Mellon Bank Corp. has become the first banking company to publicly admit bailing out a trust investment portfolio for losses on Orange County securities.
The bailout occurred last week, when Mellon bought taxable Orange County bonds from its $935 million-asset Common Trust Cash Investment fund at their face value of $25 million and put them into its own portfolio.
The move followed a restructuring on Dec. 22 that had allowed the fund to keep its $1-per-share value.
Regulators in Washington said they were not aware of any other such transactions involving trust funds and Orange County bonds.
"The folks here have not heard of anything like that before," said a spokesman for the Comptroller's office.
A Mellon spokeswoman said the Pittsburgh-based banking company exercised its "best business judgment" when it chose to make the bailout, even though Mellon does not want to be seen as a guarantor of investments.
She added that the purchase of the Orange County bonds - which mature in July - will not have a material impact on Mellon's earnings.
She also explained that the Orange County bonds had the highest possible ratings from ratings agencies when they were purchased for the trust portfolio. But the bonds declined in value after Orange County's Dec. 6 bankruptcy.
The commingled trust fund that bought the securities is used by about 50 trust and custody customers for short-term cash management.
But even though Mellon is the first banking company to acknowledge bailing out a trust fund for Orange County losses, it is not the first banking company to say it will indemnify customers for possible Orange County losses.
Specifically, BankAmerica Corp. last month said it had issued a letter of credit to indemnify its $290 million asset Pacific Horizon California Tax-Exempt Money Market Fund for losses on a $4.5 million Orange County note.
A total of 35 money market mutual funds have asked the Securities and Exchange Commission for permission to compensate money market mutual funds for loses on Orange County bonds.
The SEC has declined to identify these funds. But six mutual fund managers, including BankAmerica, have publicly acknowledged indemnifying funds for Orange County losses, .
