BLINDSIDED / ORANGE COUNTY’S FINANCIAL CRISIS : What Happened to the Money? : Tales of incredulity and shock, of ignored warnings and misplaced trust as the saga of a financial catastrophe unfolds.

There was a certain smugness about how Orange County went about the business of investing its money. But there always seemed to be good reason to crow.

Then came the first of the terrible days. In the opening hours of the crisis, it all seemed like a confusing bad dream, with incomprehensible losses in a financial medium that was like Latin to a layman. Derivatives. Things that lost money as interest rates went up. It was all so unreal.

Now those terrible days are beginning their march into weeks, which will surely turn into months of agonizing choices and pointed fingers and, of course, lawsuits. But those first days will always be the worst, the time when the realization struck that Orange County Treasurer-Tax Collector Robert L. Citron had blundered badly. Would the teachers be paid? Would someone be around to pick up the trash? Are we really cold, flat broke?

There are dozens who have been involved in this, the most dramatic and fateful event ever to befall Orange County. They talk of sleepless nights and tears, of careers and investment portfolios gone up in smoke.

Spring 1994 / The Wolf Begins to Howl

JOHN MOORLACH

Republican candidate for county treasurer-tax collector

Voices from the past now look so prescient, and none was more forceful than accountant John Moorlach, Citron’s Republican opponent in the last election. In discussing his losing campaign, Moorlach now talks like a man who has been vindicated. He described in detail how Citron first stalled, then grudgingly gave him a copy of the county’s investment portfolio in May.

Moorlach: “I finally got his portfolio in readable condition on May 2, a month before the election. I shopped it around to bond brokers around the country. They took all kinds of evening hours to pore over it. They were just flipping out. He’d increased his leverage from $4 billion in March of 1993 to $12 billion in March of 1994. He not only bet that rates would go down, he bet really big.”

On May 31, Moorlach, who was destined to lose his election by a large margin the following week, sent an eight-page letter to Thomas Riley, chairman of the County Board of Supervisors. What was dismissed by the supervisors then now seems to have been exactly on the mark.

The letter: “Every prudent investor chooses safety of principal as the top priority. Next comes the need for liquidity. The last priority is achieving yields. It’s time to get back to basics. Mr. Citron has these priorities inversed. He has focused primarily on yields. He has poor liquidity. He has put our principal at risk. He is willing to make highly leveraged, highly speculative and highly aggressive investments. I am very uncomfortable with that and you should be, too.”

As it turned out, few heeded Moorlach’s warning. He did, however, help convince the city of Costa Mesa, where he lives, to pull most of its funds from the county investment pool.

*

SANDRA GENIS

Former Mayor, City of Costa Mesa

One who was most concerned was then-Mayor Sandra Genis, who still rues the fact that the city was unable to extract all of its money. Still, the city managed to withdraw $11 million of the $14 million that was in the pool.

Genis: “Maybe if I had just beat my head against the wall a little harder, pushed a little more. Maybe when I got real worried last October I should have gotten real obnoxious and beat on people. I know how to be pushy. But I was trying to be cool, to do this quietly.

“If we were to withdraw, we didn’t want a public flurry. If there was a run on the bank, we didn’t want to cause it.”

Others were more trusting. The city of Cypress had a relatively small $5.85-million investment and chose to stay with the tried-and-true Citron even though interest rates were on the rise.

*

CECILIA AGE

Mayor, City of Cypress

Age: “Citron won that (political race) overwhelmingly and assured everyone that everything was fine. I think everyone was comfortable with that after his statement in which he reassured everyone that he’s been in that office for 16 years or whatever it is and he’s always had a high rate of return.” His reassurances “eased my fear that there was something wrong there. There was no cause for alarm and there was no cause at that point in time to really question it.”

Nov. 10

‘I Did Nothing Wrong’

WILLIAM G. STEINER

County Supervisor

County Supervisor William G. Steiner has a notation on his calendar for the date of Nov. 10. It says “Ernie Schneider 2:15.” It was on that date that the county administrative officer notified the supervisors individually that outside consultants were being hired to examine the portfolio and its value.

That briefing, according to sources, came only after Assistant Treasurer Matthew Raabe threatened to quit if something was not done to improve the portfolio. But even with this official admission that all was not well with the county’s investments, Steiner said the belief was that Citron could pull the proverbial rabbit out of the hat.

