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The InTowner
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Suddenly we’re confronted with the news, reported on April 7th by the Washington Post that the city is now having to pay an additional $1.2 million “every month because its interest payments have doubled, and in some cases even tripled, on $601 million of . . . bonds. That represents nearly one-seventh of the city’s total debt and includes $24 million for the Washington Nationals’ new stadium. . . .”

But what are these bonds that have suddenly blown up in the face of our Chief Financial Officer (CFO)? They are an exotic investment invention perpetrated by the Wall Street gang bangers called auction-rate securities. Their lure was the promise of super-duper rates of return but when the sub-prime debacle started to unfold and the credit crisis spread world-wide this part of the house of cards collapsed. Trouble is, they never should have been purchased in the first place. Even as far back as two years ago, Warren Buffet publicly likened those things to “nuclear weapons” and he would have nothing to do with them.

While it is true that many supposedly savvy money managers got caught up in the allure of those things, many heeded the advice of Buffet and stayed away from them. But not the money managers in our CFO’s office. Now, with egg on their collective face, as reported by the Post, the DC Treasurer said, “In hindsight, it’s easy to say what we could have, would have, should have done. Nobody expected . . . the auction-rate market would go into a tailspin.” Yet, Warren Buffet wouldn’t touch those things two years ago with a 10 foot pole. And neither did, according to the Post, “everyone [believe] the sales pitch on these securities. Auction-rate bonds were shunned by all of the localities that border the District as well as the state governments of Maryland and Virginia.” Why did those money managers understand the risks and not our CFO?

It’s the old story, investors looking for unrealistic return on their money ignore the old adage that if it looks to be too good to be true, it’s not true. We would have thought that investment decisions by our CFO would have been more prudent given all the hype that has surrounded his tenure — at least until the revelation that trusted members of his staff had been robbing the city blind for years and he never noticed in all the time that he was in charge. And, as news reports revealed the very day we were going to press, more phony refunds have been issued to phony payees!

Will this gang that runs the city’s financial operation ever learn to shoot straight?

And if this business with sloppy investing and more phony refunds being issued wasn’t bad enough, on April 8th we learn that the 2007 fiscal year audit, performed by the outside auditors BDO Seidman, revealed “material weaknesses” with the city’s internal financial controls, including problems with the handling of federal grant money, payment of unemployment and disability compensation, and other matters. Also, as the Post reported, the audit revealed that “procurement operations and . . . payment of city vendors were not in full compliance with the law.”

But this business about poor funds investment judgment or keeping track of where the money is are not the only things that raise concern over how the CFO is managing the store.

Just in the past two or three days we were treated to a circus-like performance by the CFO with respect to his attempt to jam though a gargantuan, multi-year sweetheart contract deal with a local entrepreneur to run the DC Lottery even though the two principals have no background in the gaming industry. In fact, one of them made his mark as the proprietor of the infamous Club U which was in the Reeves Center until the city closed it down because of it being something of a wild place where patrons got stabbed. The other principal is a landlord who, according to Ward 1 Councilmember Jim Graham has been cited many times for housing code violations and has a blemished record with respect to the apartment buildings he operates in the ward.

Here was another instance of DC officials ready to proceed with issuing contracts or making appointments without proper vetting. If it hadn’t been for the hearing called by the chairman of the Council’s Committee on Finance and Revenue, Ward 2 Councilmember Jack Evans, at which time most members raised perfectly well-founded objections, this contract might easily have slipped on through. We were pleased to learn, as we were going to press, that the CFO has eaten crow on this one and has withdrawn the contract from the Council’s docket. Let’s hope it stays withdrawn.

Notwithstanding that the CFO has backed away from this mess, it should be clearly worrisome to all residents that things seem to be done in such a slap-dash manner by the CFO’s bureaucracy. We are certain that the vast majority of the staff are highly competent — in fact, we know from personal experience that this is the case — so we have to wonder where does the problem lie? We believe the problem is at the top, and the top dogs need to shape up or ship out. Simple as that.