[Congressional Record (Bound Edition), Volume 156 (2010), Part 5]
[Extensions of Remarks]
[Pages 6440-6442]
[From the U.S. Government Publishing Office, www.gpo.gov]




    INTRODUCTION OF THE RESTITUTION FOR LOCAL GOVERNMENT ACT OF 2010

                                 ______
                                 

                           HON. ANNA G. ESHOO

                             of california

                    in the house of representatives

                        Tuesday, April 27, 2010

  Ms. ESHOO. Madam Speaker, I rise today to announce the introduction 
of my legislation, the Restitution for Local Government Act of 2010. 
This legislation will require the Department of the Treasury to assist 
public entities that lost taxpayer dollars when Lehman Brothers 
declared bankruptcy in September of 2008 . . . the single largest 
bankruptcy in the history of the United States.
  More than 40 municipalities from around the country lost close to 
$1.7 billion when Lehman collapsed.

[[Page 6441]]

  In my Congressional District, San Mateo County and its public 
institutions were severe victims, and still are, of the Lehman Brothers 
bankruptcy.
  San Mateo County is required by California State law to hold 
operating funds, reserves and bond proceeds in an investment pool. 
Their investment pool held funds for the county and local cities, 
school districts, transit agencies and the community college district. 
They invested in the most highly-rated, conservative Lehman securities. 
They were not `playing the market' or rolling the dice. They are 
victims of some of the worst abuses and deceit of a financial 
institution that was considered to be one of the soundest and safest in 
the Nation.
  When Lehman collapsed, San Mateo County lost $155 million. As a 
result, the county and its 735,000 residents are now reeling 
financially. Teachers are being laid off. Schools are not being built 
or renovated. Roads are not being improved. Transportation plans are 
being scrapped, and critical upgrades in public safety have ceased.
  The financial plight of San Mateo County was recently profiled in 
detail in a February 24, 2010, Wall Street Journal article entitled, 
Lehman's Ghost Haunts California. (Madam Speaker, I respectfully 
request that this article be included in the Record.)
  My legislation will require the Secretary of the Treasury to use any 
profit made by the sale of troubled assets acquired through the 
Emergency Economic Stabilization Act of 2008 to be used to purchase the 
securities, bonds, and other financial instruments issued by Lehman 
Brothers which were held by local governments on September 12, 2008. 
The bill directs the Secretary of the Treasury to establish a $1.7 
billion remediation fund, and grants him the authority to assist the 
public entities affected by the collapse of Lehman Brothers.
  Under my legislation taxpayers will get their money back and will 
know where the money goes. My legislation specifically states that any 
local government which receives money from this new fund must report 
back to the federal government on how this money is being used, and 
demonstrate job creation, retention, and economic activity equal to the 
amount of funds received.
  Financial institutions were deemed ``too big to fail.'' Today, we 
should not overlook those who are being treated as though they are too 
small to help.
  It's time to serve the best interests of the American people. They 
lost their hard-earned taxpayer dollars which were specifically 
intended to be invested in their community for vital services, and I 
urge my colleagues to join in this critical effort.

             [From the Wall Street Journal, Feb. 24, 2010]

                    Lehman's Ghost Haunts California

                          (By John Carreyrou)

