Help O.C. Find Its Way Back, Expert Urges : Former head of securities-regulation panel says supervisors need guidance from outside leadership.
As chairman of the Municipal Securities Rulemaking Board in Washington, investment adviser Charles W. (Skip) Fish argued for more disclosure of political contributions from securities brokers, which federal investigators now suspect may have contributed to Orange County’s financial crisis.
Fish, chief executive of Fish & Lederer Investment Counsel Inc. in Orange, was a member of the rule-making board for two years before his yearlong term as chairman, which ended last fall. The board, whose 15 members mainly come from the securities industry, was created by Congress in 1975; the guidelines it suggests for bond traders are subject to approval by the Securities and Exchange Commission.
In an interview last week, Fish reiterated his concerns about the financial expertise of the Orange County Board of Supervisors and called for additional assistance from other officials, including Gov. Pete Wilson, to help the county choose its strategies for dealing with the bond crisis.
Question: A lot of comparisons have been made between Orange County and New York City’s near-bankruptcy in the mid-1970s. How similar are the two situations?
Answer: The primary difference is the underlying health of the issuer. You have a situation in Orange County where the economy is well off, except for this glaring problem you have with the investment pool. The other conspicuous difference is that the marketplace is a completely different entity today than it was 20 years ago. Twenty years ago, there was about $31 billion worth of new debt issued. The figure for last year was $230 billion. That’s not quite tenfold, but it’s a huge difference. And there are a lot more complicated, more exotic (securities) out there.
You have this growing volume, let’s call it a freight train headed east, on an increasingly complicated type of product. On the same track headed west is the investor, who is gradually changing. The banks are taking a diminishing role. Now you have the casual, retail customers--the ordinary families--who buy bonds through mutual funds. They’re relying on their own intuition and the broker they’re doing the transactions with. Everything . . . screams out for more disclosure.
Q: There has not been much political pressure for disclosure in the last 10 years. Is that because something like Orange County’s bond fiasco hadn’t happened yet?
A: That’s a good part of the reason. Obviously the Orange County situation would have hastened it, as would any other disaster in the municipal securities industry. Now there’s no question that more has to be done. It was just a matter of time until you had the collision.
Q: Did you think it would happen this way?
A: It was a question of when it would take place. I didn’t think it would take place this soon, I didn’t think it would be this dramatic, and I certainly didn’t think it would happen here.
It’s a disclosure problem. With a corporate bond filing, you have all the 10Ks and 10Qs (disclosure forms mandated by the SEC), but you don’t have those requirements with (municipal) bonds. This is a problem because you’ve got people valuing the bonds daily, but the data they had to rely on to judge the credit, that data became five, six or seven years old.
Q: You’re referring to the rating agencies?
A: No, I’m referring to the mutual funds. There’s only so much a rating agency can do. You always want them to do more, but they have an awesome task. . . . I think it’s very hard for a rating agency to stay current. Most of the disclosure that they would want (in order) to make a decision is voluntary, and I don’t suppose it’s always easy to get the cooperation of the issuers of the bonds. The rating agency’s only hold over them is, if they want to maintain their rating, they had better cooperate.
Q: Should there be standards for the way that these portfolios are constructed?
A: To me, it was inadequate for Orange County to issue debt with the fund in the condition it was in last September, when they did their last issue. There’s no question in anybody’s mind that, if you use so much leverage that the portfolio appears to be three times its size, that’s a ridiculous use. That’s so totally beyond what is prudent that even a young, inexperienced portfolio manager would be shocked to see that happen.
But the light of day never hit, the alarms never went off. The people that knew this was going on were (former County Treasurer-Tax Collector) Bob Citron and maybe three to four members of his staff, and I suspect maybe three to four . . . of the securities dealers that were facilitating the actual transactions.
Q: Whose job was it, outside that circle of people, to say that the fund had too much leverage?
A: Obviously, the county should have had the checks and balances in-house, and the oversight should have been there. But the point is that, if the disclosures had been taking place, this problem never would have occurred. There’s an obligation on the part of the underwriters of the bond to do due diligence.
Q: How much can you put the blame on the brokerage houses?
