LOS ANGELES -- A finance committee for the Los Angeles County Metropolitan Transportation Authority on Friday dropped Merrill Lynch & Co. from a list of underwriters that will provide investment banking services to the agency for the next two years.
The move was made in reaction to media reports about federal probes into Merrill Lynch's involvement in the Orange County, Calif., investment pool, said authority Treasurer Leslie V. Porter.
The decision by the authority's finance, budget, and efficiency committee now goes to the authority board Wednesday, Porter said.
H. Cody Press 3d, managing director of Merrill Lynch's Western region public finance group, said he plans to make a last-ditch appeal to the full board to overturn the committee's decision.
Saying he was "extremely disappointed," Press added that Merrill Lynch is "hopeful that at the board meeting we will be reinstated. We hope that the board understands the facts, as opposed to the newspaper reports."
Porter said media reports on federal investigations in Orange County were a primary reason Larry Zarian -- the mayor of Glendale, Calif., who chairs the authority finance committee -- endorsed the move to exclude Merrill Lynch from the underwriting pool.
The underwriting team is being chosen to replace a two-year pool that expired last August. Merrill Lynch was in the earlier pool, and was senior manager in 1991 on the authority's $500 million Proposition A sales tax bond issuance.
Zarian "was very clear to say we are in no way disparaging this highly reputable firm," Porter said. "It was simply a matter of the board being particularly cautious in light of the continuing disclosures in Orange County about potential impropriety on the part of some firms and what we understand is a pending SEC investigation."
While the board on Wednesday could overrule its finance committee, Porter said he could not speculate on that possibility.
"It is hard to predict what action the board might take," he said. The board "might decide there are other firms who should be similarly excluded," he added.
Or, Porter said, the board "may decide that we don't know enough at this point in time to exclude anyone. So, it is difficult to predict."
The finance committee decision to exclude Merrill Lynch went against a staff recommendation to approve the firm. However, the committee endorsed all other staff recommendations, including the naming of four firms to the senior-managing bracket.
Firms named to that highly coveted pool position were CS First Boston Corp., Goldman, Sachs & Co., PaineWebber Inc., and Smith Barney Inc.
Porter stressed that the decision by the staff to recommend Merrill Lynch was made in part because the selection process and oral interviews "took place prior to the full understanding of developments in Orange County."
"Most importantly, however, we evaluate proposals strictly on the criteria outlined" in request for proposals that were sent to firms interested in being considered for the underwriting pool, Porter said.
"So, developments in Orange County would have no effect at all on our assessment of those firms' capacity to do business for the" authority.
Inclusion in the pool is highly coveted by investment bankers because it represents an important step toward gaining a foothold in the business of the authority, which is one of California's largest issuers of tax-exempt bonds.
"It has been a very lean year" for many Wall Street firms, and "next year promises to be lean as well," Porter said, adding that he would not be surprised if firms who were not chosen for the pool "may want to protest" their exclusion to the authority board.
A total of 40 firms applied to be members of the underwriting pool, and 33 qualified.
Besides the senior managing bracket, the authority staff created three other categories: co-senior bracket, consisting of four firms; co-managers bracket, composed of 16 firms, and a selling group, with eight member firms.
In the co-senior bracket, the finance committee approved four firms that it categorized as disadvantaged business enterprise firms. They are: Artemis Capital Group Inc., E.J. De La Rosa & Co., Grigsby Brandford & Co., and Pryor, McClendon, Counts & Co.
In the co-managers' tier, the finance committee approved the following firms: Apex Securities Inc.; BA Securities Inc.; M.R. Beal & Co.; Bear, Stearns & Co.; Dillon, Read & Co.; W.R. Lazard, Laidlaw & Mead Inc.; Miller & Schroeder Financial Inc.; Morgan Stanley & Co.; Prager, McCarthy & Sealy; and, Prudential Securities Inc. Also approved as co-managers are: Samuel A. Ramirez & Co.; Reinoso & Co.; Rideau Lyons & Co.; Smith Mitchell Investment Group Inc.; Stone & Youngberg; and Sutter Securities Inc.
In the selling group category, the committee approved the following: Carmona, Motley & Co.; A.G. Edwards & Sons Inc.; Henderson Capital Partners Inc.; Howard Gary & Co.; LAM Securities; Muriel Siebert & Co.; William E. Simon & Sons Municipal Securities Inc.; and Yaeger Capital Markets Inc.
Porter said the finance committee dropped Merrill Lynch from another list of finalists that will help the authority restructure its outstanding debt.
Bear Stearns, Morgan Stanley, and Smith Mitchell were approved to work on a proposed tender offer, and Merrill Lynch, despite a staff recommendation that it be included, was dropped by the finance committee.
The committee approved Artemis Capital, M.R. Beal, and Smith Barney to assist the authority in a proposed cash defeasance.
An authority staff report said although the authority has aggressively refunded most of its high-coupon debt during the last two years, the authority still has "opportunities to refund moderate and low-coupon debt and still achieve substantial savings."
The authority may be able to execute a tender offer or a cash defeasance program that, combined, "could realize over $30 million in debt service savings," the report said.
In a realted development, the finance committee approved bond counsel pool participants for the next two years.
The firms are: Nossaman, Guthner, Knox & Elliott; Kutak Rock; O'Melveny & Myers; Mudge Rose Guthrie Alexander & Ferdon; Orrick, Herrington & Sutcliffe; Robinson & Pearman; Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel; Lofton, De Lancie & Nelson; Curls, Schwartz, Brown & Webster; Law Offices of Marilyn L. Garcia; and Ochoa & Sillas.
"The pool concept has proven to be quite successful for the [authority] over the last two years, and similar pool concepts are utilized by other large issuers such as the state of California, the New York Metropolitan Transportation Authority, and the city of New York," a staff report said.
The underwriter and bond counsel pools will allow authority staff "to work with a smaller and more manageable group of firms," the report said. "Without the pool, staff members are often bombarded daily with unsolicited and often redundant proposals."
