Los Angeles - Speculation that Orange County, Calif., may be forced to liquidate its battered investment fund grew Friday, as county officials began working with a team of financial crisis experts headed by former California Treasurer Thomas W. Hayes.
Full or partial liquidation within the next few months is almost inevitable, market observers say, and the only question now is-how the county will restructure its investments to deal with an actualized loss of at least $1.5 billion.
Much of the talk centers on the use of derivatives - the same risky investments that got Orange County into this mess - to help insulate the fund from further losses.
But that strategy has been met with some skepticism, largely because of the numerous collateral calls that have already stripped the county of $9 billion - although officials say they will sue to get that money back.
"Orange County has already proven itself to be inexperienced in complex derivatives," said Robert Lamb, a professor of public finance at New York University's Stern School of Business. "Taking another swing at that is likely to lead to more harm than good."
Lamb said he expects county officials to begin a phased liquidation of the fund within three months - the same time period that Hayes has been given to help turn the situation around.
On Thursday, the Orange County Board of Supervisors named Hayes chairman of the financial institutions, team. The 90-day appointment gives him full responsibility over the country's investment portfolio, including executive authority to deal with all 187 public agency investors, financial institutions, and other parties.
Hayes, who served as California treasurer from 1989 to 1991, will also have full authority over the Orange County treasurer's office, which was left without an elected leader with the Dec. 4 resignation of Robert L. Citron.
County officials were optimistic Thursday following the appointment of Hayes, as well as the hiring of Salomon Brothers Inc. to guide the county's future investment decisions.
"We are fortunate to have a person of Tom Hayes'reputation and a firm of Salomon Brothers' experience to steer us through the current financial situation and help set the course for the county's return to financial stability," said Thomas F. Riley, chairman of the board of supervisors, in a statement to the press.
Despite Riley's optimism, most observers didn't believe Hayes or Salomon could stop the county from turning that $1.5 billion "paper loss" into an actual loss.
"There's no question they will have to liquidate," said Zane Mann, publisher of the California Municipal Bond Advisor in Palm Springs, Calif.
"It seems to me they have some maneuvering room," Mann said. "But these lawsuits against the brokers who have liquidated the collateral are probably going to go on for the next 15 years, and who knows what the outcome will be."
In other developments late last week:
* Orange County supervisors authorized their lawyers to file suit against all investment broker-dealers who sold securities related to county repurchase agreements, allegedly in violation of Chapter 9 municipal bankruptcy statutes.
"We are outraged that some broker-dealers have elected to ignore the law and have only contributed to the uncertainty that has confronted us in recent days " said board chairman Riley.
County officials did not name the broker-dealers, but they are reportedly seven of the largest New York-based firms. Only Meryll Lynch, which holds $2 billion of county collateral, has not sold, according to press reports.
* California Gov. Pete Wilson and outgoing state Treasurer Kathleen Brown, in separate statements, said the state is under no obligation to help Orange County.
Wilson, a Republican, said he would like to assist the largely conservative, Republican county, "but we are not in a position where we can bail out bad judgments."
Brown, a Democrat who will give up her job on Jan. 2, was less sympathetic. In an opinion piece in Friday's Los Angeles Times, Brown blamed the financial debacle. on Citron's "cockiness."
Brown said Citron, a fellow Democrat, "bet local public dollars in a bold gamble to make a market killing," but to make a market killing," but "in the end, the market killed Orange County."
* Anaheim, home to Disneyland and two professional sports teams, announced Thursday afternoon that it has frozen all hiring and stopped all capital improvement projects because of concern over cash flow.
Anaheim is the second largest city investor, with $169 million tied up in the county fund.
City manager Jim Ruth said only about 20% of the city's portfolio is invested with the county, so he believes he will have enough cash to keep the city operating.
"Nonetheless, I am concerned about this situation and, while confident it will be resolved without serious impacts on the city, I believe we must collectively act prudently and conserve cash wherever possible," Ruth said.
Other local governments, including the Orange County Water District, have expressed concern about meeting payroll in the weeks to come. And the La Habra City School District said it will delay a $1.5 million school expansion project.
* Fitch Investors Service Inc. said Friday that it is placing $1 billion of Orange County transportation revenue bonds on FitchAlert with negative implications.
The rating action reflects the current uncertainty surrounding the Transportation Corridor Agencies' $301 million in bond proceeds invested in the Orange County fund, Fitch said,
The BBB-rated bonds were sold to help finance the construction of the San Joaquin Hills toll road.