A: The SEC is looking for violations of the law in their investigation (of Merrill Lynch and other brokerages). But the moral issue is, even if there weren’t violations of the letter of the law, I think it was readily apparent to a lot of people a long time ago that they didn’t want to be part of what was going on there. Maybe they owed it to the public to make it part of the body of public knowledge.
Q: By that do you mean the employees of the brokerage houses?
A: I have no firsthand knowledge, but I have been told there were some people who just backed away from the whole thing and refused to do these kinds of trades. Very commendable, Eagle Scout stuff. But it’s only half a measure, because nobody else knew that. If it was some sort of a professional courtesy, by some really sick interpretation, that they don’t want to say something nasty about one of their fellow securities dealers, then they let them go and exacerbate an already bad situation.
Q: What are some of the things the supervisors or other officials of the county ought to be doing now?
A: There’s a tremendous urgency for leadership, and the leadership has to come from outside the county. I think the supervisors have been taking some good steps, but only to address half of the problem. (Former state Treasurer) Tom Hayes seems to be doing an excellent job; I think he was a very good choice. And Salomon Bros. is apparently doing a very credible job of handling the assets left in the pool . . . (but) the resources to extract the county from the problem just don’t exist inside the county.
Q: Who are some of the outsiders you’re thinking of?
A: What I want to do is talk to the governor. I’d like to see something like a financial emergency control board created, and created immediately. He could do this in a matter of days, and bring together an extremely knowledgeable body of volunteers, men and women who are all highly ethical and who have their own networks and a great deal of ingenuity--all the things that the internal situation lacks.
Q: Who are they? Where should they come from, Orange County?
A: No, probably elsewhere besides Orange County. What you want them to do is calm the markets, just like Tom Hayes, his mere presence has people breathing easier. But that’s only part of the problem. The other problem is that you have the (cities and school districts) that invested in the fund, which are in dire straits.
I’m not trying to be an alarmist here, but the plain and simple truth is that it may not be enough to get some of the money out of the fund and get it into their hands. That may not be enough to stave off future defaults. If you get a rash of future defaults, if you get a domino-type thing going here, the effect would be very profound. What we need to do is buy time.
Q: Are you suggesting that the county needs the backing of other government entities?
A: No, Orange County isn’t expecting anybody else to pay for the problem. . . . The state just got done with revenue anticipation warrants, and the county should look at using those as well. That probably means the county would have to get letters of credit and would have to agree to comply with certain budget goals at certain time intervals.
Q: You mentioned that there were some other specific things that county officials could do.
A: Yes, there are a number of things, so let me just give you a list. The county could identify payments it is owed from the state and from other sources that it could ask to be accelerated. It could outline programs where the major tax and fee payers could be given incentives to prepay their taxes or fees. They could also look at substitute sources of credit, or identify revenue streams, such as things that come back to the municipalities from user fees. Or you could look for ways to mobilize pension assets, where that would be appropriate. Finally, I would urge the county to take steps to secure revenue sources that it has failed to take advantage of in the past, mostly because of political barriers.
Q: As these things are done, what should the county’s priorities be?
A: The most important thing is that they have to do everything possible to avoid defaults by any of the entities that were members of the pool. (County officials) have a profound responsibility to them. It takes decades to repair the damage that a default or a delinquency would cause in the investment community. They (the Board of Supervisors) need the support of all the citizens of the County of Orange.
Q: Why should citizens now support the supervisors or other county officials who were supposed to oversee the fund?
A: I suppose I could say at this point that I rest my case, talking about how much help leadership needs to come from outside the county. I might say that, in a number of instances, the citizens have absolutely no reason to feel comfortable with the leadership that is coming from inside the county right now. And they desperately need leadership.
Q: You argued against the county seeking Chapter 9 bankruptcy protection before the county filed for it. Are there other legal actions that might still be worth pursuing? Is county government spending too much effort on legal defenses?
A: It’s easier for them to understand (legal actions). I don’t think they understand the ramifications of long-term and short-term debt, or the financial markets that are involved in what they’re facing. Lawyers are giving them logical explanations of what they should do and why to protect themselves against liability. But if the priority is on doing what is right by the average Orange County resident and taxpayer, it seems to me that the priority should be on containing and minimizing the damage. That’s what they need to be focused on right now.
