Schabarum Wants Details on County Securities Loans

Expressing concern over Los Angeles County investment policies after the stock market crash, Supervisor Pete Schabarum on Tuesday initiated a study of how the county lends some of its billions of dollars to make money in the securities market.

The Times reported Monday that county officials, concerned about volatile market conditions, have temporarily halted the program.

After Schabarum introduced a motion demanding information, county Treasurer and Tax Collector Sandra R. Tracey said her office was “pulling the facts together” and would have a report for the supervisors next week.

Funds in Pool

The program involves the county’s $4-billion pooled fund, an account containing tax receipts, state payments and other money needed to finance county expenditures. Rather than have the money sit idle, the county invests it in U.S. treasury bills, treasury notes and bank certificates of deposit.

Earlier this year, the county began lending the securities to brokerage firms that needed them temporarily for transactions. As Tracey explained it, a securities dealer might have a customer wanting to invest in certain treasury bills that were not available on the market. The dealer, needing to satisfy the customer immediately, would borrow the securities, and pay interest. The treasury bills are returned to the county when the dealer obtains them for the customer on a permanent basis from another source.

The practice, called securities lending, has long been used by pension funds, mutual funds and other large holders of stocks and bonds to increase income.

Tracey said the county suspended the practice after the Oct. 19 stock market crash. She said the decision was made when at least two brokerage houses the county had been dealing with “were mentioned in the press” and by financial sources as “possibly being in trouble.”

She said that if the brokers found themselves strapped for funds in the deteriorating market, and became the target of lawsuits, the county might have trouble recovering the securities it had loaned. Tracey declined to name the brokerage houses.

“We felt it was better to bring them (the securities) back in,” she said.

Financial experts told The Times they were surprised the county engaged in securities lending, which involves some risk and brings a small return.

Tracey said that the county has earned $1.2 million by lending an average of $1 billion of securities this year.

The president of one West Coast brokerage house told The Times last week, “I am more than a little surprised they were doing it. Municipalities are supposed to be ultraconservative.”

Source of Surprise

Citing the Times article, Schabarum said, “I, for one, was surprised that we had been operating a securities lending program. . . . While I understand the principles behind securities lending, I question the appropriateness of its use by the county.”

Tracey said the county intends to resume lending from the pooled fund at a later date. She said the county’s separate $7.8-billion employee pension fund, which invests in stocks, bonds and real estate, will continue its lending program.

She said that the lending practice was conceived under the administration of her predecessor, Richard Dixon, who is now the county’s administrative officer.

Dixon was sharply questioned on investment policies by Schabarum at a supervisors meeting last month. Schabarum told reporters just after the stock market crash that he was concerned over investment policies.