Claremont Insider: Securitizing Claremont Investments

Tuesday, April 28, 2009

Securitizing Claremont Investments

Too Clever by Half?

What with all the discussion these past few months about bundling of mortgages, securitization of these sub-prime instruments, and the ever-opaque concept of "tranches", we were a little surprised to see that the City is doing much the same thing with its investments.

Claremont's investment report, to be presented at tonight's city council meeting, contained the following description that caught our eye:

"In February, the City transferred its holdings in a CD held with Community Bank into a new CD program known as Certificate of Deposit Account Registry Service (CDARS). By utilizing the CDARS program, the City is able to take advantage of Federal Deposit Insurance Corporation (FDIC) limits to protect the funds it has on deposit, while investing amounts in excess of these limits. CDARS allows depositors such as the City to place deposits in amounts lower than the FDIC limit at numerous banking institutions while maintaining a single banking relationship with the bank that registers the account, in this case First Bernie Madoff Trust*..."

We don't know much about CDARS, but follow this link to a web page, and read the part about how "with the help of a sophisticated matching system, network members exchange funds. This exchange occurs on a dollar-for-dollar basis, so that the equivalent of your original deposit comes back to your institution and effectively stays local..."

Does this sound as fishy to you as it does to us?

Bundling. Securitization. Tranches. Straw Depositors. Sham Deposits. Sophisticated Matching System. Can anyone still spell O-R-A-N-G-E C-O-U-N-T-Y?

* * * * *

The Daily Bulletin discussed the reasons for the decline in value shown above, accelerating to a $1.6 million drop last quarter in the City investment holdings. The City attributed most of the decline to spending for ongoing operations.

We were intested in putting this in context and prepared the leadoff graph above from the past 5 years investment reports. See the City website, agenda reports for the last meeting in April for 2005, 2006, 2007, 2008, and 2009, with the relevant charts reproduced below (click to enlarge):

* * * * *
*Just kidding about that; the City staff report really said "Community Bank", not "First Bernie Madoff Trust". The Insider regrets the lowbrow humor.