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December 20, 2007
Jeb Bush and the Subprime Mortgage Crisis

The Huckster and the Wreckage

It was a classic run on the bank. Until his recent resignation under fire, Coleman Stipanovich, a Bush loyalist, headed the Florida State Board of Administration, responsible for investing billions of dollars of state funds. Stipanovich's brother, "Mac", is a former chief of staff in the governor's office, Jeb Bush campaign manager, and now partner in the law firm, Fowler White, Boggs-the Tallahassee lobbying whip of the Growth Machine (he is also board member of US Sugar).

Jeb Bush left Tallahassee for Miami in January 2007, having served two terms as governor. He incorporated Jeb Bush & Co., and in June was hired as a consultant with Lehman Brothers, the Wall Street investment banking firm.

In July and August, Stipanovich approved the purchase of $842 million in securitized mortgage bonds from Lehman.

Today the value of those bonds is practically zero, vanished in the debt crisis that is tipping the national economy into a recession.

So far, the media is buying the state spin: that Florida's municipalities made their own decisions to invest with the state government investment pool. Senate President Ken Pruitt, another Bush loyalist, huffily defended the state investment pool with Indian River county officials, "No one put a gun to your head."

But that is only half of the story, as any investor knows: the other half is that the state was fiduciary and obligated to invest those funds within tolerable risk parameters.

Any fiduciary that bothered with due diligence could see in the overdevelopment of Florida that the bubble in housing markets would pop, and that financial instruments that created the bubble would vanish into the ether.


Stipanovich, who earned $180,214 in 2006 as executive director of the State Board of Administration, was in New York in confidential meetings with Lehman Brothers Holdings Inc., the largest U.S. underwriter of mortgage-backed bonds. Lehman was proposing ways to help the state manage the risk of its debt investments, according to a letter the bank sent to Stipanovich after the meeting.

What Stipanovich, 58, hadn't told his boss, Florida Chief Financial Officer Alex Sink, was that Lehman Brothers was the same firm that had sold the state fund $842 million of mortgage- backed debt in July and August [EVEN I COULD SEE THE MARKET WAS ABOUT TO CRASH!!]. Those securities defaulted within four months, and totaled more failing debt than any other bank sold the state, Florida records show. ``At the time, I never knew it was Lehman Brothers that actually sold us these investments,'' Sink says.

Sink also was unaware that former Florida Governor Jeb Bush, who incorporated Jeb Bush & Associates in February 2007, a month after completing his second term, had been hired as a consultant to Lehman Brothers in June. Bush is the brother of President George W. Bush.

``Lehman and the other big players in the market decided they didn't like this stuff in their own accounts,'' Sink says. ``Where did they drop it and who did they dump it to? It looks questionable to me.''

Joseph Mason, a former U.S. Treasury official and now a finance professor at Drexel University in Philadelphia, says Wall Street had few takers for its subprime-tainted debt. ``When they couldn't sell it to more-sophisticated investors, they found less-sophisticated investors like local government investment pools,'' he says.

At the same time, Lehman Brothers served its shareholders well in 2007, says Bruce Foerster, president of Miami-based corporate financial adviser South Beach Capital Markets. On Dec. 13, the bank reported it had limited a fourth-quarter writedown of $2.2 billion tied to residential mortgages with $2 billion it made on hedges.

The board of Lehman, whose shares are down 21.2 percent this year, gave Chief Executive Officer Richard Fuld a $35 million stock award for record income in 2007.. ``What's not to like about a record year?'' Foerster says.

Are you quite cross about this, by now?
Not yet? Well how about:

Lehman Brothers spokeswoman Kerrie Cohen says the bank had only good intentions in its sales to Florida. ``The firm's number one priority is to deliver first-rate products to our clients,'' she says. ``We are disappointed when any security that is purchased by a client underperforms expectations.''

JPMorgan Chase spokesman Joseph Evangelisti declined to comment for this story.

Florida first revealed that close to $1 billion of its money market fund investments had been downgraded by credit rating companies on Nov. 1, after a month of inquiries by Bloomberg News, which published a story on the pool on Nov. 14.

