Orange County Rode the Crest of ‘80s Prosperity : Economy: The county’s pastoral aura seemed to fade forever in the 1980s, giving way to a lot of defense dollars, high finance, costly housing and a generally booming economy.

The 1980s has been a decade of deregulation, defense and deals. And for Orange County, it ushered in an era of seemingly unbridled economy activity that reshaped the area’s corporate landscape.

In the entrepreneurial atmosphere of the ‘80s--kicked off with the election of Ronald Reagan as President and the adoption of his supply-side economics and free-market philosophy--the Orange County business community shook off its insularity and grasped a global view.

Nationally, the economic revolution wrought by the Reagan Administration made itself felt in all areas of commerce.

A massive defense buildup created tens of thousands of jobs. Deregulation of banks and thrifts brought greater competition, market-level interest rates and new financial services. An unfettered airline industry took off with the creation of new airlines, fare wars, and the development of a hub-and-spoke structure. Tax reform encouraged investment and spurred the stock market to new heights. Anti-trust concerns were pushed aside, clearing the way for a wave of mergers and acquisitions.

But the new freedoms also led to abuses.

The defense buildup gave rise to military procurement scandals. Banks and thrifts were racked by fraud and mismanagement, failing by the hundreds. Airline deregulation also brought a spate of consumer complaints about poor service and inadequate air-traffic control. The de-emphasis of regulatory enforcement created an environment in which stock market manipulation, insider trading and investment fraud flourished. Merger mania piled huge debt on many companies, which laid off employees and sold assets to cut costs.

And Orange County reflected all of it--the good, the bad and the ugly.

“The decade was marked by the increasing realization that business in the county has become an integral part of the region, the state, the national and the international economies,” said Mark Baldassare, professor of social ecology at UC Irvine and a specialist in urban growth.

“And as part of the bigger picture, business in the county was influenced by the ebbs and flows of the larger economic trends,” he added.

And Orange County did the decade up bigger and better than most other areas:

* Population here grew nearly 19% from 1.9 million in 1980 to almost 2.3 million this year.

* The gross county product--the value of all goods and services produced here--nearly doubled during the decade to $64 billion, making it the nation’s 10th largest county economy.

* Median annual family income in Orange County grew 74%, from $28,705 in 1980 to $39,916 this year.

* Job growth was astounding. Employment grew 39.3% for the decade--an average of 33,130 new jobs a year as employment totals climbed from 843,800 in 1980 to 1,175,100 this year.

* The county approached full employment with the jobless rate at a mere 2.9% as 1989 neared a close.

One boost to the employment base began with the massive defense buildup, fulfilling Reagan’s campaign pledge to rearm America. In Orange County, which began its growth spurt when defense contractors began moving here in the 1950s, the business of military might brought mighty economic benefits over the past 10 years.

The impact began early in the ‘80s. Ford Aerospace in Newport Beach won the contract for the Sgt. York antiaircraft gun system in 1981. The cost of designing and building a mobile, computer-controlled antiaircraft gun platform was pegged at $1.5 billion. Officials at Ford Aerospace promptly began building a new, $50-million manufacturing plant and hired 1,600 new workers.

The next year, Hughes Ground Systems Group in Fullerton won a $285-million NATO contract, its largest ever, to provide electronics to link military airborne and ground-radar systems in Europe. Hughes’ payroll in Fullerton grew to an all-time high of 15,000 employees in 1985.

In all, the aerospace industry added 20,000 jobs in Orange County between 1980 and the end of the defense buildup in 1987.

Since then, with pressures to balance the federal budget and easing international tensions, defense cutbacks have resulted in the net loss of about 3,000 aerospace jobs countywide. At the Hughes division in Fullerton, employment has fallen to 10,000.

No boom is complete without at least a hint of scandal, and with the defense buildup came abuses in production and procurement. There were several small cases here. One example: Swedlow of Garden Grove and one of its top officials were indicted in 1989 for allegedly falsifying reports to minimize flaws in windshields made by the company for the B-1B bomber.

