ORANGE COUNTY IN BANKRUPTCY : No Call for Bold Government Intervention, Experts Say : Investing: Such action would send the wrong signal to other municipalities, a banking professor argues.

It’s too bad for Orange County, but its financial hardship does not demand any bold government action, municipal finance experts said Thursday.

If the federal government helps with some kind of emergency financial aid or regulatory help, “it would send a signal to other treasurers: ‘Why don’t I try gambling too?’ It would be an encouragement to make bigger and bigger bets,” said George Kaufman, professor of banking and finance at Loyola University in Chicago.

Once the immediate shocks are over, other experts suggested, the Orange County financial debacle could even prove salutary for various U.S. counties, cities and districts as they make investment decisions.

“In the long range, this could be good for municipalities . . . making them more prudent in what returns they expect on their funds,” said John Antonellis, vice president of municipal trading at J.B. Hanauer & Co., a retail bond firm in Parsippany, N.J.

The firm’s clients, affluent individuals, have expressed interest and some concern, but there is no sense of panic and no fear that the Orange County problem will be duplicated elsewhere, Antonellis said.

John Shannon, an expert on state and local finance and a consultant to the Urban Institute, said Orange County’s troubles offer a painful but beneficial lesson.

“People have to learn by experience,” Shannon said. “If you try to devise a master plan from Washington to prevent people from making mistakes, you create more problems than you solve.”

Federal Reserve Chairman Alan Greenspan “made darn good sense not to go for some knee-jerk manufactured solution,” Shannon said.

Indeed, there was general acceptance of Greenspan’s deliberate inaction in telling a congressional hearing Wednesday that the massive losses Orange County and other unlucky investors suffered were simply part of the “bumpy process” in falling bond markets.

Hundreds of billions of dollars has been lost as bond prices fell, Greenspan reminded the members of the committee. As interest rates rise, bond prices fall. The Fed’s policy of driving up interest rates to nip any resurgence of inflation has had the effect of wiping out a significant portion of bond portfolios.

In borrowing money to invest in bonds, Orange County was betting on low interest rates. As rates kept rising this year, the bonds’ value fell.

In keeping hands off the Orange County situation, Greenspan “was acting appropriately,” said Barbara Shipnuck, chairwoman of the Monterey County, Calif., Board of Supervisors.

“It is a good judgment for now,” she said. “To overreact based on the partial knowledge of one incident is not the best way to deal with financial issues in the long run.”

She noted that the Orange County supervisors are trying to put together a workable plan to solve the fiscal problem.

“If they find they are unable to come up with a plan that satisfies them, then they ought to be able to ask for (outside) help,” said Shipnuck, who has also led the tax-exempt finance committee of the National Assn. of Counties.

Greenspan and his Fed colleagues could not intervene because helping Orange County “would have been contrary to their anti-inflation policy of raising interest rates,” noted Edward Furash, managing partner of Furash & Co., a Washington financial consulting firm.

The fund managers “crossed the line from prudence to gambling,” Furash said. “These people gambled, and rates went up faster than they expected,” he said. “That doesn’t mean the rest of the country should pay for it.”

The ultimate market effect of Orange County’s problems will be difficult but manageable, though, according to Richard Lehmann, president of the Bond Investors Assn., which provides advice on municipal and corporate bonds, and publishes newsletters.

“California paper generally will get hurt,” he said. “There probably will be a widening of spreads between lower and higher quality bonds, with a flight to quality.”

But the market will settle down, he predicted, as states and municipalities involved in pooled investing “step forward and say they were not engaged” in this kind of highly leveraged, risky activity.