thing we did to restructure 
was work closely with our staff and closely with all the 
community leaders. It was a very difficult time at first with 
people, lots of recriminations. Fortunately, we got over that 
and down to the issues of really dealing with reality. We 
worked together. We tried to use efficiency. Unfortunately, 
there were some layoffs, but over time we were able to bring 
back our credit rating and bring back our community.
    Mr. Royce. Also one of the things that changed was a policy 
from taking risk to one that was far more prudent.
    Mr. Street. That is correct.
    Mr. Royce. What do you believe the impact on market 
discipline will be if Congress awards these municipalities TARP 
funding, thereby making them whole on the investments on the 
bankruptcy of Lehman Brothers?
    Mr. Street. I am concerned, quite frankly. It encourages 
people to take that little bit extra risk and little bit extra 
yield, and the results you see today are quite challenging.
    Mr. Royce. Several of our municipalities across the country 
lost money on Washington Mutual. Should Congress make these 
municipalities whole as well? And where should we draw the 
line, then, if we start down that road?
    Mr. Street. Congressman Royce, I think you ought to set the 
line where it is right now, that we have to take personal 
responsibility, and that is what I am encouraging the committee 
to do today.
    Mr. Royce. Maybe you could discuss a little bit some 
observations you have about market discipline and the role it 
would play. Going back to 1994, back to the decision-making 
process and the treasurer's office back far before you were 
treasurer of the county; maybe some of the observations about 
why those risks were taken at that time.
    Mr. Street. I think it was a challenging time in 
government. In 1993, as many will remember, there was a real 
estate recession and times were hard. I think people were 
trying just a little bit harder and the treasurer had been very 
successful for a long period of time doing just a little bit 
more, and he tried just a little bit more, and finally one day 
we missed payroll.
    Mr. Royce. Yes, it was very highly leveraged derivatives, 
actually, at the time.
    Mr. Street. Correct. He was leveraged about 6:1. In fact, I 
think one of the greatest shocks to Wall Street was the fact 
that Orange County was highly rated. We were double A at the 
time. What Bob Citron, our treasurer, was doing was very 
transparent. People knew what he was doing, Wall Street knew 
what he was doing, and one day the whole house of cards came 
down.
    Mr. Royce. Now, you saw the investments, the $6 billion in 
subprime exposure by Lehman; you saw the fact that they owned a 
subprime mortgage originator, B&C Mortgage. Is there a reason 
specifically why Orange County was not, after its experience in 
1994, not investing in Lehman or not utilizing Lehman in 2008?
    Mr. Street. We have an in-house research capability. We 
also use this tool, Standard & Poors and Moody's, and we chose 
not to have Lehman Brothers on our investment list.
    Mr. Royce. Thank you, Mr. Street.
    Ms. Speier. [presiding] I am going to take you down memory 
lane with Mr. Citron a little bit. If I recall correctly, in 
1994 there was $7.6 billion that was invested in Orange County 
for about 200 municipalities in special districts; is that 
right, Mr. Street?
    Mr. Street. About 7.6 billion, I believe, is about right. 
He had a portfolio of about $26 billion. It was essentially 
leveraged up from that point.
    Ms. Speier. If I recall correctly, the investments that 
were being made in Orange County would not be defined as 
prudent; is that correct?
    Mr. Street. In fact, most of it would be defined as 
extremely prudent as far as the instrument he bought. He bought 
5-year U.S. Government agencies. He simply leveraged them. He 
had some number of derivatives, but 90 percent of Mr. Citron's 
investment philosophy was leverage.
    Ms. Speier. Well, he did invest in derivatives and inverse 
and floaters; is that not true?
    Mr. Street. A number of them, yes, about $4 billion worth.
    Ms. Speier. And you heard testimony that none of these 
jurisdictions have invested in derivatives or inverse floaters; 
is that correct?
    Mr. Street. That is correct.
    Ms. Speier. So you are really trying to suggest that their 
prudent activity was liked to Mr. Citron's very imprudent 
investment policies.
    Mr. Street. I can only speak for Orange County.
    Ms. Speier. Well, I know. But you have attempted to 
establish that somehow what happened to Orange County should 
happen to these jurisdiction, when in fact they didn't engage 
in anything like derivatives or inverse floaters. And 
furthermore, as I understand it, he was so hooked on the fact 
that he was getting 12 percent interest and that about 35 
percent of the revenues for Orange County at the time were 
coming from interest made on these very speculative 
instruments, that he went out and borrowed money, did he not?