       San Mateo, Calif.--Little more than a year after the worst 
     of the financial panic, Wall Street is bouncing back. But in 
     this county just south of San Francisco, pain from the 
     financial system's near-collapse is still felt every day.
       San Mateo, a scenic swath of peninsula between the Pacific 
     Ocean and San Francisco Bay, saw $155 million evaporate when 
     Lehman Brothers went bankrupt in September 2008. On top of 
     deep budget cuts brought on by California's fiscal crisis, 
     the loss on Lehman securities means San Mateo's 735,000 
     residents are taking a hit.
       Public schools here have laid off dozens of teachers and 
     delayed or canceled renovations. Local community colleges are 
     slashing classes and scrapping new facilities, even as 
     enrollment surges because of the bad economy. The county 
     trimmed its commuter rail service and shelved plans to build 
     a new women's jail to alleviate overcrowding.
       The biggest factor behind San Mateo's trouble is 
     California's spending cuts. But its Lehman losses make a bad 
     situation worse. The problem underscores the diverging 
     fortunes of Wall Street and Main Street and helps explain the 
     populist anger still simmering in many parts of the country. 
     Last week, Barclays PLC reported that its 2009 profit more 
     than doubled to $14.7 billion thanks in part to its 
     acquisition of Lehman's North American operations.
       Lehman Brothers' collapse is ``old news for most of 
     America,'' says Richard Gordon, a member of the county's 
     board of supervisors. But in San Mateo County, he says, 
     ``It's a continuing story that continues to unfold.''
       A report by Beacon Economics, commissioned by the county, 
     estimates that the Lehman losses reduced local government 
     spending, especially on construction projects, by $148 
     million over two years. The consulting firm says this 
     resulted in 1,648 jobs lost or not created. County 
     unemployment now hovers around 9%, double what it was 18 
     months ago.
       Dozens of cities and counties around the country, from 
     Sarasota, Fla., to Boulder, Colo., lost a total of $1.7 
     billion when Lehman went under, because they held Lehman 
     bonds or other securities. The two worst hit states are 
     Florida and California. Florida public agencies lost a total 
     of more than $400 million, mostly from a state investment 
     pool. California municipalities lost a total of $250 million 
     across some 28 cities and counties.
       San Mateo County's loss was the biggest of any 
     municipality. Under state rules, the county government, city 
     governments and area school districts hold their operating 
     funds, reserves and bond proceeds together in an investment 
     pool that lost about 6% of its value when Lehman went under.
       The investment pool owned highly rated Lehman bonds and 
     notes, which currently trade around 20 cents on the dollar. 
     Any recovery from the bankruptcy process will take at least 
     another year. A recovery of 20 cents on the dollar would 
     leave the pool with a loss of roughly $125 million.
       Much of the anger in San Mateo is directed at the Obama 
     administration and, specifically, at Timothy Geithner, the 
     Treasury secretary. Mr. Geithner has declined to use funds 
     from the government's Troubled Asset Relief Program, or TARP, 
     to bail out municipalities.
       ``There's too big to fail, and we're too small for them to 
     care,'' says Mary McMillan, the county's deputy manager.
       Before Wall Street's crash in late 2008, San Mateo County 
     was on track to balance its $1.7 billion annual budget within 
     five years. California's cutbacks and the Lehman collapse 
     torpedoed that.
       The county government lost $37 million when Lehman Brothers 
     went under. That's on top of a $100 million deficit due in 
     part to state cutbacks. San Mateo County has limited power to 
     increase taxes: Boosting sales taxes requires two-thirds 
     voter approval, and two efforts have failed in recent years.
       The schools were hit hard, too. In one typical case, 
     Lehman-related losses at the Sequoia Union High School 
     district, one of 25 in the county, totaled $6.2 million, an 
     amount equivalent to 7% of the district's annual budget. 
     Meanwhile, the state cut its funding to the Sequoia district 
     this school year by $1.9 million and is cutting it again next 
     school year by another $3.4 million.
       San Mateo ranks among California's most diverse counties. 
     Home to software giant Oracle Corp. and biotechnology pioneer 
     Genentech, it encompasses both wealthy enclaves and working-
     class, immigrant cities such as Daly City and East Palo Alto 
     that depend heavily on county services. In East Palo Alto, 
     unemployment is 20%.
       When Lehman Brothers filed for bankruptcy-court protection 
     on Sept. 15, 2008, the news was met with a mix of panic and 
     disbelief by local officials. The county's schools took the 
     worst hit, losing $38 million overnight. Two county school 
     districts, the Sequoia district and the Menlo Park City 
     Elementary School District, had just sold more than $90 
     million worth of bonds to fund renovations and expansions and 
     deposited the proceeds in the county investment fund. The 
     lost bond proceeds totaled nearly $8 million, a debt local 
     taxpayers will be paying off for the next 30 years.
       Jean Holbrook, the county's superintendent of schools, says 
     the Lehman losses came on the heels of deep funding cuts from 
     the state that had already cost the jobs of 91 of the 
     school's 681 employees, including 21 teachers. In the ensuing 
     year, 60 more school employees would have to be let go, 
     resulting in larger class sizes and fewer elective courses.
       San Mateo's board of supervisors ordered an independent 
     review of the way the county investment fund was run, but 
     found no wrongdoing. In keeping with rules California passed 
     in the mid-1990s (following Orange County's disastrous 
     experiment with derivatives), San Mateo's treasurer had 
     invested in highly rated securities and put no more than 10% 
     of the fund in any single issuer.
       With Lehman bonds trading at pennies on the dollar, county 
     officials held little hope of recovering their investment 
     through bankruptcy proceedings. So they opted for a two-
     pronged strategy: They sued former Lehman Brothers executives 
     for fraud, and they lobbied their state congressional 
     representatives to insert language in TARP legislation that 
     would let municipalities tap the federal rescue program.
       Though such language was included in the final bill, 
     bailing out municipalities was low on the list of the federal 
     government's priorities in late 2008 as the financial system 
     flirted with collapse.
       To rally support and keep the issue alive in Washington, 
     Ms. McMillan, the deputy county manager, began reaching out 
     to other counties and cities ensnared in the Lehman 
     bankruptcy.
       In May 2009, as financial institutions began to stabilize 
     and the specter of a depression subsided, the House Committee 
     on Financial Services agreed to hold a hearing on the matter.
       In their testimony before the committee, Democratic Reps. 
     Anna Eshoo and Jackie Speier, whose districts span parts of 
     San Mateo County, argued that the $1.7 billion municipalities 
     were asking for amounted to just one-quarter of 1% of TARP 
     funds and paled in comparison with the hundreds of billions 
     of dollars the Treasury Department had provided to banks.
       Ron Galatolo, chancellor of San Mateo's community colleges, 
     told the assembled congressmen that he felt it was ``highly 
     inequitable to use TARP funding to shore up banks

