Orange County Files for Bankruptcy Protection as Creditor Seeks Payment : Finance: Unprecedented move follows seizure of $2 billion in collateral, stunning financial markets. Police protection, other basic services will not be disrupted, officials say, but major projects could be jeopardized.

Orange County on Tuesday became the largest municipality in U.S. history to file for federal bankruptcy protection, after an all-day standoff with Wall Street bankers who insisted that the county repay $1.2 billion in loans to its troubled investment pool.

The stunning news that one of the nation’s largest, wealthiest and most politically conservative counties was seeking protection from its creditors capped a day of turmoil that shook not just Orange County but the country’s financial markets.

Somber county officials insisted that the filing--made at 5:01 p.m. Tuesday, an hour after the Santa Ana federal bankruptcy court’s normal closing time--would have no effect on the county’s ability to maintain police protection and other basic services.

But the move raised questions about the funding of dozens of major projects in the county, from toll roads to a Disneyland expansion to a possible new stadium for the Los Angeles Rams and California Angels sports teams.

And it could cost the county its stellar bond rating, meaning that it could become more expensive to borrow for public needs--if the county and other local government agencies are allowed to issue debt at all. One rating agency said it would drop Orange County’s rating today from double-A to triple-C--meaning they are viewed as in danger of default.

“This certainly is a difficult pill to swallow right now,” said state Sen. Marian Bergeson (R-Newport Beach), who will assume a seat on the County Board of Supervisors in January. “It’s a shocking occurrence. We’re going to have to look to Sacramento, to Washington and obviously we’re going to have to look to ourselves.”

Members of the Board of Supervisors, roused from their beds at 3 a.m. with news of an impending financial catastrophe, spent virtually all day behind closed doors. They met for hours with their advisers and attorneys to sort through the dilemma, made more drastic by one investment bank’s demand that the county come up with $1.2 billion in cash or securities that had come due Tuesday.

The bankruptcy filing became inevitable after Orange County, through a private firm it had hired, approached leading Wall Street firms Monday and began to try to liquidate its huge holdings of derivatives, according to a senior executive at one of the four biggest Wall Street firms, who declined to be identified. Derivatives are the complex financial instruments that magnified the fund’s exposure to rising interest rates.

The source said all of the firms turned the county down--partly because they found that the county fund’s losses on the derivatives were much larger than the $1.5 billion that has been publicly reported. His firm, he said, concluded that the lost value is “hundreds of millions” more than that, although not double the amount.

“They approached a number of people on the street, including us, to liquidate the portfolio for them,” the executive said. “But no one wanted to trade with them. The people who looked at it (the portfolio) were frightened by it.”

By Tuesday, county supervisors and administrators were more nervous, placing calls to myriad state and federal officials in search of financial help, such as low-interest loans to help resolve the cash crisis.

Instead, CS First Boston Corp.--one of several large brokerages that has loaned the county money to purchase securities--demanded additional collateral for $1.2 billion in loans it had made, which permitted the county to enlarge its fund with additional purchases of securities.

When the county was unable to put up the cash demanded, CS First Boston seized $2 billion in securities that had been held as collateral for the loans, according to Wall Street traders familiar with the situation.

The brokerage firm then placed those securities, mostly U.S. government agency bonds, on the bond market near the close of trading Tuesday, a move that stunned traders, dealers said. The county presumably lost money on the sale, but the extent of the loss could not be determined Tuesday.

CS First Boston officials would not comment on their relationship with the county or on any actions the brokerage might have taken on Tuesday.

County officials said they saw no alternative by late in the day but to file for bankruptcy protection, despite the embarrassment and financial stigma it would bring.

“There was no alternative given to us,” said Supervisor Harriett M. Wieder. “We were concerned with the fact that we are here to protect the public and to protect the investors.”

Supervisor William G. Steiner expressed bitterness over the conduct of both Wall Street and former Treasurer-Tax Collector Robert L. Citron, who resigned Sunday after 24 years in office.