    Mr. Street. That is correct.
    Ms. Speier. So he borrowed money to invest it. So for every 
dollar he borrowed, he was attempting to make $2 in an 
investment; is that correct?
    Mr. Street. I don't know the return at $2. I remember that 
he was making about 8 percent on his investments. He was buying 
instruments that yield at about 4\1/2\ percent and leveraged 
them to an 8 percent yield.
    Ms. Speier. As you heard from testimony here today by these 
various local communities and jurisdictions, they weren't 
playing the market; they were taking their money and what was 
the equivalent of putting it in a savings account to be used, 
appropriately, to build buildings, to make payroll. It was not 
being used in any way that can be likened to what Mr. Citron 
was doing in Orange County, correct?
    Mr. Street. I have in no way said that the investments that 
were made here were the challenge. The challenge today is that 
the bill that is before you, I think, would set a bad precedent 
and, in fact, be dangerous to the financial markets.
    Mr. Royce. Would the gentlelady yield?
    Ms. Speier. I am not a gentleman, but I will be happy to.
    Mr. Royce. I said gentlelady. Excuse me, ma'am.
    You know, I think the point he was making here, you made 
the point it was a savings account that they were invested in. 
No, they weren't investing in a savings account. They were 
investing in a highly leveraged institution that was Lehman 
Brothers, just as Orange County was highly leveraged in 1994. 
And what we are talking about in terms of market discipline is 
getting county treasurers away from the concept of leveraging 
and investing in these institutions that are so highly 
leveraged. I thought that was one of the underlying themes 
here, so I just--
    Ms. Speier. Would the gentleman yield?
    Mr. Royce. Yes.
    Ms. Speier. I did listen to his entire testimony, and my 
interpretation was that he was suggesting that if Orange County 
made some bad mistakes and they kind of swallowed hard and 
dealt with it, then these jurisdictions should do the same 
thing.
    The only point I was trying to make is that it was very 
different, what was happening in Orange County, than in these 
specific jurisdictions.
    Mr. Royce. And I understand that point. But in both cases 
we are dealing with leverage. And that is, I think, the take-
away or the theme that he was trying to leave us with. But I 
thank the gentlelady for yielding.
    Ms. Speier. All right.
    Mr. Street, if I could, I would just like to ask you one 
other series of questions. And that is, based on what you have 
said, I would interpret that you would not have supported the 
TARP funding; is that correct?
    Mr. Street. I think that once you started to bail out Bear 
Stearns that it was only a matter of time before people would 
take more risk and people would say things are too-big-to-fail, 
and then you would have the situation we are dealing with 
today.
    Ms. Speier. I guess you didn't answer my question. Would 
you have supported the TARP measure? Did you support it? Do you 
support it?
    Mr. Street. I think that there needed to be some form of 
standby guarantee within the Fed. Is the TARP the correct 
measure? That was really your decision.
    Ms. Speier. So you, then, would not be opposed to having 
TARP moneys being spent to bail out Wall Street companies, but 
you have an objection to having TARP moneys used to bail out 
local jurisdictions; is that correct?
    Mr. Street. I think that we are talking here about really 
replacing lost dollars. If that is what TARP money is going to 
be used for, I think it would be a mistake.
    Ms. Speier. You don't think the money has been used to help 
AIG and that we are possibly not going to see any of that money 
come back, or with some of the money we have given to Chrysler?
    Mr. Street. I think those are the tough decisions you have 
to make every day, and clearly those decisions keep coming.
    Ms. Speier. All right, thank you.
    Mr. Thornberg, I have one question for you. You indicated 
that there were probably about 1,700 jobs lost in San Mateo, 
about 1,658 jobs lost in San Mateo County as a result of the 
money that had been invested in Lehman. If you would 
extrapolate for the $1.7 billion that has been lost by 
jurisdictions across this country, how many jobs do you think 
have been lost as a result of Lehman's being allowed to failed?
    Mr. Thornberg. It would be, of course, just a rough 
estimate, but probably something on the order of 20- to 25,000 
jobs in total.
    Ms. Speier. Thank you.
    Mr. Lance from New Jersey.
    Mr. Lance. Thank you very much, Madam Chairwoman. Good 
morning to you all.
    I find this a very interesting issue, and as I view the 
testimony, the State of New Jersey where I live may be in a 
similar situation to the State of California. And I will direct 
my questions to Mr. Street, but certainly there are other 
experts on the panel as well.
    In the State of California, is there a requirement, 
constitutionally, that the State budget has to be balanced each 
year; and can debt be issued for the general operating portions 
of the State budget? Would you know that, sir?