[[Page 6442]]

     and to bail out failing corporations but fail to protect 
     agencies' taxpayer dollars, such as ours.''
       After the hearing, Rep. Eshoo sought a meeting with Mr. 
     Geithner, but says the Treasury secretary didn't respond to 
     her letters and phone calls for months.
       Rep. Eshoo finally met with him on Oct. 28, followed by a 
     second meeting on Dec. 2. She says Mr. Geithner told her that 
     TARP was intended only for financial institutions and that 
     rescuing municipalities would open a Pandora's box of claims 
     from other investors.
       Rep. Eshoo invoked the passage inserted a year earlier in 
     the TARP bill, which refers to ``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.''
       She says Mr. Geithner said the passage fell short of 
     mandating use of TARP funds to bail out municipalities.
       While declining to comment on the meetings, a Treasury 
     spokeswoman says: ``There are countless well-intentioned 
     ideas for deploying TARP funds, but we determined that making 
     Lehman Brothers' creditors whole is not consistent with what 
     Congress intended for TARP funding.''
       In San Mateo, reverberations from the Lehman losses were on 
     display on the campus of Canada College, one of the county's 
     three community colleges, earlier this month.
       Students held a two-day teach-in to protest faculty 
     layoffs, course cancellations and fees that jumped 30% this 
     year.
       Lilliam Castellanos, a 35-year-old student majoring in 
     Latin America studies to become an interpreter, said she 
     could no longer afford textbooks because the funding for a 
     program that handed out book vouchers to Hispanic students 
     had been cut sharply. Other students complained about long 
     wait lists to get into courses and a reduction in the number 
     of counselors.
       Mr. Galatolo, the chancellor, says the colleges' $25 
     million Lehman loss compounded funding cuts made by the 
     state, forcing him to slash the colleges' annual budget by 
     one-fifth, to $100 million from $125 million.
       Of the $25 million loss, $20 million had been earmarked for 
     new buildings and classrooms that he says now won't be built. 
     The remaining $5 million came directly out of the colleges' 
     operating fund.
       Mr. Galatolo says he's angered by the return of 
     multimillion-dollar bonuses on Wall Street ``while we can't 
     make ends meet for our students.'' As for Mr. Geithner, he 
     says, ``He had the ability to help us, and he chose not to.''
       On the other side of the peninsula, in the wind-swept, 
     rural community of Half Moon Bay, Robert Gaskill, 
     superintendent of the Cabrillo Unified School District, says 
     his district's share of the Lehman loss was $1.4 million, out 
     of an annual budget of $28 million.
       Mr. Gaskill says he had to lay off five teachers and 
     projects that 20 more will be let go in the 2010-11 school 
     year, out of 177, because of state funding cuts. The district 
     is also paring back summer school.
       Michael Bachicha, former director of the schools' special 
     programs, sat through the school-board meeting at which his 
     job was eliminated in April 2009. Because he had tenure, Mr. 
     Bachicha was able to land another job teaching at the 
     district's ``continuation'' high school for students who are 
     falling behind. But his salary dropped from $105,000 to 
     $72,000. Around the same time, his wife lost her job as a 
     kindergarten teacher at a local private school.
       Mr. Gaskill, the district superintendent, says the teaching 
     job that Mr. Bachicha took bumped someone else less senior 
     off the payroll, resulting in one of the five teacher 
     layoffs.
       Ms. McMillan, the deputy county manager, hasn't given up on 
     getting the Lehman money back. She holds conference calls 
     every two weeks with officials from other affected counties 
     and cities to plot strategy. On last week's call, 35 people 
     dialed in from across the country.
       In the meantime, the county is gearing up to dismiss 
     hundreds of employees this spring, the first time it has had 
     to resort to mass layoffs, according to Mr. Gordon, the 
     member of the board of supervisors.

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