“We’ve had a steady parade of hotshots in blue shirts representing the investment bankers pitching these sophisticated investment strategies,” he said, “and the treasurer obviously went down that path.”

Steiner said he had two conversations with Gov. Pete Wilson to discuss the “magnitude” of the county’s financial crisis and to ask for help--including a request that the state make an advance on funds due the county to help provide liquidity to the county fund.

“I’m used to dealing with dysfunction,” said Steiner, former director of the county’s Orangewood Home for abused and neglected children in Orange. “But never anything of this magnitude.”

Filing under Chapter 9 of the federal bankruptcy code is a desperate last step for any public entity, experts said.

“It’s rare, it’s quite rare . . . for any government to take that step--and unprecedented for a county of that size,” said Bennett Murphy, a bankruptcy expert and partner in the law firm of Latham & Watkins. “It’s seldom used, and I’d say that it’s quite unusual.”

Murphy said Chapter 9 functions much like Chapter 11 of the bankruptcy code does for businesses: It provides a government with protection from its creditors while it attempts to work out a plan for rehabilitating its finances.

“Drastic financial distress--it’s there for that purpose,” Murphy said.

Faced with criticism from federal regulators that state officials have failed to step in swiftly to help, Wilson issued a terse, one-sentence statement through his press office.

“We will assist Orange County in analyzing the situation to identify the alternatives necessary so that Orange County can bring its finances back into solvency,” Wilson said.

The state attorney general’s office had lawyers “looking all day at the situation,” a spokesman said.

Spokesman Dave Puglia said the federal Securities and Exchange Commission, which is investigating the Orange County financial crisis, “has made contact with us,” adding, “we’re working with them in any way that can be helpful.”

But Puglia also said the office was rebuffed by the SEC earlier Tuesday after state attorneys requested access to all information on the ongoing financial crisis. The two sides agreed to discuss the dispute further on Wednesday.

Federal officials, meanwhile, said the debacle was the state’s responsibility to resolve.

“We are watching the situation carefully but don’t see the likelihood of a ripple impact in financial markets,” a Clinton Administration official said.

The rumors of a bankruptcy filing--an almost unthinkable turn of events for the affluent, conservative county--spread from Wall Street to Washington, D.C., to California throughout the day.

Rep. Christopher Cox (R-Newport Beach) had been the first to appear on television hinting at a bankruptcy filing. Cox, a former securities lawyer, said he had been in contact with county officials as the financial crisis exploded and will hold hearings to sort out what happened and find ways to prevent such catastrophes in the future.

Tuesday, county supervisors were roused from bed and called to the Hall of Administration in Santa Ana for a 4 a.m. briefing. But because of potential violations of the state’s open meeting laws, the supervisors had to be sequestered in different parts of the building, with information shuttled among them from the county’s financial advisers.

Peer Swan, chairman of the Irvine Ranch Water District--which had threatened to pull its remaining $300 million investment out of the pool--learned of the county’s worsening troubles early Tuesday.

“This is high-stakes poker,” Swan said. “I can understand from an investment firm’s perspective that this is a bad situation and they have shareholders who are very concerned. However, investment firms also have to realize that if they pull the plug, that’s it. And that’s a hard pill to swallow.”

Sources said that neither the SEC nor the Commodity Futures Trading Commission plans to take any major action in the near future concerning the Orange County situation, except to continue their very active investigations.

The SEC had considered the possibility of going into court to seek an injunction that would have placed the fund into receivership. But federal regulators ruled that out, concluding such a step might cause more, rather than less, disruption to the securities markets, sources said.

One worry was that a receiver might forbid securities firms from selling any of the collateral they hold, which could cause serious disruption in the market.

Some of the same ill effects, however, might happen amid bankruptcy proceedings, in which a bankruptcy judge could issue orders about the handling of securities and collateral.

In addition, federal regulators were said to be concerned that there might be a political backlash if Washington stepped in to seize control of the Orange County fund.

