State Treasurer: Banks Need To Belly-Up
As Treasurer and Receiver General of the Commonwealth of Massachusetts, it is my job to make critical financial decisions to protect the assets and investments of the commonwealth’s taxpayers. As most people are aware, we are in the middle of an uncertain time for financial institutions in the country:
• The Federal Government’s recent interventions over the past few months in the Bear Stearns, Freddie Mac and Fannie Mae failures shows that nobody is too big, too prestigious, or too smart to fail.
• Rating agencies’ long accepted methodologies have been tested, and lacked the ability to assess the actual risk in the financial reports of many financial institutions.
• Bond insurers have found their own financials upended and have sold municipal issuers valueless insurance policies as a result of their own instability.
• Local governments and private investors in Massachusetts have experienced frustration and, in some cases, fraud by being left with auction-rate securities or exotic financial instruments that no longer have a market or value.
For these reasons, I am requesting that our banking partners work with me to secure the commonwealth’s significant short- and long-term investments by collateralizing our deposits or by strategizing with me to develop other ways to protect our public deposits.
Bank failures in the United States were minimal until this year. During times such as these, minimally insuring the bank deposits of the Commonwealth is a wise move.
Debits & Credits
Over the past few months, my office started reviewing the collateralization regulations of public deposits throughout the United States. Our research found that 46 other states had some type of collateralization requirements.
Most states have laws requiring it, including California, which just suffered from Indymac’s failure in July. In Massachusetts, our laws only reference collateralization. Despite the fact it is not legally necessary, I have started to require it for deposits.
On September 9, 2008, we required banks that competed for our deposits to certify that they have membership in Depositors Insurance Fund (DIF), Share Insurance Fund (SIF) or provide collateral from an approved list published on our www.bidmass.com web site.
Thus assured, we were able to place $50 million in banks throughout the state and still earn an additional $128,714.44 in interest for the state. Since this was a new requirement, we understood some banks would not be ready and our office will continue to work with institutions to answer questions, and help them understand our position. Nonetheless, we still had twenty banks bid with nineteen accepted for deposits and were oversubscribed.
This is a first step. Next, we will analyze the deposits held in various banks throughout the Commonwealth. We will also work with cities and towns around the Commonwealth and the banking community to establish achievable guidelines to protect their deposits.
First and foremost, our goal is to protect the assets of the Commonwealth, while getting a respectable rate of return.
Now is not the time to reach for yield by taking on more risk. I stand ready to work with our financial institutions to ensure that taxpayer funds will not suffer in this uncertain market.
Protection of public funds not only makes sense, but also is good public policy.
Timothy Cahill is treasurer for the Commonwealth of Massachusetts.
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