In 1985, the vaunted Sgt. York program was canceled--largely because of questions about whether the robot gun system would work, but also because of allegations of cost overruns and contract fraud by several subcontractors. Ford was not charged with any wrongdoing, but loss of the program cost the company millions of dollars in future profits and resulted in the layoff of 1,300 workers.

The defense arena, however, was not the only one with problems.

The bank and savings and loan industries entered the ‘80s suffering from growing competition and hurt by the high interest rates. Deregulation was pushed as the savior of the troubled financial sector.

The result instead has been the largest financial scandal in the nation’s history. Hundreds of banks and thrifts have failed in the ‘80s--many because of insider abuses, illegal loans, mismanagement and outright fraud.

The severity of the problem was clearly demonstrated in Orange County, where many entrepreneurs bought thrifts in order to take advantage of the new-found investment opportunities allowed by deregulation. Many thrifts left their traditional home-loan bailiwick and entered the more risky arena of equity investment in real estate projects.

Lincoln Savings & Loan of Irvine symbolizes the disaster. Phoenix real estate developer Charles H. Keating Jr. bought the thrift in the early ‘80s and embarked on a series of expensive and ill-timed real estate deals. He also invested in junk bonds and financed leveraged buyouts.

Federal regulators objected to his risky investments but were held off as he enlisted the aid of a vast array of politicians, including Sen. Alan Cranston (D-Calif.). The thrift was seized by regulators in April and is expected to cost taxpayers $2 billion. The legal and political battle resulting from the failure may continue for years.

Then there was American Diversified Savings in Costa Mesa, which was seized by regulators in 1986. The Federal Savings and Loan Insurance Corp. liquidated the institution in 1988, paying out $1.14 billion to insured depositors, a record amount.

American Diversified was run by Ranbir Sahni, a former airline pilot-turned developer who invested depositors’ money in wind farms, an ethanol refinery and hundreds of millions of dollars worth of overvalued real estate.

The lesson of the ‘80s, said Brea banking consultant Gerry Findley, is that “if you want to rob a bank, you buy it.”

Deregulation spawned lots of buying in the ‘80s in another industry--airlines. Begun in the mid-’70s by former President Jimmy Carter, airline deregulation was made a reality by the Reagan Administration.

The result was an industry turned topsy-turvy. New airline companies started up, mergers abounded, fare wars erupted and passenger traffic skyrocketed. Bankruptcies grounded carriers that couldn’t compete, flight delays and complaints grew and labor disputes erupted.

Into all this, in 1981, stepped two Orange County developers, William Lyon and George Argyros, who bought struggling Air California for $65 million. They streamlined the name and built AirCal into a formidable competitor along the heavily traveled Southern California-San Francisco Bay Area corridor.

At the same time, AirCal and other carriers able to enter this market for the first time because of deregulation created pressure for expansion of John Wayne Airport.

When Lyon and Argyros bought AirCal in 1981, only two carriers served Orange County. When they sold the company to American Airlines for $225 million, there were nine. Next year, as the ‘90s begin, there will be 10 airlines and the airport will be allowed to handle 8.4 million passengers--nearly twice the 4.75 million allowed each year for most of the decade.

If the airline industry had a turbulent ride in the ‘80s, it was no match for the roller-coaster that the stock market found itself on.

Entering the ‘80s, Wall Street was not a place where great fortunes were being made. But as the country put the gut-wrenching recessions behind, ringing out double-digit inflation and interest rates above 20%, the markets took off. Beginning in August, 1982, the bull ran for five years, hitting record levels month after month.

Then came Black Monday. The stock market crashed on Oct. 17, 1987. The Dow Jones industrial average lost 508 points that day in a plunge blamed largely on computerized trading programs that placed sell orders without considering the consequences.

Orange County firms felt the shock waves as 91 of the county’s top 100 companies lost value that day. Only two gained ground. Economists such as James Doti, the Chapman College econometrics specialist, predicted possible recession. But it never came.

