Municipal bond underwriters are betting that Orange County, Calif., has all but settled on a lead underwriter for a possible public finance solution to the county's fiscal troubles.

The vast majority of bankers who have responded to a request for proposals from the county say that, if and when a deal takes place, officials will probably chose either J.P. Morgan Securities or Goldman Sachs & Co.

Unlike many of their competitors, J.P. Morgan and Goldman can answer the RFP's detailed conflict-of-interest question without much trouble.

Both firms also have large and experienced public finance staffs. And neither has had much contact with the county and its former treasurer-tax collector Robert Citron, who with the help of many Wall Street firms, developed an aggressive investment strategy that caused about $2 billion in losses for the county's pooled investment fund.

Most bankers say the RFP was window dressing. "Everybody on the Street believes this is wired to J.P. Morgan or Goldman," said the head of large municipal department, who asked not to be identified. "The only way to do it on the up and up is to issue an RFP."

The county, through its advisers at Salomon Brother Inc., mailed the request last Wednesday. Public finance executives at 17 firms spent their Christmas vacation responding to the questionnaire, which was to be completed by Tuesday night.

With about $2 billion in losses, the pool represents a huge liability to Orange County, and a big payday for the municipal bond firm that develops a bonding or public finance strategy that leads to recovery.

Still, most investment bankers that responded to the RFP say the county has "wired," or steered, the potential transaction to J.P. Morgan or Goldman Sachs.

Orange County spokeswoman Sandra Sternberg said the county "is very concerned with conflict of interests." When asked if J.P. Morgan and Goldman are front-runners, Sternberg said: "We need to find firms with no conflicts of interest."

Sternberg said: "The [RFPs] went out to the usual suspects. I don't know if they are wired. Did we know ahead of time there would be only two? Well you know, I'm sure there were suppositions, but I wouldn't say it is wired."

The county has not chosen a firm and doesn't expect to do so this week this week, Sternberg said. "It's not a huge priority."

The conflict of interest question required firms to provide an account of their dealings with Orange County, or municipalities that participated in the county's investment pool, whose troubles have forced the county to file for bankruptcy protection.

Firms were asked to specify if they "acted as principal or agent in connection with the purchase or sale to the county of any securities in the period from January 1, 1992 to the present."

The RFP also asked if the firms made loans or extended credit to the county, or if the firms are "aware of any litigation, pending or threatened" that "would be adverse to the county."

Michael D. McCarthy, the Goldman partner in charge of municipal bonds, did not return telephone calls. A spokesman at J.P. Morgan had no comment on the matter.

The problem faced by firms other than J.P. Morgan and Goldman is that in one way or another they worked with the county on past transactions and may be the target of litigation in the future.

Orange County has already said it may sue several of the firms that responded to the request for proposals. These firms sold securities that were held as collateral on loans made to the county.

Other firms, such as Merrill Lynch & Co., sold Citron many of the derivative investments that contributed to investment pool's losses. Merrill Lynch was one of the 17 firms that received the questionnaire.

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.