Officials from Standard & Poor's Corp. and Moody's Investors Service scheduled a meeting with officials from Orange County, Calif., late yesterday to discuss the county's troubled investment pool.
The meetings mark the first face-to-face encounters between bond raters and the county since officials announced huge losses in their pooled investment fund.
Fallout from the losses led to the resignation of Orange County Treasurer Robert Citron, who engineered the county's investment strategy.
On Tuesday, the county filed for protection under Chapter 9 of the federal bankruptcy code, following disclosures that Citron's investment strategy of interest-rate speculation, leverage, and investment in derivatives caused the fund to lose at least $1.5 billion.
A day after the filing, Standard & Poor's downgraded the county's bond issues to a speculative grade of CCC from Aa-minus. Moody's suspended its AA rating on county debt.
Richard Larkin, a managing director at Standard & Poor's, said the rating agency dispatched three executives to Orange County for a meeting late yesterday evening with county officials.
"Basically, we want to know the five w's: who, what, where, when, and why," Larkin said.
Cheemee Hu, a vice president at Moody's, said the rating company will ask officials for a complete description of the county's fiscal problems, and for an assessment of what the bankruptcy filing will mean for bond holders.
Moody's will also ask for a complete list of all the municipalities in the investment pool, not just those the company rates, Hu said.
In recent days, the bond raters have also been under some scrutiny. Several market executives said raters should have been aware that the Orange County portfolio was in trouble, and should have promptly alerted investors who bought both the county's debt and the bonds issued by municipalities that participated in the pool.
"Many people are wondering why Standard & Poor's and Moody's were not ahead of the curve," one market executive said.
Raters, however, said they had regular contact with officials in Orange County, and that county officials did not disclose the seriousness of the situation.
In fact, Standard & Poor's will ask county officials why die county did not inform raters about problems in the investment fund much sooner.
Larkin said Standard & Poor's spoke to county officials on Nov. 22 to set up a meeting on Dec. 6, and to discuss the county's fiscal condition, including a sharp drop in the investment fund's liquid holdings.
Larkin said the county told rating executives that its liquid holdings fell to $450 million from about $1.2 billion over the past three month, but county officials added that there was "no crisis and they are making changes."
"They wanted to review [the changes! with us," Larkin said. "But they said there was no crisis. It sounded like they had everything under control."
Hu of Moody's said the company was scheduled to meet yesterday with county officials in the agency's New York offices. Hu said Moody's and county officials spoke a number of times before the fund's losses became public, but that they were unaware of the severity of the problem.
"The bankruptcy and all the turmoil erupted before we had a chance to meet," Hu said. "It's all an issue of timing, and then the whole thing blew up."
