The chief fiscal officers of New York State, New York City, and Connecticut yesterday tried to distance themselves from the events unfolding in Orange County, Calif.
In separate public statements, the officials pledged that they have not used risky investment techniques when managing pension funds and other assets.
The statements, made by the comptrollers' offices of New York State and New York City, and the Treasurer of Connecticut followed Tuesday's announcement that Orange County filed for bankruptcy after experiencing huge losses in its leveraged investment fund. Late yesterday, speculation swirled that several other issuers of debt would make similar announcements.
The New York State and city comptrollers manage two of the largest pension funds in the country. Their statements came as municipal market analysts predicted that a slew of other municipalities would soon announce problems similar to those in Orange County.
On Tuesday, the county said it filed for bankruptcy protection after its investment fund faced billions in losses because of the aggressive investment strategy of former county treasurer Robert L. Citron.
Citron, who resigned Monday, relied on leverage and derivatives to produce huge profits for the fund, particularly in the early part of the decade as interest rates fell to recent historic lows.
But this year's upward swing in rates forced the county to pay more to maintain its leveraged position and reduced the value of many of the county's derivatives holdings. The county said last week that the fund has experienced losses of about $1.5 billion.
The market's growing unease with Orange County's dilemma precipitated the announcements by state Comptroller H. Carl McCall, city Comptroller Alan G. Hevesi, and Connecticut Treasurer Joseph Suggs, Jr.
Said McCall: "I want to assure all New Yorkers that the practices involving derivatives and structured notes that contributed to the situation in Orange County are not investment vehicles utilized by my office." Steven Greenberg, A spokesman for McCall, said the state does not invest in derivatives, nor does it use leverage to inflate the size of its investment fund.
As state comptroller, McCall is sole trustee of the $60 billion state common retirement fund. He also manages the state's short-term investment pool.
Said New York City Comptroller Alan G. Hevesi: "It is important that leading issuers in the municipal market assure the investing public, and the public at large, that the investment practices that are at issue in Orange County are not normal practices in the industry."
Hevesi helps manage $49 billion in city pension fund assets. The statement said the city does not use the investing techniques used by Orange County, including reliance on reverse repurchase agreements, to leverage its investment funds.
Michael W. Geffrard, the city's first deputy comptroller, said that the city may have some money invested in derivatives, but the amount is small.
Geffrard, who said he could not identify the city's derivative holdings, said the city hires private companies to manage much of its pension assets and these firms may have decided to invest some money in these instruments.
In Connecticut, Suggs issued a statement through his financial adviser, Public Resources Advisory Group, saying that the state has on occasion purchased derivatives, and used repurchase agreements for its short-term investment fund.
But the statement said Connecticut has never used these instruments to speculate on interest-rate movements, and that at the moment, the state owns no derivatives.
The announcements were applauded by Wall Street bond analysts. "It's very good that these officials are coming forward," said Michael Shamosh, a managing director at Corby North Bridge Securities. "But where are the others?"
Michael Bessendorf, quantitative analyst at JJ Kenny, said he believes there are "at least 10 other counties in the same position."
Merrill Lynch had been selling similar notes and products to authorities all over the country, Bessendorf said.
Bessendorf warned it is possible some might default, and based his forecast on comments made at a conference last week sponsored by the International Association of Financial Engineers.
"Quite a few of the people there had structured notes that are very similar to the ones that Orange County had. Merrill Lynch basically was selling these products not just to one county but to quite a few."