This in from California Congressman Ed Royce (R-Fullerton)…
The Federal government Must Get Out Of The Business Of Picking Winners And Losers
Congressman Edward R. Royce
Tuesday the House Financial Services Committee held a hearing on proposed legislation that would make whole local municipalities with failed investments in Lehman Brothers, an investment bank that filed for Chapter 11 bankruptcy last fall. Orange County’s Treasurer, Chriss Street testified.
By all accounts Lehman Brothers was and is today a failed institution. The firm was highly leveraged; it had significant exposure to the mortgage market, including over $6 billion in subprime exposure. It even owned a subprime mortgage originator, BNC Mortgage. 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 any government assistance. In 1994 Orange County took on tremendous losses, forcing it to become the largest municipality in U.S. history ever to file for bankruptcy. While in bankruptcy, the County underwent significant restructuring to become more efficient. Orange County took a hit and (for County Treasurers) a lesson was learned that it was a dangerous endeavor to use taxpayer funds to invest in products local governments do not understand.
Our incessant desire to reward these 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 and your ability to make prudent investments. Unfortunately Congress has repeatedly signaled the opposite in recent months.
Time will tell whether or not these local municipalities will be made whole at the expense of the American taxpayers. I believe these bond holders (like the other bond holders in Lehman Brothers) should attempt to recover a portion of their investments through the ongoing bankruptcy proceedings, not the American taxpayers.