    Mr. Street. There is a requirement, constitutionally, that 
the State has a balanced budget. Certain debt can be issued as 
revenue anticipation notes to smooth out cash flow--
    Mr. Lance. I am not concerned about that, but those are 
merely short-term obligations. I am talking about the length of 
the budget year.
    Mr. Street. My understanding is it is illegal to basically 
borrow money for operating outside the current fiscal year.
    Mr. Lance. Your testimony indicates that issuance of debt 
by California, as I understand your testimony, has increased a 
yield from 4 percent to 6 percent in the last several months. 
Am I reading your testimony correctly?
    Mr. Street. That is correct. From the start of the year, I 
think we started out at about 2 percent for short-term money 
and went to 4 percent. Now the last issuance is longer-term 
money; it is 6.2 percent, I believe.
    Mr. Lance. We issued debt in New Jersey over the last 
decade for the general operating portions of our State budget, 
over my strong objection; I was the minority leader in the 
State Senate before I came here. And a constitutional amendment 
was passed last November in New Jersey, under my authorship, to 
prohibit that in the future, because it has been so devastating 
to our State. If you are not able to issue debt for the general 
operating portions of the budget, is it your understanding, 
sir, that the general operating portions of your State budget 
are exclusively funded through ongoing revenues?
    Mr. Street. Well, that is correct. Currently, the State of 
California faces an inability even to sell short-term cash-flow 
instruments and is anticipating selling what are called revenue 
anticipation--
    Mr. Lance. I see that in your testimony, yes.
    Mr. Street. But these are really PAYGO. So California is 
approaching PAYGO.
    Mr. Lance. And am I reading your testimony right, sir, that 
there is going to be a ballot initiative sometime later this 
month regarding increasing taxes in California?
    Mr. Street. That is right. There are six ballot 
initiatives, I believe, four of which I think have revenue that 
would add about $6 billion or $7 billion a year. Those four 
revenue initiatives are currently failing in polls quite 
heavily.
    Mr. Lance. I see. Thank you.
    This is certainly reminiscent of what is occurring in New 
Jersey. We rely on an income tax that, in turn, relies on 
upper-income New Jerseyans. You indicate in your testimony that 
40 percent of your State income tax is derived from the top 1 
percent of filers. That is also true in New Jersey. We have a 
gross income tax, not an adjusted gross income tax, with very 
few deductions. And I would be interested, and perhaps I will 
ask the nonpartisan office here, to analyze the similarities 
between California and New Jersey. I am struck by them in your 
testimony.
    I know this is not the main purpose of today's hearing, 
Madam Chairwoman, but certainly it has piqued my interest.
    I yield back the balance of my time. Thank you, Madam 
Chairwoman.
    Ms. Speier. Thank you.
    The gentleman from Texas, Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman.
    And I thank the witnesses for testifying, as well.
    Mr. Street, I thank you for your line of logic, and I would 
like to pursue it, if I may. Given your line of logic, would 
you have allowed Bear Stearns to fail?
    Mr. Street. Yes, I would.
    Mr. Green. Would you have allowed AIG to fail?
    Mr. Street. I think that AIG is probably a function of what 
happened with Bear Stearns.
    Mr. Green. May I take it that your answer is ``yes?''
    Mr. Street. Yes.
    Mr. Green. Would you have allowed Chrysler to fail?
    Mr. Street. Chrysler failed once before. It got a loan. I 
think it is currently failed and in bankruptcy, and we will see 
how it goes.
    Mr. Green. May I take it that your answer would be ``yes?''
    Mr. Street. Perhaps.
    Mr. Green. Would you allow GM to fail?
    Mr. Street. I think GM is going to come back as a very 
strong company, and I think it is going to go into bankruptcy.
    Mr. Green. Would you allow the banks that received the 
equity capital from the TARP--we purchased equity positions; 
would you have purchased those equity positions?
    Mr. Street. Would I have accepted that the Federal 
Government should put money to back the banks?
    Mr. Green. Yes.
    Mr. Street. I would accept that the Federal Government 
should put money to back the banks.
    Mr. Green. The backing of the banks with the funds is not 
something that we traditionally do. We have the FDIC, but what 
we are doing with TARP is in addition to FDIC. Do you agree?
    Mr. Street. It is going to a new level, yes.
    Mr. Green. Just for my edification, what world do you see, 
had you allowed all of the things that you would allow to take 
place, how do you see the world today if these things had 
occurred?