Steiner: “I still had a feeling that Bob Citron had his arms around the problem and that he would save the day. Ten years ago, I was a school board trustee, a member of the Board of Education in the Orange Unified School District. We had really severe financial problems. Citron came to the rescue and produced a greater return on the investment. It literally kept us from laying off teachers and increasing class size.”

This time, though, there were no miracles. Instead, there was a somber news conference called by county officials to announce that the unthinkable was happening. On the first day of December, Schneider and Raabe told an incredulous group of reporters that Orange County was $1.5 billion in the hole.

*

DAVE LOPEZ

Reporter, KCBS-TV

The news conference was scheduled for 2 p.m. and Dave Lopez, a longtime television reporter for KCBS-TV, was given the assignment of what was billed as a somewhat innocuous-sounding discussion of county finances. The assignment editors, though, were less than enthused and instead ordered him to Huntington Beach for a story about students chewing gum laced with LSD.

But things quickly began to change as word got around that the news conference to discuss finances could be big. Lopez was ordered to the Hall of Administration at the last moment, only to find the conference room crowded with reporters who are not usually there.

Lopez: “I’d done interviews with Citron before and he was just sitting over there all quiet and meek. And I was thinking, something’s weird about this, really weird. Wall Street reporters were there, all the big news services. After listening to Raabe and the other guys, I thought, ‘We gotta get Citron to comment.’ So I said, ‘Mr. Citron, a lot of people are blaming you, saying this is your fault.’ He started to answer and I said, ‘No, no, you’ve got to get closer to the mike.’ And he says, ‘I did nothing wrong. I feel as though I have nothing to apologize for.’ And then they whisked him off. It was all of nine seconds.

“Friday, I didn’t touch the story because the Heidi Fleiss verdict came in.”

Dec. 2

‘Things Are Going Off a Cliff’

MAYA DECKER

President, Newport-Mesa Federation of Teachers

Word began to spread. Maya Decker, president of the Newport-Mesa Federation of Teachers, said she got word on her telephone answering machine that there were going to be big headlines Friday and that the news would not be good. Her school district had $47 million invested in the now-bankrupt pool.

Decker: “I went to the office in the morning. We take three papers, and I looked at all of them. ‘Frenzy’ was one of the words in a headline. I thought they were overplaying it. . . . My feeling was a lot of people were running around shouting the sky is falling before having serious time to reflect on it.”

*

DAN MILLER

Santa Ana neighbor of Citron

News of the financial disaster sent county authorities and news organizations scurrying while Citron dropped from sight. Citron’s Santa Ana neighbor, Dan Miller, noticed that all was not as usual in the neighborhood. There seemed to be a lot of cars in front of Citron’s house.

Miller: “I didn’t talk to him that weekend at all. I didn’t see him outside. He doesn’t usually have a lot of visitors. That was the only inkling I had that something was going on until it broke out.

“I think it was Sunday when they (the media) started coming around. Most of the questions were ‘Have you seen Bob? Have you talked to him? How is he?’ They were just coming up asking. Then they’d go away, sit in their car for four or five hours, seeing if people are coming and going. I went to talk to Bob and I told him, ‘I think it would be good to say something. People are saying they’re concerned about your health.’ Friends of his were calling, too.”

Steiner kept to his weekend schedule. He was on his way to a football game when it became clear to him that events were veering out of control.

Steiner: “I was in the car and the car phone rang. I was taking guests to the Rams game. The CAO (county administrative officer), Ernie Schneider, called. He said you have to come. We’re being told that the SEC (Securities and Exchange Commission) is in the treasurer’s office, that they’re talking tough as far as freezing the investment pool. . . . There’s a possibility of civil fraud charges against Bob Citron.

“I thought, ‘Things are going off a cliff.’ ”

Sunday, Citron signed a resignation letter. It was only one sentence long: “After much thought and soul-searching and with much regret, I have decided for the benefit of the county of Orange to resign my elected office.”

Dec. 6

The Day It All Collapsed

If matters had seemed swift and tumultuous to that point, they only intensified as the drama of the next couple of days unfolded.

MARIAN BERGESON

State Senator

In Sacramento, state Sen. Marian Bergeson of Newport Beach, who will take a seat on the Board of Supervisors next month, began receiving calls from county officials telling her of the resignation. Even with the political cat fight being waged by Willie Brown to retain his speakership, she boarded a plane and flew to Orange County. One of the ironies was that she had withdrawn her endorsement of Moorlach during the campaign, fearing that his claims might somehow affect the status of the investment pool.