Instead, growth in 1988 actually picked up and the stock market recovered, again entering record territory in mid-1989.

A second scare hit the markets Oct. 16, 1989, when the Dow dropped 190 points. This time, investors were calmer and many jumped in on a buying spree. Local firms again felt the jolt--74 of the top 100 losing value--but most recovered quickly.

Much of the rise in the stock market throughout the decade was spurred by mergers and acquisitions. The takeover business even developed its own peculiar vocabulary--white knights, green mail, poison pills, bear hugs and junk bonds.

The freewheeling economy of the ‘80s, boosted by the new types of investment vehicles created under financial deregulation and a general relaxation of anti-trust concerns, gave rise to a flurry of mergers and acquisitions that began subsiding only last year.

Orange County had its share of the action. Hundreds of Orange County firms changed hands during the decade, most going unnoticed publicly because the deals were small and private. But others, such as the $1.2-billion combination of Baker International and Hughes Tool Co. in 1987, drew worldwide attention.

The merger mania was exemplified in a series of deals involving two local firms. SmithKline Corp., the giant Philadelphia pharmaceutical company, bought Allergan, an Irvine-based eye- and skin-care maker, for $259 million in 1980. Two years later, it acquired Beckman Instruments, the Fullerton maker of medical and scientific equipment, for $1 billion. The new company, SmithKline Beckman, was gobbled up by Beecham Group PLC, a London pharmaceutical concern, in 1989 and, as part of that deal, Allergan and Beckman were spun off to once again become independent public companies.

Mergers and acquisitions made many lucky investors richer. But the real money was being pulled in by the investment bankers, accountants and lawyers who put the deals together--and by the arbitragers, or “arbs,” who made money buying and selling the stock of potential takeover targets.

But rises in stock prices before public announcement of merger deals raised questions about ethics on Wall Street. Those concerns were confirmed when famed arbitrager Ivan Boesky was jailed for insider-trading violations and junk bond king Michael Milken faced similar charges. The taint of insider trading was displayed in Orange County too. The Securities and Exchange Commission filed a civil suit in 1988 against hamburger magnate Carl Karcher, 14 members of his family and the corporate accountant, charging them with illegal use of non-public information to dump company stock in 1984 just before a dismal financial statement was made public.

Karcher’s wife, Margaret, later was dropped as a defendant and one family member was fined for insider trading violations. Other members of the clan resolved the suit this year by paying fines but not admitting wrongdoing.

A few months after the Karcher suit, a stockbroker at Prudential-Bache Securities in Anaheim, 28-year-old Brian J. Callahan, was named as a participant in the Business Week magazine insider stock-tip scheme. Callahan was fired for his alleged role in profiting from tips passed on by a printer who lifted the information from stories being typeset for the magazine.

The insider-trading scandals focused the spotlight on white-collar crime. But Wall Street was not the only place it was to be found. And the extent of the schemes gave proof to the old saw that while some men rob with a gun, others use a fountain pen.

Fraudulent oil and gas leases, precious-metal fraud, penny-stock scams, futures and options trading schemes and other rip-offs were pulled off by unscrupulous telemarketers operating out of boiler rooms.

No place were such scams more prevalent than Orange County, which became the nation’s investment-fraud capital in the ‘80s. Wealthy Newport Beach was the haven to so many boiler rooms that law enforcement officials dubbed it Cote de Fraud.

Authorities responded with the formation of the Southern California Fraud Task Force, which obtained more than 200 convictions of con artists from 1986 through early 1989. But the problem persists.

Many con artists were drawn here by the area’s conspicuous wealth. And nowhere is that more evident in Orange County’s housing prices, which have become among the highest in the nation.

In fact, housing--the building and buying and selling of it--is one of the driving factors in the county’s economy. And it made headlines all through the ‘80s.

The average single-family home price here jumped 154% during the decade, from $158,540 to $402,071 in North Orange County and from $150,390 to $381,787 in South County. As a result, only 14% of the county’s families can afford the median-priced resale home as the ‘80s end.