    Mr. Street. I wrote an article, along with David Evans, in 
Bloomberg magazine in July of 2007, which outlined all of the 
problems that we are facing in the real estate markets--
    Mr. Green. Because my time is somewhat limited, please, I 
don't mean to be rude, but tell me about the world that you 
would see today. What would unemployment be like in this world 
today, had we pursued your line of logic?
    Mr. Street. I think if we would have had failures and then 
rehabilitations through bankruptcy we would be back in a better 
shape today.
    Mr. Green. Let's talk about today, and we are talking about 
over the last year now all of these events were occurring. So 
are you of the opinion that unemployment would be lower today 
and that we would be better off today, had we allowed the 
failure of Bear Stearns, AIG, possibly Chrysler and GM? We did 
invest in them. Are you of the opinion that we would be better 
off?
    Mr. Street. I believe that if we had let Bear Stearns fail 
of its own actions, we would be better off today and have less 
unemployment.
    Mr. Green. But not just--you see, we are not talking about 
one; we are talking about a number of entities. Let's put them 
all in the equation. If we had allowed all of the things to 
occur that could have occurred but for action, are you of the 
opinion we would be better off?
    Mr. Street. Yes.
    Mr. Green. Now, let's talk about something else, Mr. 
Street. You asked, how do we pick winners and losers? I assume, 
Mr. Street, that you don't pave all of your streets in Orange 
County at one time. That is a fair statement, I assume.
    Mr. Street. Yes.
    Mr. Green. And, Mr. Street, if you don't pave all of your 
streets at one time, somebody picks winners and losers.
    Mr. Street. Yes.
    Mr. Green. That is the job, sometimes, of government. It is 
not a nice thing to have to do; no one relishes having to do 
it. But there are times when you have to make hard decisions, 
very difficult decisions, and you do the best that you can. You 
may not get it right, you may not be perfect. But you do what 
you can, the best that you can, to be of assistance.
    Final question: All of these persons with you are here 
because there is a law that they are trying to cause us to 
implement as they see it appropriately. Had there been a law at 
the time Orange County found itself in this dilemma that 
connoted Orange County could receive some assistance, would you 
have pursued receiving that assistance from the Federal 
Government?
    Mr. Street. No.
    Mr. Green. You would have simply allowed Orange County to 
do as it has done and not made a bid for Orange County to 
benefit from what the law says Orange County may have been 
entitled to?
    Mr. Street. Yes.
    Mr. Green. I thank you very much.
    And I yield back the balance of my time.
    Ms. Speier. The gentleman from California, Mr. Campbell?
    Mr. Campbell. Thank you, Madam Chairwoman.
    Mr. Street, when Bob Citron, the former treasurer of Orange 
County, did what he did, he was trying to increase the yield 
and increase return to the County of Orange, was he not?
    Mr. Street. That is correct.
    Mr. Campbell. So he was chasing yield, let's call it.
    Mr. Street. He had a strategy to maximize.
    Mr. Campbell. And because of the failure of those things, 
the County of Orange went bankrupt, correct?
    Mr. Street. That is correct.
    Mr. Campbell. Okay.
    And, Ms. Rushing or Mr. Galatolo, could either of you have 
invested in something that was a higher-rated bond but gave a 
lower yield instead of Lehman Brothers at the time?
    Ms. Rushing. Absolutely.
    Mr. Galatolo. In my situation, actually, I am required by 
law to invest in the county commingled fund, so the answer is 
no.
    Mr. Campbell. You are required by law to invest in what?
    Mr. Galatolo. Yes, the proceeds that we receive from our 
general obligation bonds as well as all our property taxes in 
addition to the State apportionment goes into the county 
commingled fund, and, by law, it is invested on our behalf.
    Mr. Campbell. You are required to invest in Lehman 
Brothers?
    Mr. Galatolo. We are required to invest in the county 
commingled fund, in the San Mateo County commingled fund.
    Mr. Campbell. Oh, all right. Then I should be asking the 
question of who made the investment in the county commingled 
fund, I guess.
    Is that you, Mr. Gordon?
    Mr. Gordon. The county treasurer made that choice.
    Mr. Campbell. Okay. But he could have invested in Treasury 
bills and had a lower yield.
    Mr. Gordon. We were invested in Treasury bills.
    Mr. Campbell. But he could have invested it all in Treasury 
bills.
    Mr. Gordon. But there are diversification rules in the 
State of California. We were actually maximum on our 
Treasuries. So--
    Mr. Campbell. But you could have invested in other things 
that gave a lower yield and a higher return and still met the 
diversification rules.
