Chairman Frank, (Rep.) Bachus, and colleagues –

I thank you for convening this hearing today to examine the devastating impact the failure of Lehman Brothers has had on state and local governments and other publicly funded entities. Although my district has been hit particularly hard, this truly is a national problem, as you will hear from the witnesses today from California, Colorado and Florida.

There are affected communities in at least 20 states, from Alaska to Washington to Massachusetts. Some of the losses are relatively small — only $18 in Tennessee as far as we can tell — but Minnesota lost more than $56 million, Missouri lost $50 million, Oregon lost $173 million, and Arizona lost $61 million. You will hear from one of today’s witnesses that Florida, already hurt hard by natural disasters and the recession, lost more than $465 million.

I would like to ask for unanimous consent to enter testimony from some other affected entities into the record.

As you know, Ms. Eshoo and I have introduced a bill, HR 467, that would require the Treasury Department to repurchase certain Lehman investments held by these government entities at full face value using TARP funds. The Treasury Department asserts it still has more than $135 billion left in its TARP arsenal. It has used hundreds of billions of those taxpayer funds to save Wall Street. We are asking that it use just $1.7 billion of those taxpayer provided funds to save Main Street.

Let’s be clear. Lehman is the only major investment bank the federal government did not prop up last September when Wall Street went into freefall, seemingly overnight. Bear Stearns, the first to be helped — and deemed “too big to fail” — was half the size of Lehman Brothers. Negotiations the weekend of September 13 between the Treasury, the Fed, Lehman Brothers and Merrill Lynch resulted in Merrill — with Treasury’s help — being acquired by Bank of America.

Goldman Sachs and Morgan Stanley were each allowed to become bank holding companies. Lehman then was allowed to go into bankruptcy — the largest in our history. In the words of Nobel Prize winner Paul Krugman, the decision to let Lehman fail was the event that “basically brought the entire world capital market down.”

The decision by the Treasury and Fed to allow Lehman to fail was arbitrary and caught many taxpayer-funded agencies unprepared. They had watched the takeover of Countrywide by Bank of America and the bailout and takeover of Bear Stearns by JP Morgan and concluded, like many others, that since in those cases noteholders had been made whole, Lehman was unlikely to declare bankruptcy.

But Secretary Paulson did not offer Lehman the same guarantees it had offered the others. And if these local governments had chosen to sell their Lehman investments prior to maturity, they would have suffered a definite and substantial loss, negatively affecting the whole investment pool.

It is not like these government bodies were using taxpayer funds to speculate in the market. The public agencies we are talking about invested in Lehman corporate bonds and notes as part of a strict, safe and conservative investment strategy. In fact, most of the debt instruments in question were highly rated right up until the moment of Lehman’s collapse.

San Mateo County’s pooled investments in Lehman were rated A-1 for its “floating rate” securities and A for its corporate bond. That investment pool is prohibited under state law from investing in equities, and is limited to conservative instruments such as U.S. Treasury obligations, highly rated commercial paper, certificates of deposit and the like. Preservation of principal is of primary importance — to minimize credit risk while recognizing and controlling market risk, matching maturities with capital expenditures and other planned outlays. Diversification plays a big role in that effort. San Mateo County only invested 5.9 percent of its pool in Lehman as part of its diversification strategy. It also holds similar investments with Morgan Stanley.

These local governments provide critical services and programs that every American family and business relies on to protect public safety, provide health care services, respond to emergencies and educate our children. Given our current economic situation, these services are more essential than ever, and the local governments providing them are already struggling with greater demand for services and declining tax revenues to fund them. These losses represent hundreds of jobs lost for construction, teachers, public safety, health care, and other services, and class rooms, fire stations, jails and other projects that will halt or never get started.

I believe the Treasury already has the power to do what we are asking. Section 103 of the Emergency Economic Stabilization Act, that we passed last fall, instructs the Treasury Secretary to take into consideration “the need to ensure stability for United States public instrumentalities, such as counties and cities that may have suffered significant increased costs or losses in the current market turmoil.”

We requested that Secretary Paulson take such action last fall, and we have made the same request of Secretary Geithner in February, but have gotten no response.

