The District's brush with a New Jersey-based government securities firm that went bankrupt last week ended happily for city officials, who recovered the $10 million they had invested with the firm.
Alphonse G. Hill, the deputy mayor for finance who was responsible for placing Bevill, Bresler & Schulman Inc. on the District's list of approved investment organizations, insists that the city never was in any real danger of losing its money, because BB&S had been required to post collateral for the transaction. In fact, the city made $135,374 in interest on the transaction, after seizing and selling the collateral.
Still, the incident provided a few tense moments for the Barry administration and prompted at least two D.C. City Council members -- Chairman David A. Clarke and John A. Wilson (D-Ward 2) -- to call for reviews of the way the city invests its cash.
"It may well be that in this one purchase the city was safe because of the collateral, but I do think there needs to be an examination of the entire cash management process," Clarke said.
Council members were troubled to learn that Alvin C. Frost, the city's senior cash management analyst, wrote a memorandum last December to one of his supervisors, Fred Williams, warning against investing with BB&S Inc. and complaining of pressure from Hill to do business with the firm. Frost said that BB&S Inc. was "thinly capitalized" and showed little evidence of being able to do "quality business" with the city.
Williams apparently filed away the memorandum without informing Hill of Frost's concerns. Hill said he first learned of the memorandum when he read about it in The Washington Post last week, shortly after BB&S Inc. and four related firms went bankrupt and were accused by the Securities and Exchange Commission of engaging in fraudulent activities.
Unbeknownst to Hill and other city officials, more than half the $10 million the District invested with BB&S Inc. had been shifted to another BB&S firm that had not been reviewed or approved by the city to handle public funds.
But Hill indicated he was less concerned about the essence of Frost's memo -- that the District was risking its financial reputation by investing with BB&S -- than he was about the fact that he had been unfairly accused of trying to pressure Frost and that the memorandum somehow was leaked to the press.
Hill did acknowledge that the District had been "sensitized" to the risk of investing in small government securities firms such as BB&S and the E.S.M, Government Securities Inc., another firm that went bankrupt a month ago. He said that he would be inclined to do business strictly with primary dealers from now on.
At any one time, the District has many millions in cash on hand to invest for short periods -- usually from a day to two weeks -- at a relatively high interest rate.
Hill maintains a list of approved financial institutions, including such well-known firms as Merrill Lynch, Kidder Peabody and Riggs National Bank -- which are entitled to bid regularly on the use of city funds.
Last December, Hill added BB&S to the list, and the city subsequently made at least six transactions before the firm ran into trouble. Why BB&S was chosen from among all the banks and financial institutions pleading for city business has yet to be fully explained by Hill or other officials. That likely will be a subject of intense interest when the council begins its hearings.
Wilson, chairman of the Finance and Revenue Committee, said that the administration has never spelled out its short-term investment strategy, including who calls the shots, how well the city has done in managing its cash, and specifying the criteria for adding an investment firm to the city's list. "There are many unanswered questions about the city's investment policies," he said.
Clarke and Wilson have yet to work out a specific game plan for getting answers to their questions. Clarke contends that the council's Committee of the Whole, of which he is chairman, has primary responsibility for overseeing the District's investment policies. He indicated an interest in holding hearings to air the issues.
But Wilson, who was incensed that Frost's memo was disregarded, wants his Finance and Revenue Committee to begin hard-hitting "investigative hearings" May 6 into the city's cash-management practices. The two men may have to work out a compromise on how best to proceed.
Wilson has criticized Mayor Marion Barry's handling of the budget and finances for years. He may use his hearings as a forum for punching a few holes in Barry's oft-stated claim that he has the District's finances firmly under control.