Don’t Quit Your Day Job

My comments to Durham City Council concerning financial markets from this morning’s paper:

City moving around $171M in investments

By Ray Gronberg : The Herald-Sun

Sep 19, 2008

DURHAM — The Wall Street meltdown has prompted the city government to shuffle its $171 million investment portfolio to ensure that taxpayer monies remain safe amid the turmoil.

Officials in the city Finance Department started the move two weeks ago when it began dumping all but about $8.4 million of its holdings of “commercial paper,” a type of security large banks and corporations issue to raise working capital.

The move came after officials noted what city Treasury Manager John Allore termed “whispering about volatility in that market,” and thus preceded the weekend shakeup that produced the bankruptcy of Lehman Brothers Holdings Inc., one of the country’s major investment banks.

Interim Finance Director Keith Herrmann told elected officials Thursday that the city “has no exposure” to stock losses because of problems at Lehman, the American International Group and Washington Mutual.

Fund managers who handle the bulk of the $40 million the city’s socked away in money market investments have assured city officials that they “don’t hold any risky investments such as Lehman Brothers,” Allore said in a memo to Herrmann.

The city does own $69.4 million in securities issued by Fannie Mae and Freddie Mac — the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. — but that appears safe because the federal government effectively nationalized those enterprises earlier this month, Herrmann said.

That decision made those investments as safe as any “backed by the full faith and credit of the United States government,” Herrmann said.

The Fannie Mae and Freddie Mac holdings are part of a $120 million group of “agencies,” which are securities issued by U.S. government-sponsored corporations.

Allore and Herrmann did consider moving a bigger share of the city’s money into U.S. Treasury instruments, but dropped the idea because so many people have bought Treasuries this week that the yields on them have dropped to nothing.

In fact, there’s “risk of actual negative yields” on Treasuries, Allore said.

The city does hold $805,255 in Treasuries. The yield on those is safe because the city bought them long before the crisis began, Herrmann said.

The effective nationalization of American International Group — also known as AIG — shouldn’t cause trouble for the city, in part, because it now obtains insurance from a different company, Herrmann said.

AIG was the city’s insurer from April 2004 to April 2007. It has to pay claims arising from any incidents that occurred then, which means that it’s on the line for part of any judgment arising from the lawsuits linked to the Duke lacrosse case.

But the commercial-insurance end of AIG’s business is healthy, and its ability to “pay its obligations has never been in question,” Herrmann said, declining to speculate on whether the federal government might force a sell-off of that unit.


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