SANTA ANA, Calif. -- Orange County Calif.'s investment portfolio loss has reached $2.02 billion, or roughly 27% of what investors have put into the fund, a financial adviser to the county said yesterday.
If the entire portfolio were sold today, it would be worth "73 cents on the dollar," said Thomas W. Hayes, the former California treasurer who is heading a team trying to restructure the county's finances.
County officials will begin to restructure the investment pool "in an orderly manner," and they will not conduct a "fire sale" of the remaining securities in the pool, Hayes said.
Although there is no realistic scenario that could return the portfolio to its original value, Hayes said "it is important that we don't panic."
Hayes is recommending to supervisors that the investment firm Salomon Brothers -- brought aboard last week to help with the pool restructuring -- take over day-to-day operations of the fund from the treasurer's office. "As we are going through the restructuring, it is important to restore confidence" among Wall Street investors, Hayes said.
Following the Dec. 4 resignation of county treasurer-tax collector Robert L. Citron, assistant treasurer Matthew Raabe was named acting treasurer. Raabe was not present yesterday as Hayes briefed reporters on the portfolio at the county hall of administration.
In the most complete accounting of the pool's structure since the liquidity crisis was disclosed Dec. 1, the county said the current market price of the portfolio is $8 billion, including $230 million in "cash and equivalents."
About $2.5 billion of the $8 billion is due to securities dealers from borrowings, leaving net equity in the fund of $5.4 billion, the county said.
A total of 60% of the portfolio is composed of structured notes, consisting primarily of inverse floaters, and 40% is fixed-rate, corporate, and government agency debt, the county added.
Hayes' assessment of the pool, based on an analysis by Salomon Brothers, was the first time the county has publicly confirmed what many observers had widely speculated in recent days -- that losses were greater than the original estimate of $1.5 billion, or 20% of capital.
That initial estimate of the loss to the county's highly leveraged $7.5 billion investment fund -- blamed on rising interest rates -- touched off a chain of events highlighted by Citron's resignation and the county filing for Chapter 9 bankruptcy protection on Dec. 6.
Yesterday, the county said that when the restructuring is completed, it will eliminate its practice of leveraging the portfolio. The fund will no longer contain derivatives or structured notes.
A county press release said the restructuring should "eliminate further downside risk," and will focus on eliminating interest-rate sensitive positions. Higher-quality investments will be sought, and the average maturity of the portfolio will be shortened.
But, Hayes said, the dollaramount estimate of the investment fund loss could change, depending on market forces.
"Markets by their very nature are very volatile," he said. For example, he said, a 1% move in interest rates could drop the underlying value of the portfolio by another $300 million.
Asked who would buy the securities the county plans to sell, Hayes said he believed that sophisticated investors will be interested: "They are good credits, but they are structured in a risky form."
"What happened is going to be a problem for a number of years to come," Hayes told reporters before supervisors began a closed-door session yesterday.
"Orange County can get out of it," Hayes said. "It will be painful. But, we have to execute [it] professionally and do it in the best interests of the citizens."
"If you look at the underlying strength of Orange County, economically, there is strong job growth, the unemployment rate is going down, the household income in this county is over $12,000 above the national average, there is a diversified economy, there is good infrastructure, and, basically, you have good people in this county."
In other developments yesterday, William Bennett, the county's bankruptcy lawyer, said the county is working on a plan to allow pool participants to tap into the nowfraozen investment pool.
On Monday, county supervisors voted to curtail any spending in the county that was not related to the "health, welfare, or safety of county residents."
As a result, Bennett said county contractors and vendors who are owed money might have to be patient.
"The problem is that we have a good deal less money than we ought to have," Bennett said. "There is just not enough money to pay everyone."
Meanwhile, 11 of the largest investors in the pool were scheduled to meet yesterday with county officials in a last-ditch effort to avoid litigation over the frozen pool funds.
The Orange County Water District last Friday filed a motion in federal bankruptcy court to allow it access to $34 million of district funds in the pool. Over the weekend, the county tentatively agreed to release $5.8 million to the district, but the action was temporarily delayed until the 11 agencies could discuss the matter.
The Water District "is in a rather unique situation, where the district used the county commingled fund much like a checking account," the district's general manager, William R. Mills Jr., said in a statement. The district invested $110 million in the county pool, representing "the great majority of the district's operating funds and cash reserves," a district statement said.
In other Orange County-related news:
* Standard & Poor's Corp. yesterday lowered its rating on Montebello, Calif.'s $25 million of taxable notes to SP3 from SP1-plus. The downgrade reflects the notes' Dec. 30 maturity date and the fact that the county has frozen withdrawals from the pool, where the city's note repayment funds are held. The rating agency also downgraded Montebello's $6 million of tax-exempt notes due Sept. 29 of next year.
* Supervisors said they have hired accounting firm Arthur Andersen & Co. as a special consultant. Thomas E. Daxon, the former state auditor of Oklahoma, will lead the team, which will be in place for at least 90 days. Daxon was recommended by Hayes, the county said.
* Assemblyman Mickey Conroy, R-Orange, said supervisors should appoint John Moorlach to fill the now vacant position of county treasurer-tax collector. Moorlach, an accountant who was defeated by Citron in last June's election, had charged during the campaign that Citron's investment policy was risky.