States and counties run pools similar to money market funds to hold cash for school districts and local agencies. Most states require fund managers to make only short-term investments in debt such as U.S. Treasuries, certificates of deposit and corporate commercial paper, or short-term loans.

Did anyone else notice that December 19, 2007 was Terrible Truth Day?

On July 2, Lehman Brothers sold Lombardi $250 million of one-month commercial paper from a structured finance company called KKR Atlantic Funding Trust yielding 5.37 percent, state records show. KKR Atlantic was rated A-1+ by Standard & Poor's and Prime-1 by Moody's.

It matured, and on Aug. 2, Lehman Brothers sold Lombardi $200 million of one-month KKR Atlantic paper yielding 5.53 percent. It was downgraded to default by Fitch Ratings on Oct. 8, and Not Prime, or junk, by Moody's on Oct. 29.

From July 3 to July 9, Lehman Brothers sold the pool $153 million of commercial paper from another structured finance company called Ottimo Funding yielding 5.36-5.38 percent.

Lehman Brothers spokeswoman Cohen says there's no link between Bush and Lehman's sale of debt to Florida. ``Bush is a member of the Lehman Brothers private equity advisory board and his company has been retained by the firm for consulting and advisory services,'' she says. The former governor declined to comment.

That is as may be. But:

Craig Holman, of Washington-based nonprofit public interest group Public Citizen, disputes Lehman Brothers' view. ``That defies credibility,'' says Holman, who lobbies for ethics in government. ``It's a clear conflict of interest. Bush is a consultant to the company selling bad investments to the same agency on which he served as a trustee until January.''

Lehman is still quoted on Wall Street. So is Citi.
Thank you for not laughing. Enjoy the holidays and have fun electioneering!

Originally posted to Heteraetcaetera on Thu Dec 20, 2007 at 11:42 PM PST.


Now that I've seen deregulation how Global Free Markets work

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Comment Preferences

  •  Very good diary. (2+ / 0-)
    Recommended by:
    manwithnoname, deMemedeMedia

    Thanks for bringing this to light.  A lot more needs to be written and shared about the Florida/Bush scandal.

    Can you tell us what the impact is going to be on municipal bond investors in Florida?

    Were insured bonds affected (e.g., AAA rated insured bonds)?

    Do you know what the impact of the downgrade in MBIA insurance is likely to be?


    •  MBIA (1+ / 0-)
      Recommended by:

      From Minyanville:

      Ambac, MBIA: Prognosis Negative

      S&P this morning lowered the credit rating outlook for MBIA (MBI) and Ambac (ABK) to negative from stable, according to Bloomberg.

         * S&P also reduced its outlook for Financial Guaranty Insurance Co. and XL Capital Assurance Inc. to negative, Bloomberg said.
         * Why the change?
         * According to S&P the changes were due to "worsening expectations'' for insured nonprime residential mortgage bonds and collateralized debt obligations of asset-backed securities.
         * The ratings outlook downgrade is significant because these are major players in the bond insurance arena.
         * Ambac, the second-largest bond insurer, guarantees $546 billion of securities, according to Bloomberg.
         * MBIA backs about $652 billion of municipal and structured finance bonds, and FGIC Corp., parent of Financial Guaranty Insurance Co., insured $314 billion.
         * As a side note, municipal bonds are headed for their worst year since 1999, according to Merril Lynch (MER) indexes that track muni bonds.

      Municipal bonds could be toast if MBIA ratings decline. The credit mess is not over by a long shot.

  •  second time around for Jeb (2+ / 0-)
    Recommended by:
    unterhausen, deMemedeMedia

    Looking for intelligent energy policy alternatives? Try here.

    by alizard on Fri Dec 21, 2007 at 01:01:26 AM PST

  •  Anybody surprised? (0+ / 0-)

    Where is Neil these days?

    Does Ken Lay RIP?

    Can somebody start a list of the Bush accounting and investment associations?

  •  Anyone wanna guess what the Bushes (1+ / 0-)
    Recommended by:

    had in mind for Social Security, after its planned privatization?

    Thanks for this diary. Tags need to be separated with commas, not semicolons. As it is, you have one very long tag.

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