Investment Loss Details and the Appearance of Impropriety
Posted on Tuesday, January 22 2008 by Heather Brandon
In an article published in the Wall Street Journal on Saturday, January 19, “Springfield, Mass., Takes Aim at Merrill Over Subprime Losses,” additional details emerged about the city’s recent, significant loss following its investment in a collateralized debt obligation issued by Cayman Islands-based Centre Square.
Reporter Craig Karmin wrote that in November, Merrill Lynch informed city officials in a document “that some of the CDOs [purchased in April] could be backed by subprime mortgages and might not be easy to sell.” From the article:
Mr. [Mark] Herr, the Merrill spokesman, said Springfield officials weren’t given the CDO’s prospectus last spring, during the sale of the CDOs, because Springfield had purchased them after the initial offering. Under those circumstances, “There was no requirement for a prospectus at the time of the purchase,” he said. …
Some analysts say the brokerage firm shouldn’t have sold the city the securities in the first place. “Merrill has to know its customers and sell them what’s suitable and appropriate,” says Janet Tavakoli, president of Tavakoli Structured Finance Inc., a Chicago-based consulting firm. For Springfield, “These CDOs are not,” she said.
…[L]ocal governments usually lack the staff and resources to make informed decisions on complex investments. Instead, they lean heavily on ratings firms and their advisers for guidance. …The consequences of a government fund losing money can have a direct impact on schools, police and safety, and other public services. Over time, a municipality might have to raise taxes or cut spending if it loses access to some of its cash.
Also on Saturday, the Republican published an article confirming the rumored words of Natick town treasurer Robert Palmer, previously published in the Boston Globe as second-hand information from Springfield City Councilor James Ferrera in an article by Megan Woolhouse, who also published a January 4 report about a related state-level probe.
Earlier in the week, Ferrera had obliquely peddled his suspicions in the regional media.
Ferrera’s assertion was that Springfield Finance Control Board Stephen Lisauskas (pictured with former Mayor Charles Ryan) recommended Merrill Lynch broker Carl Kipper to Palmer when Lisauskas was a Natick municipal employee.
Kipper, based in Albany, along with Clifton Park, New York-based broker Manuel Choy, were evidently named by Merrill Lynch as the two individuals responsible for handling Springfield’s investments. The Globe confirmed that Lisauskas at one time worked in the same New York state office as Kipper’s wife.
Reporter Peter Goonan was successful at gaining a few comments from Lisauskas on the matter, in his defense. While he would not comment on his relationship with Kipper, he said, “I am confident that a review will find that I acted properly. There is no inappropriate relationship. There is nothing that was taken by anybody on the city or control board side that was in any interest but the public interest.”
City Councilor Timothy Rooke came to Lisauskas’s defense in Goonan’s report, adding, “The political maneuvering going on to try to blame the control board and Steve Lisauskas is embarrassing the city and the business community.”
Meanwhile, anonymous local pundit “NoPolitician” has stated that he believes Lisauskas should step down.
In a comment on a previous post, he wrote, “No city official should be steering business to any agency with whom they have ties, even one based on a friendship. And even a competitive bidding process is problematic, because if Lisauskas was the one handling the paperwork it wouldn’t be that hard to pass along inside information to the connected party. City officials need to avoid even the appearance of impropriety; Lisauskas should have at the very least disclosed his relationship with Carl Kipper, and more appropriately, recused himself from the decision [to place the investment through Kipper].”
“We don’t know if Lisauskas disclosed anything,” he added. “[W]e don’t know if he was the sole person picking the vendor, we don’t know if there was a bidding process and Merrill Lynch Albany was the lowest bidder. But it still has the appearance of impropriety, and that must be avoided in government.”
Heather Brandon http://urbancompass.net
January 22nd, 2008 at 11:39 am“Ben Arnold,” a blogger in Saratoga Springs, New York, picked up on the news of Springfield’s fiscal challenge with Merrill Lynch with special focus on broker Manuel Choy, who at one point was involved in local land use planning there, chairing a comprehensive plan review committee. In a December post on the subject, Choy got called to task for having what seemed to be a conflict of interest.