Bergeson: “It was a shock, the severity of it. It was inconceivable that this could have happened to the county.”

The inconceivable, though, only got worse.

Tuesday, Dec. 6, will go down as one of the longest days in Orange County history. No one knows exactly when it began for Citron and Schneider and the county support staff--or even if they slept at all--but Steiner’s day started at 2:55 a.m. with a call from Steven E. Lewis, county auditor-controller. The message was terse.

Steiner: “I was told to come down to the Hall of Administration. Urgent. I was there in 30 minutes. (Supervisor) Gaddi Vasquez was the first to arrive. Tom Riley was second. We were in separate offices on the third floor, and that’s where some incredible things occurred. We were told that the county would potentially default on $1.2 billion in bonds at 11:30 a.m. Tuesday, Pacific Standard Time, 2:30 p.m. New York time.”

As Orange County slept unaware, the drama began to unfold at the Hall of Administration. The Brown Act, which keeps more than two supervisors from meeting together at a time, forced the county staff to race up and down the office stairs and deliver their early morning message of doom over and over and over again.

*

HARRIETT AND IRV WIEDER

County Supervisor and her husband

One message that was not immediately delivered was for Supervisor Harriett M. Wieder.

As the other supervisors began to mobilize for the emergency meeting, Wieder slept on. County Finance Director Eilene Walsh had tried to reach the slumbering supervisor but dialed the wrong number. An hour later, a Huntington Beach police officer was dispatched to Wieder’s home with orders to bring her to Santa Ana.

As the officer banged on the door, Wieder and her husband, Irv, panicked. Do they let the officer in? Then the phone rang. It was Walsh. Wieder knew the news would be bad.

Harriett Wieder: “I’ve been here 16 years, and the only other times (I’d been summoned) had been an earthquake and a flood. So this was a major disaster--a 10 1/2 on the Richter scale.”

Irv Wieder: “We didn’t go into too much discussion. We just started getting dressed as fast as we could. I think Harriett was reviewing the upside and the downside of what could be the worst, what could be the best, and who does she know who could be of help. Should she call the White House? Should she call (Sen. Barbara) Boxer? Should she call (Sen. Dianne) Feinstein?”

Here is the problem that was facing the supervisors: Not only were they confronted with their county’s financial health going up in flames, but Raabe was talking about selling off the portfolio, “the whole damn thing, the whole works,” Steiner said, in an effort to recoup at least something. That made the local officials mighty nervous. And when lawmakers are nervous, they hit the phones.

*

PETE WILSON

Governor of California

They called the three biggest investors in the investment pool. They called the senators. Steiner called the governor. It was 7:30 a.m. Two hours later the board began yet another in an interminable string of meetings. And at 9:45, Steiner was called away. Pete Wilson was on the line.

Steiner: “Pete Wilson is in San Diego giving a breakfast speech. He’s going to get on a plane. I explain to him the magnitude of the problem. I ask him: Will you please call Arthur Levitt, chairman of the SEC? What I was hoping for was the SEC to freeze trading, freeze the pool and prohibit the investment bankers from liquidating their positions; $1.2 billion was due in an hour and a half. What did Pete Wilson say? ‘Oh my God.’ ”

Wilson: “It was shock . . . and great concern as to what the dimensions of the problem would turn out to be.”

*

CHRISTOPHER COX

U.S. Representative

In Washington, Rep. Christopher Cox (R-Newport Beach) emerged Tuesday morning from the heady atmosphere of a conference room where he had just been elected to a leadership role in the new Congress, only to find himself facing a bank of television cameras.

Cox: “I walked out . . . fresh from a 148-77 vote and had this note thrust into my hands. I said, ‘I’m taken aback by the phone message I just received. It says Orange County may declare bankruptcy by this afternoon.’ ”

The 10:15 a.m. phone message, which had been handed to Cox by a staffer, was from James McConnell, the county’s Washington lobbyist. “URGENT,” it read, “Orange County may declare bankruptcy by 1:30 this afternoon. Please call the SEC to urge them to get the federal court to freeze the asset pool.”

After leaving the news conference, at which he made his comments and thus became the first to leak the extraordinary news of the bankruptcy, Cox called McConnell to confirm that he had left the message. McConnell, in reply, said he had and that he had left similar messages for other members of the delegation.

The worst of the worst did happen. At 5:01 p.m. Tuesday, Orange County became the largest municipality in U.S. history to file for federal bankruptcy protection. The decision sent shock waves through Wall Street. The county’s all-important bond rating, which determines, among other things, at what interest rate money may be borrowed, took a dive.

