Once you slog through the details it’s just gets more disturbing. Springfield basically gave $50 million of its hard-saved money to Merrill Lynch in 2006 for safe short term investing. From April – June 2007 Merrill Lynch invested about $14 mil of the cash in complex securities comprised of subprime mortgages. Apparently, Springfield did not get an actual description of the investments when they made them. By August the $14 million had lost 25% of its value, by Sept. it had lost 50% of its value- $7 million. It’s wasn’t until late November, when the investment was worth on paper $1.3 paper (but, actually, impossible to sell) that anybody thought to actually ask for a written explanation of what they had bought.
The next aspect of this story came to light about a month after word first broke about the disastrous investment, when City Council Vice President James Ferrara went to the Globe. It seems that Lisauskas had known Kipper for a long time. Details are somewhat sketchy (to say the least), but what is out is that the Executive Director and the broker have known each other at least since ’96-’99, when Lisauskas worked with Kipper’s wife at the New York State Comptrollers office in Albany. Anyway, here are the only initial (and only) newspaper stories about the relationship:
http://www.boston.com/news/loc…
and
http://blog.masslive.com/break…
As this story broke, Lisauskas, Gabrieli, and the Control Board basically said they couldn’t comment because it would hurt the efforts to get the money back and anybody who did ask questions was jeopardizing chances getting it back. Shortly after Merrill Lynch decided to give the money back and fired Kipper, as well as another Merrill Lynch broker, Manuel Choy. A day or so later Secretary of State Bill Galvin filed securities fraud charges against Kipper, Choy, and Merrill Lynch.
http://blog.masslive.com/break…
and
http://www.nytimes.com/2008/02…
Galvin’s suit, and especially the first few pages of the exhibits are extremely disturbing. I think Galvin is one of the few politicians who deserve praise- both for acting quickly and for making his filing easily available on the internet, open government is good. Galvin’s evidence starts off with several very chummy emails between Lisauskas and Kipper- emails that contained inside information about city operations and were sent at the time leading up to the awarding of this no-bid contract. Here is my favorite on p.2:
From: slisauskas
Sent: Wednesday, June 21, 2006, 12:12 A.M.
To: Kipper, Carl (Albany, NY)
Subject: Hey
Hey Carl,
I’ll give you a call on my way to work in the AM. Springfield recently re-did their investment portfolio to greatly increase their return on cash invested. Than will mean one of two things- they are married to their plans and won’t think about changing, or they are in the mood to pursue returns and would be delighted to pursue options.
I’m going to talk to CFO tomorrow about the work we did in Natick to see if they want to talk with the short-term investment specialist we worked who gave us very personal attention and increased our returns. Will let you know how it goes.
Steve
Yikes. What really bothers me the most about this is that Lisauskas refers to himself and Kipper and “we” and refers to Springfield as “they.” Lisauskas is apparently referring to when he encourage the town treasurer at his last job (as assistant town administrator in Natick) to invest town money with Kipper. Neither what happened leading up to the investments, not the full scope of the relationship between these two men has ever full been explained. Read all the gory details below, and don’t forget- Lisauskas is still running the city:
http://www.sec.state.ma.us/sct…
I’ve always generally like Chris Gabrieli, even voted for him in 2006. And like many people my opinion of him only grew after his classy display in attending Deval’s primary victory party and endorsing him for the general then and there. But the fact that he is continuing to let Lisauskas handle city finances, when Lisauskas was basically acting as a Merrill Lynch sales agent while collecting a paycheck to run Springfield and still has not revealed what happened- it just looks bizarre, weak, and really fishy. Sadly, Gabrieli looks more and more like he’s trying to sweep this under the rug- it feels like to avoid embarrassment. If anything else does come out, that strategy will badly backfire. At the very least, Gabrieli has been spectacularly tone deaf, and even caught flack for moderating at a conference sponsored by Merrill Lynch Feb. 7, right in the middle of the scandal!
http://www.powerdrugsandmoney….
