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State records $130 million loss on Lehman news

A man looks out the window at the Lehman Brothers headquarters in New York. (The Spokesman-Review)
A man looks out the window at the Lehman Brothers headquarters in New York. (The Spokesman-Review)

On a miserable day for investors large and small, the Washington state Investment Board recorded its largest loss ever on its stake in a single company, and Spokane investors, officials and institutions searched for a haven.

Investment Board Executive Director Joe Dear said the state will lose $130 million on its bond and stock investments in Lehman Brothers, which filed bankruptcy Monday.

The board had $147 million invested in Lehman, Dear said. Losses will be smaller because some senior debt should be worth more than the 35 cents on the dollar the market was offering for the securities Monday.

The losses will be sustained by state retirement funds, Department of Labor and Industry funds, and trust funds the board manages, Dear said.

He said the bankruptcies of Enron Corp. and WorldCom earlier in the decade cost the state about $100 million each. Until Sunday, those were the biggest single-company losses the state had sustained.

Dear noted the damage, while substantial, represents only 0.17 percent of the total $78 billion the board manages. That’s down from $80.5 billion in June, and Dear said managers had no time Monday to calculate what a 500-point plunge in the Dow Jones industrial average, and injury to other domestic and global indexes, might have had on the portfolio.

“We’ve really been trying to get our arms around Lehman today,” he said.

Gonzaga University will also be watching Lehman, bond counsel Roy Koegen said.

Last week, he said, Lehman underwrote a $47.5 million, variable-rate bond issue for Gonzaga. The rates will reset for the first time Wednesday. If the market demands a premium rate to offset higher risk – 3 percent versus 2 percent for other variable bonds, for example – the university could choose to refinance the issue rather than pay the higher interest rate, Koegen said.

“I think we’re going to be just fine,” he added, noting the bonds are backed by a Bank of America letter of credit with a very attractive rate.

At the Spokane Public Facilities District, Executive Director Kevin Twohig said a refinancing swap negotiated with Lehman in 2005 might prove advantageous when the investment bank’s situation is better understood. The swap produced $9.1 million for the district, which was financing a convention center expansion.

Twohig said a bond adviser told him Monday the district is at no risk because of Lehman’s woes.

“From everything he knows, we’re fine,” Twohig said.

That would not be an accurate assessment of the small investor’s fate, said Craig Hart, president of Hart Capital Management Inc. in Spokane.

A year ago, as the credit crisis began to develop, clients hunkered down, believing it was a Wall Street problem that would soon pass, he said.

As more and more of the financial sector has been engulfed, Hart said, “The market is starting to wear on people.”

But, excepting the financial sector, U.S. corporations are doing well, Hart said.

He said an earnings announcement early today from Goldman Sachs, one of the surviving Wall Street investment banks, and a possible decision by the Federal Reserve Board to lower interest rates will probably dictate whether the stock market rebounds today.

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