The ‘80s also saw 165,000 homes and apartments built in the county. More than 850,000 new and resale homes changed hands, according to the county recorder’s office, and there was more commercial and industrial space built than in any other decade in county history.

Much of the county’s housing and commercial development in the ‘80s was done by the Irvine Co. But its projects drew less attention than the struggle for control of the influential company.

Early in 1983, company chairman Donald Bren announced that he has quietly boosted his ownership of the company--Orange County’s largest landowner with nearly 70,000 acres--from 34% to 86%. The cost was $518 million.

The takeover was challenged in court by Irvine Co. heiress Joan Irvine Smith. She opposed the structure of the deal, essentially a leveraged buyout in which the assets of the company were used to raise money for the buyout. The court upheld the structure of the deal.

Rebuffed in that argument, Smith agreed to sell her shares to Bren but protested that he had paid too little for the company. Bren originally offered $110 million for Smith’s 11%--but reduced the offer to $88 million after he gained control of the company.

Smith claims in an ongoing lawsuit that Bren grossly undervalued the company at $1 billion in figuring his price. She values the company at $3 billion and is demanding $330 million for her shares.

The Irvine Co. was not the only developer to make waves here in the ‘80s, and some did so from far across the Pacific.

Foreign investment in U.S. real estate and businesses soared in the last half of the decade. The Japanese caused the biggest stir as they acquired some of the crown jewels of America, including controlling interest in New York’s Rockefeller Center.

Locally, Shuwa Corp. of Japan in 1987 bought the Taco Bell building in Irvine--one of the county’s biggest with nearly 280,000 square feet of space--for $64 million. Another Japanese company purchased the Dana Point Resort Hotel in 1989 for $104 million.

The foreign invasion included other groups as well--British, Canadians, Koreans and Australians made significant investments here.

But none of this had the impact of another foreign group: OPEC.

After pushing oil prices worldwide to dizzying levels, the cartel was unable in the ‘80s to come to production agreements. As a result, prices fell in 1983 and again in 1985. Consumers rejoiced, but the domestic oil industry was devastated.

And the devastation was felt in Orange County, where several of the nation’s major oil-service companies are or were located, including equipment makers Smith International, Varco and Baker International, and engineering and construction giant Fluor Corp. Today, only two of those companies remain here--Fluor and Varco--and both are doing well after massive layoffs and restructuring.

The hardships are exemplified by the saga of Smith International, which was a thriving Newport Beach oil-tool manufacturer in 1981 when its annual sales topped $1 billion. But as the industry slump intensified, layoffs began and in 1983, the firm reported its first quarterly loss in 20 years.

Smith lost a costly takeover of a Texas rival and a $205-million patent infringement suit, forcing it into the bankruptcy court to reorganize in 1986. Smith emerged in 1987 as a much smaller company and moved its headquarters and other operations out of Orange County.

That is the ‘80s. A decade of deregulation, defense and deals.

For Orange County, it was a decade that saw the end of oranges and agriculture as significant businesses. It was a period that saw the service economy exert its dominance over manufacturing. It was a time that new towns took hold. It was an era when growth and environmental concerns came to the fore.

In short, the past 10 years here, said Orange County historian Jim Sleeper, have been for the economic life of the county “the most significant decade since that first postwar boom in the 1950s.”

THE 80’S JOBS PICTURE

UNEMPLOYMENT RATES

Orange County approached near full employment by decade’s end

Orange County Calif. U.S. 1980 4.3 % 6.8 % 7.1 % 1981 4.7 7.4 7.6 1982 7.2 9.9 9.7 1983 6.5 9.7 9.6 1984 4.7 7.8 7.5 1985 4.4 7.2 7.2 1986 4.0 6.7 7.0 1987 3.3 5.8 6.2 1988 3.0 5.3 5.5 1989* 2.9 4.6 5.0

* As of October.

Source: California Employment Development Department