    Mr. Gordon. No--
    Mr. Campbell. The point I am trying to make, which I am 
sure you can all get, is that--well, let me ask, are either of 
your counties in danger of going bankrupt purely and strictly 
because of the Lehman failure?
    Mr. Gordon. No, we are not in danger of going bankrupt. 
And, you know, the State law--
    Mr. Campbell. Ms. Rushing?
    Ms. Rushing. To your question, no.
    But I want to make sure I didn't misunderstand your prior 
question. I thought you asked me if I could have invested in 
instruments with higher yields.
    Mr. Campbell. No, lower yield. Lower yield, but higher 
rating.
    Ms. Rushing. Okay. So then I would take, yes, I would--
    Mr. Campbell. Would you have invested in Treasury bills 
instead of that?
    Ms. Rushing. We were.
    Mr. Campbell. Could you have invested the Lehman money in 
Treasury bills instead?
    Ms. Rushing. Well, we have diversification limits.
    Mr. Campbell. The point here is quite clear. Mr. Citron was 
chasing yield. Now, he did it to an extreme degree, such that 
the County of Orange failed and went bankrupt because he was 
chasing yield.
    The point I am simply trying to make is that you guys were 
chasing yield, too. There is nothing the matter with that. 
There is nothing wrong with that. But with yield comes risk. 
And if there is no downside to that risk, then we all chase as 
much yield as we can.
    And so I would say, Madam Chairwoman, that although the 
County of Orange is not equivalent because these people aren't 
facing bankruptcy and the County of Orange was, that there is 
an equivalency in the fact of chasing yield.
    Ms. Speier. Would the gentleman yield?
    Mr. Campbell. I will if you will give me a second, so I 
don't run out of time. But go ahead.
    Ms. Speier. Let us ask the treasurer from Orange whether or 
not they are invested in Merrill, which was bailed out.
    The point here is that everyone else was bailed out and 
Lehman was not.
    Mr. Campbell. Okay, reclaiming my time, Madam Chairwoman, I 
go to the next question, which is, why are you all more worthy 
of having your investment in Lehman than a pension fund that 
someone is counting on for retirement who invested in Lehman, 
or an individual who is living on a fixed income and this was 
part of their fixed income and they now will have to completely 
change their lifestyle, or some mutual fund that invested for a 
vast amount of investors in Lehman?
    Why are you more worthy than any of those? And so, if we 
are going to bail out people who invested in Lehman, why not 
bail out everybody who invested in Lehman?
    Anyone can answer.
    Ms. Rushing. I think we are here today because your 
regulations allow for State and local governments to 
participate in the TARP program. And that is why we are here 
today, asking for your assistance.
    Mr. Campbell. But then, shouldn't anyone who made this 
same--other people in the private sector, obviously, made this 
same investment and have suffered the same loss. Shouldn't they 
also have an opportunity to recover their loss?
    Mr. Galatolo. With all due respect, Congressman, I think it 
is important to denote a very important difference here. And 
that is that, when you are talking about the retirement funds, 
these are moneys that will be invested for a long period of 
time, actually have the time to potentially recover. The money 
that we lost in our school district, actually, we lost 
immediately. And it went to our operating fund, so it 
immediately cut right into our ability to pay our faculty and 
staff. So it resulted in lost--
    Mr. Campbell. Well, except that most retirement funds are 
paying out to people who are retired currently, and they hold 
some for--you have some balance. And I realize my time is up. 
But you have some balance of investments that you are carrying 
at all times.
    Mr. Galatolo. Retirement funds, too, obviously have a very 
large investment pool. And when they are paying out, they are 
paying out of a very small fraction of that investment pool at 
any one point in time.
    The money that we had actually went directly to paying 
faculty salaries, staff salaries, and operating expenses. And 
not being able to do that means that we have to eliminate 
positions immediately, which really causes a destimulating 
effect.
    Ms. Speier. Mr. Campbell, I would like to answer your 
question. And I think the difference is really quite clear. The 
difference is these are taxpayer entities, and we want taxpayer 
money to be returned to these taxpayer entities.
    Some of the references you made are to individuals, and we 
are not interested here in making individuals whole. We want to 
make the local jurisdictions whole that are the beneficiaries 
of the taxpayer money anyway.
    Mr. Campbell. Would the gentlelady yield?
    Ms. Speier. Yes.
    Mr. Campbell. Taxpayers are individuals, as well.