Major investors in the fund said the bankruptcy filing could have a serious effect on their operations.

Stan Oftelie, chief executive of the Orange County Transportation Authority, said his agency would be stuck financially if its $1 billion in the county’s fund was frozen for a long period of time. “We’ve taken steps today to make sure we’re OK until the end of the year,” Oftelie said. “But after that, I don’t know how long we could last.”

Times staff writers Lee Romney, David Haldane, Len Hall, Susan Marquez Owen, Jodi Wilgoren and Rebecca Trounson in Orange County, Robert A. Rosenblatt in Washington, D.C. and Shawn Hubler and Tom Petruno in Los Angeles contributed to this story.

Looking for Protection

WHAT IS CHAPTER 9?

Only a municipality, such as Orange County, may file for this type of bankruptcy. Chapter 9 buys time for cities, school districts or other governmental agencies to work out ways to pay their debts.

WHY ORANGE COUNTY FILED

“There was no alternative given to us. We were concerned with the fact that we are here to protect the public and to protect the investors. And, of course, the county itself is 37% of this fund. Then, everybody walked. The bond dealers--they walked.”

--Harriett M. Wieder, county supervisor

WHAT IT MEANS

The filing could affect about 180 cities, school districts and other governmental entities that have invested billions of dollars in the county portfolio. All of them use their investments to raise money to meet their obligations, such as new construction, day-to-day services or loan payments. They also might not be able to borrow more money.

County Fund Investors

About 180 government agencies--schools, cities and special districts--have money in the county investment fund. Money designated as being in the “bond pool” is kept separate because it is governed by specific rules regarding a trading practice known as arbitrage, an effort to profit by borrowing at one interest rate and investing at a higher one. Here is a partial list of investments as of Nov. 30. It does not include about $550 million that was borrowed by school districts and individual investors:

