WASHINGTON - As the Federal Home Loan Bank System negotiates with bankrupt Orange County to buy back some of its complex debt, critics inside and outside the system are asking whether the banks should be selling structured notes in the first place.

Eleven of the system's 12 banks are now in talks with Orange County, which last week held $1.63 billion in system debt, most of it in structured notes. The Chicago and New York banks have already repurchased their debt, paying a total of $170 million to the troubled California county.

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