CARSON CITY — Nevada’s general fund could suffer a big hit because of a potential $50 million loss from investments with now-bankrupt Lehman Brothers Holdings Inc., state Treasurer Kate Marshall told lawmakers on Monday.
The state invested the money with Lehman in 2007 and was supposed to be paid back with interest next month. But Marshall said the company filed for bankruptcy in September 2008.
At an Assembly Ways and Means Committee hearing, Marshall also said she’s closely watching the state’s $75 million investment in Wells Fargo & Co., which is supposed to be repaid with interest in August.
Wells Fargo recently posted a $13.7 billion fourth-quarter loss, and its stock fell to its lowest level in 12 years after it bought Wachovia. Wachovia Global Securities Lending, which handles securities lending for the state, played a role in the state’s investment with Lehman Brothers.
"I’m watching it," Marshall said about the Wells Fargo investment after the Ways and Means Committee meeting. "Wells Fargo seems to be well-funded. I’ll continue to watch it, and if I need to take action I will."
In response to questioning, Marshall told legislators the state has a total of $254 million invested in corporate bonds, all of which should mature in August. That raised concern for Assemblywoman Heidi Gansert, R-Reno, who questioned whether the state should pull out of its corporate investments completely.
Marshall said that if the state withdrew, it would lose potential interest and would pay $1.7 million in fees.
"I was very concerned when the treasurer said we have $254 million outstanding," Gansert said after the meeting. "Given that we’ve already incurred what looks like a $50 million loss, I believe it would be prudent to reassess that policy and to determine whether we should really have that much outstanding in corporate bonds."
"I think she should examine whether we should be moving those instruments into even safer vehicles," Gansert said. "She’ll say they are Grade A or above, but so was Lehman."
Responding to lawmakers’ questions about the impact of the potential loss on the general fund, Marshall said about two-thirds of the $50 million would have gone to the general fund and the rest would be distributed to other state accounts.
Marshall also said the federal bankruptcy court advised her that the state probably will recover 50 cents on the dollar from the Lehman investment. She doesn’t know yet how long the bankruptcy proceedings will continue, or when the state will know how much it could recover.
"Counties, cities, school districts, pension plans — nobody has been immune to this," Marshall said, adding that Nevada has had less exposure to bad investments than other states. In comparison, Marshall said, states such as Florida and Oregon sustained hundreds of millions of dollars in losses after the collapse of Lehman.
Marshall said that in 2007, when markets took a serious downturn, she consulted with Wachovia and was told not to sell the securities because the investment would be made good.
Marshall also said some states have sued Wachovia, including California and Wyoming, but she declined to say whether Nevada is pursuing legal action against the bank.
Steve George, spokesman for the treasurer, said the state is considering its legal options.
"The fact that Wells Fargo is also involved in this is one of the elements that they’re looking at as they look at their legal options," George said. "Wells Fargo has taken over Wachovia, and Wachovia is the company that we originally got the advice for Lehman on, and they’re all tied together."