ORANGE COUNTY IN BANKRUPTCY : L.A. Transit Agency Drops Merrill Lynch

Merrill Lynch & Co., catching further fallout from its role in Orange County’s financial mess, was temporarily removed Friday from the list of underwriters used by the Los Angeles Metropolitan Transit Authority, which operates bus and rail service in Los Angeles County.

The MTA’s budget, finance and efficiency committee took the action pending further review of Merrill’s handling of high-risk securities deals for Orange County, according to the committee’s chairman, Larry Zarian.

Reports that Orange County is preparing to sue Merrill, alleging that it failed to properly disclose the risks of those transactions, contributed to the MTA’s decision to distance itself from Merrill, the nation’s largest investment firm, Zarian said.

Merrill has said it will fight any such suit.

The suspension will likely last at least a month, according to Zarian. During the year ended June 30, Merrill served as co-manager on two MTA bond issues totaling $226 million, but officials said the firm has not been a senior player in the agency’s borrowings over the last three years.

“We felt the public would want us to be prudent,” said Zarian, who is also a member of the Glendale City Council. “We’re not pointing fingers, we’re not accusing anyone,” but the agency wants to wait “until it is safe to go back and deal with them again,” he said.

Earlier this week, the U.S. Trustee overseeing Orange County’s bankruptcy proceeding said Merrill could not join a committee of the county’s creditors even though Merrill is one of the county’s largest lenders.

Merrill spokesman James Wiggins said the MTA’s action was “understandable” because of the publicity surrounding Orange County’s financial debacle.

But, he said, “when all the shouting dies down and the facts are sorted out, our business dealings with Orange County will be found to be professional and proper in every respect.”