Greed, Hubris and Municipal Mendacity : Fiscal collapse: The villainy that took San Jose to the brink was at work in Orange County.
A joke is making the rounds in Orange County: How many people does it take to lose $2 billion? Six: one Democratic treasurer to make the investments and five Republican supervisors to watch.
The real answer is that the ruination of Orange County’s investment portfolio was caused by ignorance, greed and hubris--a deadly convergence of these black virtues.
To me, it was a case of deja vu all over again. Even Yogi Berra could have done better.
It was a decade ago--May, 1984--when mid-level bureaucrats and a comatose treasurer made similar outrageous decisions in San Jose. These guardians of the public purse violated city policy, recklessly, almost insanely, borrowing to the limit and beyond. The investors gambled that no one would notice the red ink, that good times and interest rates would move in the direction of the hundreds of millions of dollars they wagered. They were wrong. Without warning, the financial house of cards collapsed.
Only in pulp fiction or at death’s door do people get to see their lives flash before their eyes. In San Jose, 10 years ago, it happened to me. I was in my second year as mayor and suddenly I was in the rubble of a fiscal disaster.
In their crazed attempt to earn larger returns on our money, the bureaucrats had moved the city deep into illiquid investments. Using two instruments, a repurchase agreement and a reverse repurchase agreement, San Jose’s money managers had built a huge investment pyramid that violated our policy of safety, liquidity and yield. The city teetered on the brink of disaster and, indeed, bankruptcy. For the 11th-largest city in America, the capital of Silicon Valley, rich and optimistic, it was a bitter pill.
We acted swiftly. Only dramatic action and the truth were our allies. The city hedged more than $300 million and then sold outright the remainder of its portfolio. We took a loss of $60 million.
A reporter asked me later for my feelings on San Jose’s loss. I came up with the line from the old Timex commercial: “Takes a licking and keeps on ticking.” San Jose did, and survived.
Even from the bridge of the Titanic there are lessons to be learned. I doubt that the captain of such an ill-fated ship would (if he survived) ever again given a post on the high seas. In government, such a move is a regular occurrence. But not in San Jose: The top seven administrators were fired. A new private-sector investment panel ripped apart our practices and rewrote them. Checks and balances were instituted for all financial investments; leeway was eliminated.
Another thing I learned from that dismal episode was the value of candor. Any rationalization or prevarication would have doomed us. I spoke to the city on television and in daily briefings. Some politicians tell the whole truth only as a last resort. As I once said about state politics, their general mediocrity was varied only by cases of spectacular mendacity. “Learn or Die: Tell the Truth” should be the slogan on the desk of every elected official.
People must be held accountable for actions that cost $60 million, enough to pay for 100 cops for 10 years. They were, partially. We initiated a lawsuit against the brokers responsible for duping our money men. Here the plot thickened. I thought they should pay for what they cost our citizens. The year I left office, in 1990, we won a $24-million settlement against these Masters of the Universe. Naively, we thought that this would be a lesson. Wrong! One of these brokers has reappeared, wraith-like, in Orange County.
There should be a fiscal Nuremberg Tribunal to settle accountability and hold officials, auditors and brokers responsible. Also, the judicial system should speed justice to its conclusion. No plea bargaining or evasions of blame should be tolerated when schoolchildren and public safety areat risk. These malefactors of malicious advice must be rooted out of the system. And make the state Legislature, Congress, and the Securities and Exchange Commission get engaged. The Legislature changed the law to allow these investments. Now change it to stop them!
But ultimately this is a local matter, for, to paraphrase Tip O’Neill, “all money is local.” Stop the absurdity of a treasurer standing for election and soliciting campaign donations. Reorder county government. It must be set right in Orange County as it was in San Jose.
Lose a lot, learn a little. The magnitude of the errors in Orange County make San Jose look like a rehearsal. We will see how much California learns now, for this fiscal fiasco was not a partisan matter. Democrats, Republicans, all share the guilt.
Can it happen again? The answer is a resounding yes. Just ask the pressed citizens of Orange County, whose dollars were invested by fools doing the bidding of knaves. Lest we forget, lest we forget. The stakes of such amnesia are very high.