There seems to be no limit to the amount of assistance we are willing to provide to the likes of AIG, Citigroup, Bank of America, and Goldman Sachs, let alone the foreign interests whose speculative derivative deals have been fully paid through the taxpayer-funded bailout of AIG. Goldman not only has been the beneficiary of $10 billion of TARP money directly, but it has gotten another $13 billion through its credit default swaps with AIG. All while it reported a $1. 8 billion quarterly profit and is seeking to repay its $10 billion in TARP funds because it doesn’t like the compensation strings that come with it.

If AIG had been forced to declare bankruptcy, the financial institutions like Goldman doing business with it would have wound up in court, just like San Mateo County has had to do with Lehman, fighting to get pennies on the dollar for their claims. I say let Goldman repay its bailout and use that money where it is really needed — our local communities.

Restoring the value of these Lehman bonds is perhaps the fastest way to bring relief to communities across America, allowing them to pay their employees, maintain current levels of service and immediately put shovels in the ground on already approved projects.

Maybe in the grand scheme of things $1.7 billion is just not seen as a big enough problem. To the local governments, school districts, sanitation and water districts and the communities they serve, these losses are devastating. How ironic that they should be left wishing they had invested in credit default swaps with AIG — if they had we wouldn’t have to be here today.

In case you missed it, county Supervisor Mark Church was on “Lou Dobbs Tonight” last week, trying to protect his eyes from the glare of the CNN host’s blindingly white teeth.

Dobbs featured a segment Dec. 1 with both Church and lawyer Joe Cotchett, whose firm is handling the county’s lawsuit against Lehman Brothers, the collapse of which deprived the county of about $150 million in investments.

The suit asserts that the company fraudulently misled investors into thinking their money was safe, even as the investment firm slid closer to the abyss.

“What makes this case so outrageous is that all the while upper management was siphoning off millions of dollars for their own personal benefit, leaving investors holding the bag,” said Church, according to a CNN transcript.

Cotchett referred to Lehman Brothers’ executives as “modern-day robber barons.”

“One thing is for sure,” Cotchett said of the company’s leaders. “They shouldn’t have a $21 million condo on Park Avenue to return home to every night.”

“The person who is elected or appointed to fill Jerry Hill’s seat will likely remain on the (Board of Supervisors) until he or she is termed out in 2022,” committee member Nick Akers, author of the resolution, said in a statement.

“Our county’s at-large system for electing supervisors gives a strong advantage to incumbents,” Akers continued. “It has been nearly three decades since a supervisor running for re-election has been defeated. The people of San Mateo County should be given the opportunity to fill this open seat.”

Committee members voted “overwhelmingly” on Nov. 20 in favor of the resolution for an election. They’re looking to peg a special county election to an anticipated special statewide election in June 2009.

Not that the San Mateo County government has a reputation for being clubby and nontransparent — cough, cough — but the Insider agrees with local Democrats that holding an election to fill the seat of Assemblyman Hill, irrespective of the cost, would be the democratic thing to do.

According to the release, San Mateo County is the fifth jurisdiction in California to join the lawsuit. The others are the city and county of San Francisco, the city of Los Angeles and the counties of Los Angeles and Santa Clara.

Mr. and Mrs. Insider paid a visit to the Carolands Chateau on Friday, at the invitation of Burlingame attorney Joe Cotchett, to attend a campaign party he threw for former state Sen. Jackie Speier, who is running for the congressional seat occupied by Rep. Tom Lantos until he died in February.

Roughly 100 to 150 people circulated around the second-floor of the mansion — which is a succession of rooms off a central atrium — sipping white wine and cocktails (no red wine allowed, for fear of stains) and munching on hors d’oeuvres.

Among those the Insider spotted at the party: San Mateo County Supervisors Mark Church and Adrienne Tissier; San Mateo police Chief Susan Manheimer; former county sheriff, and current member of the Sequoia Healthcare District Board of Directors, Don Horsley; and Robert Foucrault, the county coroner.

Speier herself, wearing a red dress with a black sash, posed for photographs with supporters in the chateau’s ridiculous wood-paneled library. Sometime after 7 p.m., guests were ushered into the ballroom for the evening’s presentation.

Cotchett spoke first, thanking the chateau’s owners, Ann and Charles Johnson (who bought the estate in 1998 and spent millions refurbishing it). He said the Johnsons were “equal opportunity employers,” since they hosted a Republican fundraiser with President Bush in late January in the exact same room.