    Ms. Speier. I understand that. But this--you asked the 
question about pension funds and others who invested in Lehman. 
And my point is that we want to make those who were taxpayer 
entities, local jurisdictions, be able to be made whole with 
TARP money that all these other jurisdictions were 
beneficiaries of.
    Mr. Campbell. If the gentlelady would yield, I just don't 
see the distinction between--I mean, I understand a public 
entity has taxpayers, but pensions--which are individuals--
pensions has retirees, who are individuals; mutual funds have 
investors, who are individuals. The impact on those individuals 
is as severe, relatively, as it would be on municipalities. And 
I just think it is unfair to do one and not the other.
    Ms. Speier. All right.
    The gentleman from Missouri, Mr. Cleaver?
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Whew. I just need to editorially say that we approved, in 
this committee, toxic asset removal. We were going to take all 
the bad assets out of the markets so that people would feel 
comfortable. We went home and found out that the money for 
toxic asset removal was given to banks. And so I have some 
irritation over the fact that, in the language of the bill, we 
say that we can help municipalities. Now, we took the money, 
gave it to banks.
    Most of the people in America believe that Congress voted 
to give money to the banks. When I go home and do town hall 
meetings, people want to know, why did you vote to give money 
to the banks? I never voted to give money to the banks. I voted 
to give them to municipalities. And, as a former mayor, I 
understand that is something that is desperately needed.
    And I am going to calm down.
    What I also need to raise--Mr. Street, would you read the 
last paragraph of your statement? The statement that we have 
here is different than what you were reading. Or maybe you were 
just speaking off the cuff.
    Mr. Street. On my written submission? You are asking me to 
read the statement?
    Mr. Cleaver. The last paragraph of your statement.
    Mr. Street. ``I caution you, as our national leaders, to be 
deliberate in evaluating the legislation before you today and 
mindful of potentially unintended consequences. And I urge you 
to vote `no' on this legislation.''
    Mr. Cleaver. Okay. And I guess the paragraph earlier, you 
said that--well, ``the consequences of your behavior and 
the''--you said ``the bad behavior.'' It may have been in the 
previous paragraph.
    Mr. Street. Would you like me to read that paragraph?
    Mr. Cleaver. Yes.
    Mr. Street. ``When we create laws, no matter how good our 
intentions, that exempt individuals from the consequences of 
their actions, we eliminate responsibility and promote 
irresponsibility.''
    Mr. Cleaver. Okay.
    Mr. Street. ``Bailouts, no matter how lofty the original 
goal--''
    Mr. Cleaver. I got it. Thank you, thank you.
    I was trying to figure out how that related to the 
municipalities, the counties.
    Ms. Speier. Do you have an answer, Mr. Street?
    Mr. Street. Is that a question, how this relates--
    Mr. Cleaver. You say, is that a question? I am going to try 
it again. Let's see. How does that relate to the counties? How 
does that relate to the conversation?
    Mr. Street. It is very challenging, being from Orange 
County and suffered this pain, and I know their pain. On the 
other hand, Orange County worked out its challenges without a 
bailout, without an intervention.
    Mr. Cleaver. Excuse me, sir. Excuse me. Okay, thank you.
    How does what you say--I am going to try to say this really 
clearly, because I know I am confusing you. How does what you 
just read impact or relate to the counties, the municipalities?
    Mr. Street. If you bail out certain investors in Lehman, 
you are going to have to bail out others. And you are going to 
have to bail out lots of them.
    Mr. Cleaver. Madam Chairwoman, I surrender.
    Ms. Speier. Mrs. Biggert from Illinois?
    Mrs. Biggert. Thank you, Madam Chairwoman.
    I would yield to the gentleman from California, Mr. 
Campbell.
    Mr. Campbell. I thank the gentlelady for yielding.
    Just a couple more questions or points.
    The original TARP money, what was happening at the time was 
a systemic risk, that if various of these institutions failed, 
the belief which--in fact, I was late to this hearing because I 
was questioning Mr. Bernanke, the Chairman of the Federal 
Reserve, in the Joint Economic Committee. And I asked him, you 
know, what were we on the verge of? And he said we were on the 
verge of a financial calamity, which could have resulted in 
thousands of bank failures and literally would have touched 
every segment of the economy, at every level, if we didn't do 
that. That is his feeling, his opinion.
    Is there an opinion that somehow there is some systemic 
risk here if we do not reimburse municipalities for their 
investment in Lehman Brothers?
    Mr. Thornberg, do you want to take a crack at that one?
