Repurchase agreements will probably weather the Orange County, Calif., storm almost unscathed -- unless the courts rule against Wall Street on the sale of collateral during bankruptcy proceedings.

Market sources said the huge business of trading in the investments known as repos, and their opposite, reverse repos, was likely to go on pretty much as usual despite the more than $2 billion loss already announced by the California investment pool.

However, they said, the situation would be very different if the courts ruled that a Chapter 9 filing prevented banks from selling the securities held as collateral in the repo or reverse repo agreement.

"It would cause a fair amount of problems," said Peter Shapiro, senior vicepresident at Euro Brokers Capital Markets Inc. "The market has been premised on the fact that there's an exemption [for collateral] from bankrupty."

While a ruling preventing the sale of collateral during bankruptcy proceedings would not stop municipalities from using repurchase and reverse repurchase agreements, Shapiro said participants would have to carefully reexamine their involvement.

The picture is complicated by a lack of knowledge about how extensively public authorities use the repo market.

"At this point, we don't have that information," said Diane Schenkman, a vicepresident at Moody's Investors Services.

Moody's is contacting issuers throughout the country to update its files and build a more accurate picture of the incidence of repo use by municipalities, Schenkman said.

"We expect to be more definitive in the very near term," she said.

The Orange County investment pool used reverse repos to leverage $7.8 billion of pooled money into an almost $20 billion portfolio.

The pool's investments in derivatives plunged in value when interest rates moved higher over a sustained period of time, contrary to the assumptions of the pool's manager, county treasurer-tax collector Robert L. Citron, who resigned last week.

Under a repo agreement, a municipality can gain a higher yield on cash it has on hand, virtually risk-free.

The money is lent to a Wall Street investment bank in exchange for securities, which are held as collateral. When the deal expires, the bank "repurchases" the securities -- at a price increased by interest payments.

A reverse repo works the other way, with the municipality pledging the securities to the bank in exchange for cash; in effect, leveraging its holdings.

In both cases, the underlying securities are generally safe investments such as U.S. Treasuries. Deals are mostly short-term, but occasionally extend to two, three, or even five years.

When Orange County's pool announced it would be filing for bankruptcy, many Wall Street firms sold the collateral they held under reverse repo agreements.

Now, the dispute centers on whether such sales are allowed under Chapter 9 proceedings. The county is suing the investment bankers, alleging that they violated the municipal bankruptcy statutes.

Whatever the outcome, few sources expect the overall repo market to suffer much.

While the sale of collateral securities by Wall Street may cause a brief flurry of attention, all sources contacted for this article said that the market is so huge it would probably be unaffected over the long term.

"I hear it's not making a lot of difference to the repo market," Shapiro said.

The municipal world, however, is eagerly awaiting news on just how common repos are. In some states, municipalities are prohibited by law from using them.

One market strategist said: "It's tough to get a grip on that thing. I don't think people have a really good feel for just how pervasive it is."

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