Back in late April, the Municipal Securities Rulemaking Board banned pay-to-play political contributions from bond dealers, but it left a loophole, and Merrill Lynch & Co. took advantage of it in Orange County.

Michael Stamenson, the Merrill Lynch salesman who sold billions of dollars worth of risky structured securities to the Orange County investment fund, is not, strictly speaking, a "municipal finance professional," Merrill Lynch said so in a statement issued on Friday, Dec. 9.

Stamenson on June 13 gave $1,000 to Robert Citron's already successful campaign for reelection as Orange County's treasurer, and Cathie Lewis, whom Stamenson married in September, also contributed $1,000 to Citron's drive. Two other Merrill employees each kicked in $1,000. Since then, Orange County has sold $775 million of securities underwritten by Merrill Lynch.

Rule G-37 says a securities firm is barred from doing business with state or local governments for two years after the firm itself, its political action committee, or its bond professionals contribute more than $250 to candidates running for office or to office holders who can influence the awarding of bond business.

A lawyerly reading of G-37 shows how Stamenson avoided being a "municipal finance professional." He didn't underwrite, sell, or trade munis; he sold derivatives and other structured securities. He didn't deal with Orange County, the bond issuer; he dealt with the Orange County investment pool. As far as is known, he didn't advise the county how to borrow; he advised the county's investment pool how to borrow, just as he had advised San Jose 10 years earlier how to borrow, a strategy that cost that city $60 million.

Stamenson liked to attend city and county treasurer conferences. He was widely known throughout California. He helped select the treasurer of Anaheim, which put $169 million into Orange County's fund. He headed a six-person "municipality unit" at Merrill. And yet he was not a "municipal finance professional." There is a loophole to be closed in G-37.

Last Tuesday, the Orange County investment pool disclosed that it had lost more than $2 billion because it had borrowed so heavily, and Tom Hayes, the former treasurer of California who was called in to help, said the pool from now on was not going to borrow nor was it going to buy derivatives. Only high-grade short-term investments from now on.

That's the way these cases end. Treasurer takes unwise risks, wins for a while, then loses, and resigns. Financial white knight cleans up mess and vows fiscal rectitude. The only difference nowadays is that Orange County's losses are so gigantic.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.