    Mr. Thornberg. You mean is there going to be some sort of 
cascade effect that will bring down the entire State of 
California? No, absolutely not.
    Mr. Campbell. How about a cascade effect that brings down 
anything else?
    Mr. Thornberg. Well, again, we are in a situation, of 
course, where consumers have been pulling back dramatically on 
spending, which is creating a lot of turmoil inside the 
economy. To allow State and local governments to also pull back 
dramatically on spending creates an even more vicious cycle.
    Mr. Campbell. Okay. But, in theory, any use of TARP funds 
to a private entity or a public entity that results in an 
activity that creates jobs could do the same thing, correct?
    Mr. Thornberg. Absolutely. I agree with that.
    But let me also make the point that, I mean, one of the 
advantages of using TARP money for this particular situation is 
that, for example, you can immediately put people back to work 
because these are shovel stop projects. I mean, so this would 
have one of the most immediate impacts.
    One of my largest concerns about some of the spending 
bills, it is just that most of the spending takes place next 
year, when it is not going to be relevant anymore.
    Mr. Campbell. Right, but, I mean, clearly--all right, I 
understand. And, I mean, I disagree, in that I think in the 
private sector--and you and I have talked for years. There is a 
bigger multiplier effect in the private sector, isn't there?
    Mr. Thornberg. Well, I mean, obviously, much of this money 
would go to the private sector. Don't forget, like, for 
example, the construction projects, that is private sector. A 
lot of this money would go to external contractors.
    Mr. Campbell. Okay, but we don't know necessarily where it 
will go. But there is no systemic issue here.
    Mr. Thornberg. No.
    Mr. Campbell. So it is really not akin to TARP, I mean, to 
the original purpose of the original TARP.
    Mr. Thornberg. No.
    Mr. Campbell. The last thing is why--and if this question 
has been asked, I apologize. But if a municipality adjacent to 
any of yours, or whatever, has Chrysler debt or General Motors, 
which was pretty highly rated at one time, or WaMu or whatever, 
why should only Lehman investors be carved out, versus all of 
the other failures that have happened or are yet to occur?
    Mr. Thornberg. I will just weigh in very quickly on that.
    Again, I think one of the primary points that I tried to 
make in my presentation was that the money we are talking about 
is strictly short-run investments; that long-run investments 
should not be covered under this in any way, shape, or form.
    Mr. Campbell. Well, I mean, I am just talking about the 
bonds.
    Mr. Thornberg. Well, but these are all short-run bonds used 
for current expenditures. These were not long-run bonds wrapped 
up in pension funds or anything like that. Those should not be 
part of this process.
    Mr. Campbell. Okay. Suppose someone was invested in 
something overnight or invested in 30 days, whatever, invested 
in something short-run for one of these other institutions, one 
of these other bonds that has failed.
    Okay. All right. I will yield back the balance of my time 
to the gentlelady from Illinois. Thank you very much.
    Mrs. Biggert. Thank you.
    I yield back.
    Ms. Speier. The gentleman from Colorado, Mr. Perlmutter?
    Mr. Perlmutter. Thank you.
    And I appreciate the conversation and Mr. Campbell's points 
and some of the remarks that you have made, Mr. Street, but 
let's just start from square one.
    Orange County filed Chapter 9. That is, like, one in a 
million counties that file Chapter 9, correct?
    Mr. Street. There have been other counties that have filed 
Chapter 9 or are about to file Chapter 9.
    Mr. Perlmutter. But Orange County, back in the 1990's, was 
the only county to file Chapter 9, wasn't it?
    Mr. Street. I believe so.
    Mr. Perlmutter. Okay. And Chapter 9 is a bankruptcy, very 
unusual bankruptcy for a governmental entity, correct?
    Mr. Street. Yes.
    Mr. Perlmutter. Okay. So that is how Orange County dealt 
with its financial problems, is it filed bankruptcy.
    Mr. Street. Yes.
    Mr. Perlmutter. It didn't get a bailout, but it utilized 
the laws of the United States to file bankruptcy. So it made a 
lot of very bad investment decisions. And Mr. Campbell is 
right. You compare yield and risk, and the riskier you get, 
maybe the higher yield you get and the more trouble you might 
get into. And Orange County got into a lot of trouble. Other 
counties didn't get into trouble, at that time.
