Just as Lehman Brothers, the New York City-based 158-year-old investment bank, filed for Chapter 11 bankruptcy Monday, Rhode Island’s treasurer assures his residents that their state will be unaffected by the most recent development in the nation’s credit crisis and real estate meltdown.
Rhode Island General Treasurer Frank Caprio has taken steps to ensure that the state of Rhode Island is protected, according to a press release issued today.
“It is important to note that the state of Rhode Island currently does not have any exposure to Lehman, Merrill Lynch or Bear Sterns at this time," Caprio said in the release. “The state's major concern is to have good execution on any transactions underwritten by an investment bank.”
In early March 2007, Caprio expanded the pool of investment banks able to underwrite the state’s bond transactions through a competitive bidding process.
To further safeguard the process, the state will name a co-senior managing underwriter on any state issues, according to the release. This position will step in if the senior managing underwriter is unable to perform. In addition, Rhode Island is reviewing the roles of various firms in the wake of the most recent investment bank collapse.
And although Rhode Island is safe, according to the Caprio, the Lehman Brothers bankruptcy could affect other states.
For one, if a state’s investment portfolio, including its retirement plan, had Lehman Brothers exposure, the firm’s bankruptcy filing Monday will certainly have negative implications on the state’s bottom line, said Sujit CanagaRetna, senior fiscal analyst with The Council of State Governments Southern region—the Southern Legislative Conference.
“In recent years, specifically in the last 15 years or so, states have moved aggressively away from the more staid but secure U.S. Treasury bills to more exposure to non-governmental equities, such as picking up stock in financial firms like Lehman,” CanagaRetna said.
Secondly, “if a state had an ongoing relationship with Lehman in its role as an investment bank, all those deals will now be up in the air as states and federal regulators scramble to come up with an alternative plan,” he said. “In this decade, states have increasingly resorted to issuing debt to bolster their financial positions (given that raising taxes is politically radioactive) and the role of firms like Lehman have become increasingly important.”
But that’s not all, according to CanageRetna.
States such as New York, New Jersey and Connecticut, where a large number of Lehman employees live and work, face immediate negative consequences regarding diminishing corporate and personal income as well as sales tax revenues in the face of the Lehman bankruptcy and the ensuing number of layoffs, CanagaRetna said.