The overall silence by most of the Springfield political establishment and the local paper has been deafening and pathetic IMHO. Fortunately the alternative media has picked up some of the slack. As far one can glean on the web, the only two elected officials who seem to be bothered enough by what happened to actually want an explanation are Ferrara, whose latest efforts were ignored by the paper, but were well chronicled on a local blog here:
http://urbancompass.net/?p=1063
And State Senator Steve Buoniconti (D- West Springfield), who can be heard getting fired up about the unanswered questions on a local radio show (preserved through youtube):
It’s sad what’s going on in Springfield. This situation needs more answers; it has definitely not gotten enough attention for the large dollar amounts involved and the total overall shadiness. Long term Mass politics however, Gabrieli’s failure to act could be a major blow to his credibility, and least to anyone who has followed this, and a big problem for him- assuming he wants to run for office again.
She’s in Central Mass, not Western. đŸ˜‰
Sorry, but as one who lives in western(most) Mass (I can see New York state out of my kitchen window), I view Worcester as being in eastern Mass. I realize that the population center of the state is in Framingham, so Worcester looks west to most people in the Bay State. It takes me an hour to drive to Springfield, an hour and a half to drive to Worcester, and two hours to drive to Boston, so I tend to think in geographical terms (distance), not in demographic terms, but I have come to accept that for most people in the Boston area, western Mass is anything the other side of I-495!
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p>On a more serious note, I lived in Springfield for nearly 10 years, and for that (and for at least one other reason that many of you know), Springfield is dear to my heart, and I spend a lot of time there.
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p>So, yes, it is distressing to me to have watched the city slip into what is essentially receivership, but I think the negative tone of this post does not do justice to the progress Springfield has made in the last few years, and the spirit of renewal and revival I now sense in the city.
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p>Last November, the voters of the city (under the watchful eye of the Justice Department) voted to change the form of the City Council to one that includes ward representation (it has been composed of all at-large seats). That will make a huge difference in the composition of the Council in 2009, after which (presumably) the city’s “minority” populations will have more of a voice. (The reason for the quotes is that the so-called minority populations, taken together, account for the majority of the residents of the city.)
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p>The city also has a new Mayor in the person of Dominic Sarno, and from what I’ve seen, he’s done a great job of making key appointments and reaching out to the various constituencies in the city.
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p>And, yes, the Merrill Lynch fiasco was an unfortunate incident, to say the least, but let’s put the blame where it belongs — it was an act of fraud; I can’t think what else to call it. Thanks to the prompt actions of Mayor Sarno, AG Coakley, and others, once the fraud came to light, the city will be made whole, including recovery of all its legal expenses. It’s easy to say, with perfect hindsight, that someone in city government fell asleep at the switch, but the truth is that one doesn’t expect a reputable firm like ML to perform criminal acts (at least that’s my interpretation; from what I’ve read they knew full well that the investment they made was not permitted under state law).
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p>In sum, the future of Springfield is looking brighter than it has for quite some time, though of course there are many challenges ahead and quite a bit more to do. Still, things are moving in the right direction (something that has rarely been possible to say in recent years), and the Control Board will soon be gone (not soon enough for a lot of Springfield residents, to be sure).
If them in the eastern part of the state call you “western” and them in the western part of the state call you “eastern” you are most assuredly in the center.
Sure, Worcester may be closer to Boston than it is to Springfield, but Boston isn’t the easternmost part of the state. The geographical center of the commonwealth is in Worcester County (in Holden, I believe), so I don’t think you can really argue that Worcester is in eastern Mass.
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p>Besides, the regional economies (and demographics) are hugely different (though that difference is probably rapidly shrinking).
I guess I should read the comments before rushing to post to be sure that someone hasn’t made the exact same comment!
The Control Board has proven itself smug, arrogant, and deaf to the needs and interests of the people of Springfield, in part because it is not accountable to the Springfield electorate but only to pols in Boston. (And people wonder why Western Mass is so anti-Boston.) Once the city was solvent and there was a surplus, the Control Board should have been disbanded. But when money is about, people get greedy.
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p>To hack at a better phrase from the Twelfth Night: “Some are born corrupt, some achieve corruption, some have corruption thrust upon them.” All these, sadly, describe most of the history of Springfield governance. And the good people of Springfield continue to be ignored or abused in business as usual.