“If a parallel can be drawn between land use planning and investment planning,” Arnold wrote last week, “we can safely say Manny provides the bridge…for it seems needless risk is at the heart of everything he does.”
A commenter on the more recent post blames greed as the source for all this trouble. Much the same was posited by former Springfield Mayor Charles Ryan at the December 20 control board meeting, when the news first broke about the city’s loss.
NoPolitician http://
January 22nd, 2008 at 11:50 amWhat is disheartening to me is that the FCB is supposed to stop instances where government actions are performed to the benefit of insiders. There were so many previous instances of corruption, either proven or suspected, admittedly many of which involved local federally-sponsored agencies (like SHA), but still had “Springfield” hung on them. They involved people sending public money to people they knew or were associated with. That is simply offensive to the general public.
While Lisauskas may not have done anything expressly illegal, since he likely did not profit from his actions, when the head of an agency that is here to alleviate insider activity actually performs some insider activity of its own, it raises cynicism to new levels.
We will now have to contend with the natterers that will claim that the entire mission of the FCB is suspect — even though they perform much good. The natterers will say that the old way of doing business is better, even though the old way resulted in a fiscal crisis. This activity unfairly puts into question every activity the FCB ever did or will do. Lisauskas’ actions did some serious damage and harmed the core credibility of the FCB.
The only way this could play out properly is if Lisauskas disclosed his relationship, and if he recused himself from the decision. If that is so, then his actions were merely a recommendation, not steerage, and his actions would be proper. Information on that is not yet available.
Government officials should not be in the business of playing known favorites. The city should enact a formal policy to this effect, so that no steering should take place even if financial gains are absent.
Heather Brandon http://urbancompass.net
January 22nd, 2008 at 12:17 pmThe Urban Land Institute recommended guiding principles for the city, including setting clear goals and establishing accountability. The principles recommended by the ULI:
As I recall, panelists suggested that clear ethical guidelines be posted in all city offices as a reminder of the standard to uphold.
Such recommendations aren’t exactly brand-spanking-new.
In a July 10, 2006 quarterly report from the Springfield Finance Control Board, which reported success with many labor contract negotiations and achieving greater fiscal stability, chairman Alan LeBovidge wrote, “The Control Board and the City must remain vigilant in other areas, as well. Specifically, we must continue to insist on the highest ethical standards within City government.”
Such a priority seemed to be important to the last iteration of the control board, but maybe things have slackened.
Governor Patrick said last spring that his newly appointed control board would focus on the issues of education and economic development. What if the city made great strides in those areas, but was still faltering in the ethics department? (What if the city actually had an Ethics Department?)
td
January 22nd, 2008 at 12:32 pmI see absolutely no strides being made in either education nor economic development. I see nothing that could be called a “new vision” nor a coherent “new direction.” What I do see is a bunch of mediocre Democrats who replaced talented Republcans who lost their jobs simply because they were Republicans.
NoPolitician http://
January 22nd, 2008 at 12:59 pmTD, can you be more specific in your criticism? Otherwise it sounds just like partisan griping.
What actions of the first FCB were “talented”? What actions of the new FCB are “mediocre”?
Do you think the transition period of the FCB has anything to do with things? Was the first FCB in full stride on day 1?
Heather Brandon http://urbancompass.net
January 28th, 2008 at 10:25 amMore details have come out about what’s in the paperwork in this compelling article in today’s Globe.
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January 31st, 2008 at 6:44 pm[...] a settlement with Springfield, agreeing today to reimburse the city for its recent investment loss of about $12.7 million. In a statement, Merrill Lynch said, “After carefully reviewing the [...]
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February 4th, 2008 at 12:01 pm[...] to get taxpayers’ money back in the wake of a failed Merrill Lynch investment initially worth $13.9 million. The previous evening’s achievement was hailed as a victory for the city, when [...]