Cotchett then introduced the emcee for the night, former San Francisco Mayor Willie Brown, who interrupted a tour hawking his memoir, “Basic Brown: My Life and Our Times,” to be there for Speier, a friend and colleague from their years together in the state legislature.

Brown said he owed many votes on “family values” issues to Speier, who would cast his votes for him when he was absent from the state Assembly. The Insider isn’t sure whether he was being serious, or if the practice he described is legal, but there you have it.

Brown also joked about being mortified that he was selling his books at Wal-Mart, which has become a major book retailer that helps authors get on best-seller lists, and encouraged anyone in the audience not to attend a book signing held at one of the stores.

Standing as he was within one of the Peninsula’s symbolic seats of wealth and power, Brown may have forgotten that tens of millions of Democratic voters nationwide shop at Wal-Mart because it’s what they can afford. That Willie Brown is a real champion of the working class, isn’t he?

Rep. Anna Eshoo, D-Palo Alto, also took a turn at the microphone before Brown turned the stage over to the evening’s main attraction, celebrated actress and singer Carol Channing.

As a member of Generation X, the Insider is not overly familiar with Channing’s oeuvre, but the stories and impressions from early in her career were pretty funny; and the fact that she’s still performing at the age of 87 is impressive.

One thought that came to mind following the party was that Stanford professor Lawrence Lessig proved how smart a guy he is by deciding not to enter the race against Speier, despite the pleas of online supporters.

Because the roster of Jackie-ites Friday in Hillsborough was further evidence that whoever steps in front of the Speier juggernaut this spring will be squashed like a bug.

San Mateo County Supervisor Rich Gordon got called up to Sacramento earlier this week in his capacity as president of the California State Association of Counties, a group that represents the interests of all 58 counties statewide.

Gordon, who was elected president of the organization in November, met with Gov. Arnold Schwarzenegger along with other officials for a sober discussion of a projected state budget shortfall for the coming year of roughly $10 billion or more.

Schwarzenegger is considering across the board 10-percent reductions for all state departments for the coming fiscal year. Gordon said it’s not yet clear what this will mean for the county budget, which is already in trouble.

The county can expect to see some decline in state funding for county programs such as mental health or food stamps as a result of the state’s budget problems, he said. County Manager John Maltbie has been asked to perform an inventory of all county programs that rely in part on state funding.

Of course, county officials already announced earlier this month that they are grappling with a looming $25-million deficit.

On a lighter note, this was about the fourth time the supervisor has met Schwarzenegger and his impression has been generally favorable. This latest meeting lasted about an hour.

“Number one, he commands the room,” Gordon said of the Governator, whom he described as “smart” and “engaged.”

“He’s not just reading the script,” Gordon said. “He clearly understands the policy questions that are being raised and discussed.”

Is he smart enough to keep California’s economy and budget running smoothly in the face of a reeling housing market? We’ll find out.

There were some interesting tidbits in the San Mateo County Children’s Report 2007, a study of children’s health and wellness that was presented Dec. 4 to the Board of Supervisors.

Did you know that, from 2004-2006, 11th graders in San Mateo County “were more likely than their counterparts in California to report use of alcohol, marijuana and cigarettes” within the last 30 days?

During that period, statistics show that by the 11th grade “41 percent of students reported having consumed alcohol in the previous month, 21 percent reported having smoked marijuana and 18 percent reported having smoked cigarettes.”

Maybe they’re just more honest than most California 11th graders?

Dr. Scott Morrow, the county’s chief health officer, said the county is making good progress on cigarettes and other substances and pointed us to individual drug statistics, saying they paint a brighter picture.

Well, let’s see. In the 2004-2006 survey, 93 percent 11th graders reported that they had not smoked marijuana on school property within the past 30 days. That’s good.

On the other hand, 48 percent of 11th graders said their perception was that it would be “very easy” to obtain marijuana if they were so inclined.

For those interested in looking at the information themselves, it’s available online here.

Elsewhere in the children’s report among the positive findings was the statement that “59 percent of youth surveyed in the county report that they feel safe at school.”

That actually struck the Insider as low. Morrow explained that there is a vast difference, unfortunately, between schools in affluent and downtrodden areas. Those in good school districts generally feel quite safe, he said, while those in troubled or impoverished areas feel less secure.