But some critics have concerns about the program, which is backed by federal insurance, because they say depositors have no financial incentive to care about how much risk the bank assumes.
Ohio is the first state to use the program as an option for local governments.
Since 1985, local governments could invest their money in the State Treasury Asset Reserve (STAR) of Ohio. The state treasurer invests these funds in federal government agency securities, eligible commercial paper and money market funds.
Treasurer Josh Mandel introduced a new investment program in June called STAR Plus. Under the program, made possible through a bill passed last year, STAR Ohio participants could invest up to $15 million in STAR Plus — Federally Insured Cash Accounts (FICA) that are deposited in banks around the country through a formula devised by StoneCastle Cash Management, LLC, in 2011.
The program divides large sums of money into small amounts — less than $250,000 — that are protected by the Federal Deposit Insurance Corporation. The interest rates set by the banks are often much higher than the secure, government-backed bonds and money market that fuel STAR Ohio. Account-holders can access cash in STAR Plus on a weekly basis.
Stephen Rotella, the chief executive officer of the New York-based Stone Castle Management, was the president and chief operating officer of Washington Mutual when it collapsed in 2008. The Federal Deposit Insurance Corporation in 2009 sued Rotella and two other top executives for causing WaMu to lose billions of dollars; they settled with the FDIC for $64 million plus $125 million to drop charges against 12 other former officers.
A 2010 Congressional investigation in the bank’s failure found WaMu generated “a steady stream of high risk, poor quality loans and mortgage backed securities that later defaulted at record rates.” The investigation report noted WaMu and similar lenders issued loans that became “the fuel that ignited the financial crisis.”
Eric Lansky, StoneCastle’s managing director, told the Dayton Daily News in an email that Rotella was recruited to WaMu in 2005 to clean up the company and made significant strides before the financial crisis hit. The congressional investigation uncovered emails sent by Rotella, however, expressing his support for the company’s lending strategies.
Lansky and Seth Metcalf, general counsel for the treasurer’s office, said STAR Plus is different: StoneCastle isn’t lending or selling anything; rather, the money is deposited in banks based on StoneCastle’s formula. Moreover, the funds are safely covered by FDIC deposit insurance.
“[Rotella] has a stellar track record,” Metcalf said. “StoneCastle has been very successful and is well-regarded with community banks.”
Bruce Guiot, chief investment officer at Miami University, said he reviewed StoneCastle, its leadership and similar programs before investing $15 million of university money and $7 million from the foundation.
“I don’t think WaMu’s fate was decided by one individual,” Guiot said. “I’ve seen other aggregation programs similar to this, so conceptually the program is sound.”
The FDIC does not endorse or support specific programs but advised StoneCastle on how the deposits could be eligible for insurance up to $250,000 per deposit. An FDIC spokesman said the insurability of these funds depends on the broker’s recordkeeping and oversight of the program.
Lansky said all deposits are fully insured and each participating bank is screened to ensure that it meets the credit quality standards for the program. Lansky said no bank with client funds has failed.
STAR Plus was made possible because of a law passed last year in the Ohio General Assembly. The Ohio Bankers League drafted the legislation and billed it as a way to increase funds for Ohio banks. Mandel, a Republican now running for the U.S. Senate, lobbied for the bill, which passed unanimously. Of the nearly 200 banks in the STAR Plus network, 27 are headquartered in Ohio.
Mandelhas put $24 million of the state’s money in a STAR Plus account. Mandel said his office decided on the program after treasurers around the state said they wanted higher rates of return.
“In our mind, this is how government should be working,” Mandel said in an interview at an event touting the program in September.
Greene County Treasurer Dick Gould agreed. Greene County has invested the maximum $15 million in STAR Plus, and the account has significantly outperformed STAR Ohio. STAR Plus accounts currently return 0.25% annual interest while STAR Ohio returns 0.10% — a notable difference for public agencies hit by state budget cuts.
“If something happens, worst case scenario, by some fault of StoneCastle, our money is held in individual banks,” Gould said.
Sherrill Shaffer, a former chief economist at the New York Federal Reserve Bank, said such programs encourage banks to take on too much risk and that deposit insurance was not intended as protection for large corporation and local government funds.
“If Congress wanted to allow the FDIC to be on the hook for the $400 million, they could just do that with the stroke of a pen,” said Shaffer, now a professor at the University of Wyoming.
As of Monday, 12 Miami Valley cities, counties, libraries or school districts had invested $63 million in the program. Montgomery County has not. Judy Zimmerman, the county’s director of finance and investments, said current investment methods provide greater returns than STAR Plus. She said they had questions about how the money moved from STAR Ohio to STAR Plus.
“We know when we wire the funds to the bank that wire receipt is evidence of our ownership and deposit in the bank,” Zimmerman said.
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