Lehman loss could be $1M

Costa Mesa officials are scrambling to try to recover as much of the $5-million investment they made in Lehman Brothers as possible.

The two corporate note securities that the city bought lost 80% of their market value when Lehman unexpectedly declared bankruptcy last month, but Finance Director Marc Puckett hopes the city will get most of its money back.

According to Fitch, a bond-rating agency, the city can expect to retrieve about 80% to 90% of its money when Lehman liquidates its assets, which would mean a net loss of $500,000 to $1 million.

Puckett says there was no way of knowing that the city’s investment was in jeopardy because Lehman was rated as extremely safe until the last day before its bankruptcy. The FBI is investigating the possibility of fraud in how information was disseminated to investors.

“The action I took in purchasing the securities was fully within our investment policy,” Puckett said.

If the city does end up losing money when the bankruptcy is reconciled, it will not affect the city’s budget until next year, according to Puckett.

City Council members are waiting apprehensively to find out the outcome, but some say they’re prepared to deal with losses.

Mayor Pro Tem Allan Mansoor and Councilwoman Katrina Foley both credited the finance department for doing a good job in making investments and emphasized that the catastrophe wasn’t something staff could have prevented.

A $500,000 to $1-million loss would be less than 1% of the city’s usual yearly operating budget.

“We’ll do what we have to do to live within our means,” Mansoor said.

The city might come out of the disaster unscathed, though, according to Puckett. He formed a group of 32 municipalities, school districts and other public agencies throughout the state that collectively had $700 million invested in Lehman, and got them to team up so that they don’t duplicate efforts in the bankruptcy proceedings or in trying to lobby the federal government.

A provision that the group succeeded in including in the federal rescue package passed by Congress allows for the federal government to give the agencies the money that they lost back in full and then try to recover as much as they can from Lehman in the bankruptcy proceedings, according to Puckett. Lehman was initially allowed to fail in September without federal assistance.

“I’ve worked hard to bring these agencies together to make sure we get the maximum return in terms of limiting our losses,” Puckett said.

One of the major players in the group is the California Public Employee Retirement System, which invested about $400 million in Lehman.

Costa Mesa has stricter investment guidelines than what the state requires, according to Puckett, so the city is forced to make virtually risk-free moves. Costa Mesa just got blindsided by the financial crisis like many other agencies, Puckett said.

ALAN BLANK may be reached at (714) 966-4623 or at alan.blank@latimes.com.