    Mr. Street. There were a lot of counties that got into 
trouble, a lot of cities. You just didn't hear it in the form 
of bankruptcies--
    Mr. Perlmutter. I am a bankruptcy lawyer. I did Chapter--I 
didn't do Chapter 9's, because we didn't have Chapter 9's going 
in Colorado. But I am aware of Orange County. And, really, that 
was the only one--that was the signature bankruptcy in the 
1990's, for sure, and in this decade too. And so, to use that 
as the highlight of comparison to these other folks who 
invested in, more or less, money markets with a company that 
had a high rating from a rating agency is absolutely 
ridiculous.
    So I do appreciate the comments that you made after that, 
about the fact you have to watch every nickel, because at this 
time in our Nation's history, every county and every individual 
and every government has to watch how it is doing. So those 
points are well-taken.
    But, you know, as a lousy pun, to compare Orange County to 
these other counties and districts is like comparing apples and 
oranges; it just doesn't really apply. Your point about 
watching money closely now is correct.
    I think where I have a real problem with what Mr. Campbell 
was saying--he says, well, to California, ``If you don't get 
your share of TARP money, will the system fall apart? If not, 
then you are not systemic.'' We provided TARP money because, 
across the system, everybody needed assistance. We certainly 
helped the banks; now, why aren't we helping Main Street?
    You can't have an objection to that, can you, sir?
    Mr. Street. I think that if you pass this bill, you will 
encourage risk in the future. People will see the bailout as 
allowing them to take greater amounts of risk and--
    Mr. Perlmutter. You don't think we have already encouraged 
that by assisting the banks?
    Mr. Street. I think there has been a lot of punishment 
taken out on some of the executives of the bank, and I think 
America actually applauds that.
    Mr. Perlmutter. Let me ask you this, and then I will turn 
it over to the other panelists.
    Mr. Hullinghorst described the purpose of investments in 
something like a Lehman Brothers or other things. And I am sure 
Orange County had investments in some other companies, and 
Merrill Lynch or Citibank or JPMorgan Chase. The purpose was to 
also bolster commercial paper lending. Everything is connected 
to everything else in the financial sector. That certainly is 
something we have found.
    Now, do you object to taxpayer money coming in through 
local governments being used to assist with commercial paper?
    Mr. Street. Taxpayer money coming in to bail out local 
governments' commercial paper? Absolutely.
    Mr. Perlmutter. Okay. Do you object to local governments' 
taxpayer money, their own taxes, being used to purchase 
commercial paper that then goes to assist businesses across the 
country?
    Mr. Street. I think they have investment policy statements, 
and they pursue those investment policies.
    Mr. Perlmutter. Did you hear any of these individuals state 
that they were outside of their investment policies or the laws 
of their State?
    Mr. Street. I did not.
    Mr. Perlmutter. Okay.
    Mr. Hullinghorst, what if you were all to pull back from, 
you know, buying highly rated paper that then is used for--your 
funds are used to assist other businesses across the country?
    Mr. Hullinghorst. The amount of investment in commercial 
paper by governments is probably less than 10 percent, maybe 20 
percent of our entire portfolio. I would have to be speculating 
on that. But there is at least $200 billion to $300 billion 
invested in pools, pooled investment funds.
    And so that is roughly $30 billion. It is not going to kill 
the commercial paper market, but we are in the commercial paper 
market because there are specific maturity dates that we need 
to meet. Sometimes those maturity dates aren't available in 
other paper, and commercial paper that is A1/P1 rated is 
supposed to have a maturity that you can count on.
    There are two things that are going to happen if we 
continue down this road and don't support municipal 
governments.
    One is already happening, and that is that people are 
pulling out of the pooled investment funds all over the 
country. One in Colorado has already failed because of its 
Lehman investments because it broke the buck. It wasn't a bad 
investment pool; it is just that, by the rules of the game, if 
you have more than a $1 loss in a pooled investment fund, you 
close the doors and you liquidate.
    There is another pool in Colorado that--
    Mr. Perlmutter. My time is up, but I appreciate your 
comments.
    And I guess I am the last person, so I would yield back.
    Ms. Speier. Thank you.
    Ladies and gentlemen, this brings to a close our hearing 
today. I want to thank the panelists for providing us with such 
great testimony.
    I want to thank all of you who joined who are staff to 
these jurisdictions, who came the long distance to be here 
today. Will all those who are the support to those who are at 
the table like to stand up so we can say, ``thank you,'' as 
well, for your great participation.
    I would also like to clarify that the municipal finance 
hearing will be on May 21st, not on May 17th, as earlier 
mentioned. So May 21st will be the hearing on municipal 
finance.
    And, at this time, the committee stands adjourned.
    [Whereupon, at 12:28 p.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 5, 2009


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