But No Cigar:  How a Rescue Mission Failed, Just Barely, In Orange County---It’s a Tale of Secret Codes, All-Nighters and Conflicts Amid a ‘Siege Mentality’ --- An Odd Kind of Government

By Laura Jereski

Staff reporter of The Wall Street Journal

SANTA ANA, Calif. – Early in the morning of Dec. 6, just hours before Orange County’s final financial collapse, local officials came within a pen stroke of preventing the largest, municipal bankruptcy in U.S. history.

A rescue mission, operating in secret in New York and Santa Ana, had hammered out a plan to restructure the county’s topping investment fund and avoid default.  Time was critical.  The fund was hemorrhaging cash, with loses at 1.5 billion and mounting.  To avoid tipping off financial markets about any plans, the team coded its cellular-phone messages: Orange County was “Oscar.”

After four days of round the clock meetings, the rescue team of county finance officials, consultants and Wall Street experts was within sight of its goal.  To prevent a messy and costly liquidation of the fund’s $20 billion portfolio, one of four big investment banks would be chosen to restructure the debt’s and stop further losses.  All that was needed was a green light from the county government.

The county hired Capital Market Advisors, a New York consulting firm, last month to do some sleuthing in the portfolio.  At that point, the county simply wanted to find out what the portfolio contained.

What CMRA found far worse than anyone imagined.  For years, the fund’s manager, County Treasurer Robert L. Citron, had been chalking up high yields by borrowing heavily from Wall Street brokers to buy even more bonds.  That worked fine when interest rates were falling, but when rates turned back up this year, losses mounted.  Instead of calling it quits, Mr. Citron doubled up.

Demands for Collateral

As the portfolio‘s value contained to slide the lender demanded that he put up more collateral. Those demands drained the fund of almost $900 million by Dec. 1, leaving it with only $350 million of quickly available money—just a fraction of what was needed to meet additional collateral payments of $1.25 billion falling due to the following Tuesday, Dec. 6.

Before the county officials could fully come to grips with the CMRA analysis, word of the fund’s difficulties was spreading fast.  So, the county called a news conference on Dec. 1st to announce a $1.5 billion “paper loss” roughly 20% of the value of the fund’s principal.

The CMRA consultants, by contrast, recognized all the markings of impending financial collapse.  The disclosure of Orange County’s loss meant the county’s once –accommodating brokers would quit bankrolling the tottering fund.  In particular, Tuesday’s $1.25 billion collateral payment loomed with chilling urgency.

Exploring the Options

On Friday, the CMRA consultants contacted every Wall Street firm that had avoided doing business with Mr. Citron to explore the fund’s option and negotiate a workout.  Four stepped up: J.P. Morgan & Co., Goldman Sachs & Co., Salomon Inc. and Swiss bank Corp.  They were coded as “Joe”, “Golf”, “Sierra”, and White Cross.”

At 8 o’clock Saturday morning, CMRA and TSA Capital Management, a bond firm specializing in exotic securities, met with bankers at the Regency Hotel in New York.  They shuffled half hour spots to accommodate the christening of one banker’s child.  By the time the Goldman bankers left, shouldering tuxedos on the way to their annual dinner, about 100 experts were filtering through the fund’s financial data.

Wall Street Plan Blocked

In the meeting, the Leboeuf lamb lawyers, joined by Mr. Andrus the county counsel, blocked the Wall Street plan by throwing up two legal hurdles.  First, the argued the fund’s legal status was so unclear that they couldn’t say who actually owned the assets.  What’s more, Mr. Andrus balked at indemnifying the fiduciary against any lawsuits that might arise over the sale of the portfolio.

On Tuesday and Wednesday, the fund’s lender rushed to unload some $11.4 billion of its bonds.  Late Wednesday, the county hired Solomon Brother – one of Wall Street white knights, which had been prepared to $1.5 billion of bonds from the county just the day before – to auction off the fund’s remaining assets.  Already the fund losses exceed $2 billion, while the yoke of bankruptcy court will hamper Orange County for years to come.

22 December 1994