Too Cozy a Relationship? : Wall Street and Orange County: The love affair that soured
Was Wall Street peddling risky securities to a vulnerable Orange County, much like a drug dealer feeding the habit of an addled junkie? Or was the county a wide-awake participant in its own undoing, fumbling with strategies that require savvy and flexible investing?
It may be that it was a little of each. Either way, the issue of whether investment houses have a fiduciary responsibility for Orange County’s bankruptcy is likely to end up in the courts. There is precedent for finding such accountability; however, the enormity of the Orange County debacle ought to prompt more than a settling of accounts. It should result in new thinking about oversight of public investments made by public officials.
Merrill Lynch reportedly earned about $80 million in fees and commissions in dealing with the go-for-broke investment pool of now-resigned Orange County Treasurer Robert L. Citron. Over the years, Merrill Lynch lobbied for liberalizing state legislation to make such investments possible, and it contributed generously to political campaigns. Now the Securities and Exchange Commission wants to know whether there were any misrepresentations connected with the fund. The state Department of Corporations is looking for possible violation of state law in the county’s relationship with Merrill Lynch.
Did investment houses exploit cozy relationships with municipalities to lure them into unwise investments? A 1993 Orange County ordinance was broadly aimed at curbing gifts to county officials not just from bankers but from developers and the like, precisely to discourage the luring of officials down the primrose path. But a few Lakers tickets or other small gifts do not make for the kind of colossal failure in oversight now evident in Orange County.
In its defense, Merrill Lynch says in effect that the people at the Hall of Administration in Santa Ana were grown-ups and ought to have known what they were getting into. Maybe, but did the New York-based brokerage firm fully disclose all the exposure, and make prudent investment suggestions?
Certainly, most taxpayers would agree that their money managers, and those looking over their shoulders, ought to know what they are embarking on. Yet without any oversight from other county officials, Citron had a free rein and became a favored customer of Merrill’s Fannie Mae securities. The county was the sole purchaser of a $800-million issue being investigated by the SEC.
This week, having greased the legislative wheels and courted Orange County officials with Christmas gifts in earlier years, some firms retreated by dumping nearly $9 billion in bonds being held as collateral on loans. That ought to be sufficient evidence that the carefully cultivated relationships underlying these huge deals were of the flimsy, fair-weather sort, bonded only by bottom-line returns on investments.
Suddenly, Orange County looked more vulnerable than anyone had imagined possible. Whatever Wall Street’s role was in this disaster, the experience suggests a need for better disclosure requirements on investment funds involving public money, and better monitoring of money managers by the public’s trustees in city halls. Without that, the taxpayer is alone with the wolves.