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p>Why am I not shocked by your very much appreciated and fine post?
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p>
The original poster is correct — Lisauskas’ role should be investigated here. This appears to violate the conflict of interest statute, which specifies that if something happens that any reasonable person might question as a deal not generally available to anyone, it qualifies (I’m paraphrasing).
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p>However, there are some interesting points absent from the original post.
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p>1) This activity took place before Gabrielli and the Deval Patrick-appointed FCB took over in July 2007.
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p>2) The state fund that most municipalities use to park their short-term funds was also a victim of investing in CDO’s that lost most of their value.
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p>I am not impressed with Senator Buoniconti. He does not seem to be working in the best interest of the City of Springfield. He has sponsored legislation to extend payment of the monies borrowed by Springfield to a longer term (the original repayment term is something like 4 years), but he has “pulled it back” when he sees something he doesn’t like — like a parent taking away a toy from their bad kid. That’s an offensive condescending attitude.
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p>But Buoniconti’s grandstanding aside, the relationship between Lisauskas and the agents needs to be investigated and made public, because otherwise the credibility of the FCB is in doubt – and the FCB has made tremendous progress in the city, progress that likely would not have occurred if done by an agency exposed to political pressure (as the second comment here shows). The city employees and unions LOATHE the FCB because of the actions that they took, including hard-line negotiation of union contracts. The rest of the city ranges from support to ambivalence to hatred, mostly because of a $90/year trash fee that was instituted.
Starting with Merrill Lynch and including the Romney control board who let this happened.
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p>However, it’s the new Gabrieli-led board that is in charge now and was in charge when this thing started to hit the fan. They did nothing as this investment tanked and didn’t even ask for a prospectus for TWO MONTHS after it had lost half it’s value. And they are the ones who seem aggressively opposed to finding out/disclosing what led up to this investment- even though it all happened under the Romney board.
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p>Citizens deserve answers to what happened on the Merrill Lynch side AND the Springfield side of this mess.
The FCB has made many enemies, primarily city employees. Why? Because most of the city’s budget goes to salaries and benefits, and most of the ways that the budget deficit was eliminated was via reductions in employee benefits and/or anticipated salary increases. That is why I am generally skeptical of harsh critics of the FCB, because they usually (not always) are city employees or others who have a vested interest atypical of average citizens.
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p>There are people who would use this incident to discredit the FCB, to get rid of it before its scheduled expiration. I don’t think the average citizen views the FCB with such contempt, although the critics of the FCB point to the 2007 mayoral results which saw a vocal critic of the FCB re-elected by a small margin. Alternately, the election results may have hinged on the FCB-critic promising to get rid of the $90 trash fee (an impossible promise to fulfill without FCB approval)
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p>As a resident of Springfield, I find that government service has improved, more attention is being paid to the right issues (such as code enforcement and economic development), and we are no longer hearing about a fiscal cloud looming over the city. I see instances of political jobs getting squashed (particularly one where a seated city councilor was appointed to a high-paying job in the school department over several far more qualified individuals). And while I don’t like paying a $90 trash fee, I also recognize that property tax on lowly-valued properties brings in very little revenue — we have a lot of $50-75k (rental) units, and with a tax rate of $16, they pay $800 in annual property taxes. A per-unit trash fee helps alleviate that shortcoming.
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p>So why punt the group that ushered in all that? I’m in no rush to return to “local control”, and I think the best time to do that will be when ward representation is brought to the city in 2009, so that the “same old crowd” isn’t in charge when control is relinquished.
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p>But if there’s any lesson to be learned here, there are two sides to every story, and the original post only represented one side.
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p>P.S. Although you say that the Gabrieli-led board “didn’t even ask for a prospectus for TWO MONTHS after it had lost half it’s value”, I think that’s misleading. If you read the data published by the Attorney General’s office, you’d see that the city tried to sell the declining assets once it saw they were declining in value, but was told that wasn’t possible because there was no longer an auction market for the products.
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p>You’d also see that when the money was moved into the CDO accounts, they had innocent names, and only later had “CDO” affixed to their description.