AGENCY COMINGLED POOL BOND POOL County of Orange $2,555,620,144.87 $204,859,991.48 Transportation Corridor Agencies 45,469,591.93 296,294,198.03 OC Employee Retirement System 133,368,133.21 OC Transportation Authority 533,214,927.34 559,733,372.30 SCHOOL DISTRICTS Anaheim Elementary 8,195,095.54 Buena Park Elementary 4,372,602.99 Centralia Elementary 8,761,430.85 Cypress Elementary 6,781,785.21 Fountain Valley Elementary 5,652,274.37 Fullerton Elementary 5,135,978.87 Huntington Beach Elementary 6,964,640.68 La Habra Elementary 13,198,570.42 Lowell Joint Elementary 224,115.13 Magnolia 5,709,823.30 Ocean View Elementary 9,026,919.38 Savanna 3,502,369.38 Westminster 13,545,625.38 Anaheim Union High 19,393,555.70 Fullerton High 26,080,903.91 Huntington Beach High 22,576,957.13 Brea-Olinda 7,490,680.57 Capistrano Unified 74,977,478.92 Garden Grove Unified 55,533,788.92 Irvine Unified 105,816,239.05 1,961,245.96 Laguna Beach Unified 7,186,107.00 Los Alamitos Unified 12,526,409.33 Newport-Mesa Unified 82,402,832.16 Orange Unified 18,067,197.12 Placentia Unified 32,404,654.52 Saddleback Valley Unified 62,626,980.07 Santa Ana Unified 47,507,181.16 Tustin Unified 12,804,265.51 Coast Community College 21,706,393.84 2,555,730.02 North OC Community College 98,940,262.45 Rancho Santiago 16,762,391.36 Saddleback Community College 23,532,257.26 OC Department of Education 47,725,879.97 San Joaquin Elementary 1,548.82 Yorba Linda Elementary 47,480.34 Shandon Unified 178,411.17 Foundation Trust Fund 1,321,071.41 Community Facilities District 8 7,112,407.27 County School Service 21,461,375.56 Codesp Joint Powers Authority 262,157.50 Property and liability 196,395.81 Debt service 2,040,681.16 Special reserve 3,929,450.34 Public employees retirement 3,189.06 OC workers’ compensation insurance 6,900,645.06 Greater Anaheim Sp Ed GE 1,734,873.35 Schools Community Revolve 1,911,586.09 Teacher’s retirement annuity 7,722,207.34 Unapportioned school monies 1,366,588.68 S.A. Ins Compre Liab. 4,331,209.90 Capistrano Laguna Reg Off Prog 325,934.34 Payroll Revolve-Warr 145,921.06 Payroll Revolve-Chec 29,764,468.93 West Orange County Self Fund Work 8,949,311.84 South OC Prop/LIA Joint Powers 2,998,753.41 Orange County School District 1,127,253.43 Orange County fringe benefits 4,959,561.58 Schools excess 47,718,984.82 Area-wide school tax 67,192.25 School building aid 30.62 School Total $1,043,512,338 $4,516,975.98 OC Sanitation District $391,675,528.69 $49,311,044.51 THE CITIES Anaheim $169,568,734.31 Atascadero 5,082,641.04 Brea 10,880,402.71 Buena Park 28,953,542.12 Capistrano Beach 1,759,441.70 Claremont 5,377,923.54 Costa Mesa 7,149,035.00 Cypress 5,847,611.30 Dana Point 15,859,985.01 Fountain Valley 30,880,845.90 Fullerton 22,795,580.63 Garden Grove 5,451,587.24 Huntington Beach 48,605,050.26 Irvine 198,098,007.88 La Habra 8,170,628.52 La Palma 5,518,776.22 Laguna Beach 13,851,675.87 Laguna Niguel 18,089,331.91 Laguna Hills 916,934.35 Lake Forest 9,585,291.82 Los Alamitos 2,378,613.73 Milpitas 5,000,000.00 Mission Viejo 21,857,039.12 Montebello 47,106,000.00 Mountain View 39,783,094.99 Newport Beach 6,095,463.02 $13,631,537.16 Orange 28,194,017.90 Placentia 20,685,505.00 San Clemente 35,834,956.04 Santa Ana 56,547,256.87 94,211,999.52 Santa Barbara 27,733,246.39 11,780,015.49 Seal Beach 2,060,644.82 Stanton 3,000,000.00 Tustin 183,570.98 Villa Park 1,282,297.02 Westminster 99,858.90 Yorba Linda 7,017,099.66 6,487,112.83 Cities total $916,903,671.77 $126,110,665.00 WATER DISTRICTS Irvine Ranch $300,905,317.40 Orange County 118,418,944.24 Moulton Niguel 22,158,565.26 $25,017,352.35 Santa Margarita 13,487,866.78 184,898.62 Aliso Water Management 13,150,774.79 Tri Cities 2,428,952.41 Capistrano Beach 2,307,829.65 Yorba Linda 2,645,124.75 South County 8,833,778.94 Municipal 4,531,304.24 So. Calif. Coastal Water Research 941,874.01 Coastal Municipal 1,232,734.65 Water districts total $491,043,067.12 $25,202,250.97 OTHER DISTRICTS Bank of CA-PARS $16,253,042.77 Rossmoor Comm. Services Dist. 711,361.40 Treasurer Community Facilities District 90-1 729,592.82 Optima of Orange County 1,000,000.00 Cuyama Community Services District 1,186,153.65 Madera County Superint. Invest. 5,496,289.08 S.E. Reg. Reclamation Authority 7,312,198.52 SDIA Investments 1,132,412.88 Midway City Sanitary 3,977,189.61 $2,057,712.34 Sunset Beach Sanitary 805,935.10 South Laguna Sanitary 11,471.34 Dana Point Sanitary 31.17 Volunteer Center of OC West 36,745.05 Capistrano Bay Community Services 30,370.76 Other districts total $38,682,794.15 $2,057,712.34 TOTAL $6,149,490,197.65 $1,267,886,210.61

Source: County of Orange