ORDINARY DEPOSITORS

I am a City Council member for the City of Atlantis in the State of South Utopia. We provide the usual municipal services like police, fire, garbage pick up, street sweeping, storm sewer, and sanitary sewer. We also operate our own water production and distribution system. Fortunately, our area did not experience the housing bubble the way other areas did. Home prices have not decreased more than 12%. Our tax revenues are experiencing slower growth. We are holding our own. We have not laid off employees; but, no one will get raises next year. My problem is that we have about $25 million dollars in reserves. If we lose this money, I will be publicly hung. Currently, $10 million of this is deposited with Wachovia/Wells Fargo; the other $15 million is invested in a State of South Utopia investment pool that invests in government instruments and short term high grade commercial paper. I am the gadfly that constantly questions everything.

Wachovia assures me that everything is ok. Its government account liaison courts me frequently. For the first time in twenty years, the local Wachovia market president in the City of Golf Masters recently gave me a personal phone call to say everything was fine. The City’s large amount of deposits is not insured by the FDIC. However, under South Utopia State law, Wachovia must collateralize 110% of the deposits. This is done by transferring government and agency bonds to BNY/Mellon as collateral holder. I am concerned because all the collateral consists of Freddie Mac and Fannie Mae bonds. The price of these bonds is verified by two independent pricing services. An additional concern is that the collateral agreement does not prevent BNY/Mellon from loaning the collateral to third parties of unknown solvency. BNY/Mellon has questionable solvency status as well.

The State investment pool holds several billion dollars from 46 counties and numerous municipalities. The last asset statement I reviewed showed about half the money invested in a single repo arrangement. The rest is invested in less than 1 year maturity commercial paper of various companies. I was able to get a conference call with the fund manager. She assured me the pool had never lost a dime on any commercial paper investment. I specifically asked whether any commercial paper issuer had defaulted and whether any commercial paper instrument had been sold for less than purchase price. The fund manager assured me that neither of these events had ever occurred, even during the meltdown of last fall. The big repo concerns me because my understanding is that this instrument is unwound every day and the cash sits in a bank account somewhere, in some bank, all day until the repo is reestablished for the night. Conceivably the bank holding these funds could become insolvent while the repo is not in place. If so, aren’t these funds at risk of being lost since they are far over the FDIC insurance limit?

What can I do to protect my City’s money? I am much more concerned about return of capital than return on capital. Even if the City specifies that all funds be invested in T-bills, how can it make sure that the solvency of the custodian of these investments does not jeopardize the City’s assets?