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p>Finally, you’d also see that Merrill Lynch was treating this account as a brokerage account, moving money first and then telling the city what it did. That’s where M-L’s exposure came in, because they initially claimed that the city was calling the shots, but the emails showed that the brokers were moving the money around.
Trying to sell the investment doesn’t relieve the board of the responsibility to actually know what they’d invested in. They should have known the whole time- that they waited months, even after the thing started to tank is jarring incompetence.
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p>You seem to agree that Lisauskas, at least, appears to have acted improperly and should give answers. Yet, you want to shift the blame onto everyone except the very board that actually supervises Lisauskas and is in a position to demand/provide an explanation, but thus far has not.
so no need to apologize.
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p>How typical.
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p>Had the investment (which they didn’t understand) succeeded, the Control Board overseers would have boasted of their financial cunning. But because it cratered, it was Merrill Lynch deception that duped them, not their own ineffective oversight.
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p>CB claiming success over the investment decision is like you’re skilled at the slot machine.
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p>You just know, the real story is likely somewhere in between. ML said; CB said.
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p>The CB bureaucrats had no idea of the financial risk they were engaged in because if they did, they wouldn’t be bureaucrats. They’d be pulling down millions on Wall Street.
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p>The CB rubber stamped an agreement that allowed ML to enter into a complicated derivatives that the CB didn’t understand and now the CB says it bought things it shouldn’t have.
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p>This much is irrefutable, at the end of fy 2006, the City of Springfield had no policy on fixed income investments so how could the investment have been improper? This from the City’s financial statements:
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p>
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p>That is, based on f/y 2006 policy the investment appears to have been an acceptable investment. Was there a policy implimented prior to this particular write-down? I doubt it, but don’t know.
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p>Regarding the implied admissions ($$) of responsibility by ML, the big Wall Street Houses are quick to ‘roll over’ in the face of such accusations (particularly this relatively small investment). i.e. better to pay the loss rather than face a protracted Arbitration, and lose the City as a client.
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p>Therefore it’s easy to conclude that ML writing a check to the City means very little as an admission of responsibility.
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p>As an aside, I wonder how much the PRIT state employees understand of the actual risk of the underlying investments. Frankly, I think most of the selection is based–no different from Springfield–on relationships and reputation and not from the State employee doing any actual analyst work.
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p>I wonder how much the very well paid ($320K with incentives for return) Michael Travaglini and staff understand of the actual investments and how much they simply rely on prior relationships with their outside Money Managers. If the latter, as was the case with the Springfield CB, then they’re overpaid.
But, the CB wasn’t supposed to be typical bureaucrats. Their whole purpose for existing was to bring financial expertise (Gabrieli certainly would seem to have that) and avoid insider deals like this one- not to try to sweep them under the rug.
If it’s Commonwealth of Mass, then they’re typical bureaucrats.
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p>Gabrieli, for all his alleged skills and business experience, doesn’t have the mathematical or financial expertise or time or familiarity to ascertain the ins and outs of a complicated rate driven derivative deal.
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p>The result is the bureaucrats–Gabrilli too–must rely on intuition and contacts to invest the taxpayers’ money.
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p>My points in my lengthy diatribe is that:
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p>1) IMHO, the whole of Massachusetts money management from Towns to Cities to Pension trusts, is based on insider deals, because no state employee is capable of doing such work. If he’s capable, then he’s not working for the state.
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p>2) thank god I don’t have to rely on these bureaucrats and their skills for my pension. Defined benefit plans should be exorcised.
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p>3) it’s curious that ML says the investment wasn’t appropriate for the City, when the City had no policy whatsoever with respect to it short term fixed investing.
(ML: “wink, wink. Here’s your $17 million back; we’ll take the hit, but remember us next year.”)
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p>Aside: How much did the PRIT lose in 2006 and 2007 to Amaranth, and SoWoods and CountryWide? Answer: over $100 million. How much other junk, Subprime and more, is buried in the woodshed that the Brother of the House Speaker genius bureaucrat is unaware of? Answer: No one knows.