*

TOM RILEY

Chairman, county supervisors

Immediately after the decision, Supervisor Riley insisted the county had done the right thing, despite the consequences of their action.

Riley: “I have taken great pride in talking about a great county in which to live, what its credit ratings were, how we did everything better and still the cost to live here was not that great. I think we’ll get back there. It’s going to take some time but I think we have people with the will, the staff with the will.”

One uncertainty is just where help will come from. The bankruptcy filing was made only after last ditch appeals to the state and federal governments.

Wilson: “We at this point can’t say what the state can do. But I doubt that we can do more, frankly, than possibly advance payments that might otherwise be due to assist their cash flow problem. I am deliberately not raising anybody’s expectations because I think there is a very limited role that the state can play.”

*

MICHAEL REESE

Aide to state Treasurer Kathleen Brown

Prior to the crash, Citron and others from his office called state Treasurer Kathleen Brown looking for a life preserver from Sacramento. Although state officials have no statutory authority to bail out the Orange County fund, Brown aide Michael Reese said her office is keeping an hour-by-hour watch on Santa Ana.

Reese, like Wilson, said the state could do nothing to help Orange County and that the treasurer’s office knew nothing of the impending collapse.

Reese: “We asked to see their portfolio and they have yet to deliver it to us.”

Dec. 7

‘Like a Death in the Family’

ROBERT GORE

Bond trader

While Citron’s high-risk strategies--aided by some of Wall Street’s biggest firms--were no secret on Wall Street, Orange County’s rapid descent still caught many municipal bond traders by surprise. It was not until the county announced the investment pool’s $1.5-billion loss that “alarm bells went off for everybody,” said Robert Gore, a municipal trader at Crowell, Weedon & Co. in Los Angeles.

Gore: “It was like a death in the family. The initial reaction was that everybody was scared. There was a kind of panic trading that went on early (Wednesday) morning. The market for a lot of municipals just dried up. It subsequently rebounded a little bit, but it was still kind of an eerie feeling.”

*

RANDY SMOLIK

Bond analyst

But the loss and the county’s filing for protection from creditors under Chapter 9 of the U.S. Bankruptcy Code were not the only shockers for the investment community. A big jolt came from one of their own. Federal Reserve Chairman Alan Greenspan, appearing before the Joint Economic Committee, said there were no plans for a federal fix. To Randy Smolik, a senior analyst at Municipal Market Data of Boston, it was as if Greenspan “dropped a bomb.”

Smolik: “Greenspan was just going to let Orange County go down the drain.”

Early Wednesday morning there was action elsewhere as well. Tension had reached the breaking point at the county tax collector’s office, where clerks had been besieged for days by irate taxpayers.

*

UNNAMED CASHIER

County tax collector’s office

A cashier, who would not give her name because she feared for her job and her safety, watched as a man paid his property taxes, then spotted a picture of Citron still on the wall despite his resignation three days earlier. The man swore an oath.

The cashier: “He said, ‘If you don’t get that f------ picture down, I’m coming back with a lynch mob and a gun and take care of this place.’ He looked very sane to me, very normal.”

Other taxpayers were venting their anger by writing angry messages on their tax bills.

“You name it. They are writing all kinds of things.”

Dec. 8

A Step Toward Recovery

There is still no normalcy here on California’s Gold Coast, formerly land of the largest luxury car dealerships and now home to the nation’s biggest bankruptcy. But the first signal that, perhaps, this crisis could be managed came Thursday, when the beleaguered county named former state Treasurer Thomas W. Hayes as financial adviser.

Less than 24 hours after Hayes said at a briefing that he was “strongly urged by Gov. Wilson” to take the job, he had a makeshift office in a former conference room at the Hall of Administration and was hard at work at his job. On Friday, the sight of Hayes on the job gave great comfort to Supervisor Riley, a retired Marine Corps general who served in the Pacific Theater in World War II.

Riley: “I went over at 7 a.m. He was in his office having coffee. I realized he had Marine training. He’s here, working. He was talking on the phone when I walked in. I was pleased to see he was here. The last several days, I had a little better feeling that we’re in the right direction. He’s here.”

Contributing to this story were Times staff writers Steve Emmons, Nancy Wride, Dennis McLellan, Rebecca Trounson, Dave Lesher, Chris Woodyard, Mack Reed, Lee Romney and Mark Platte.