‘Less Risky’ Pool May Have Lost More : Portfolio: Fund paying lower interest was supposed to be safe, but its losses may exceed 27% overall rate, analysts discover. Investors are ‘dumbfounded.’
The 13 Orange County agencies and cities that invested in a “safe” investment pool managed by former county Treasurer Robert L. Citron may have lost a greater percentage of their money than those participating in the county’s supposedly riskier--and higher-yielding--investment fund, county financial adviser Thomas Hayes said Thursday.
Hayes and financial analysts from the Salomon Bros. investment firm have found that the so-called bond pool, which was supposed to be a low-risk, low-yield, short-term depository for working funds, invested in risky “derivative” securities and borrowed money to make further investments, just as did the larger “commingled pool.”
Its losses may match or exceed the 27% suffered by the county’s $7.8-billion portfolio as a whole, Hayes said. The bond pool accounted for $1.27 billion on Nov. 30.
Through his attorney, Citron denied doing anything improper.
Hayes, who was appointed a special financial adviser after the county filed for bankruptcy protection Dec. 6, made his remarks in an interview just before giving the Orange County Board of Supervisors his latest interim report on the condition of the crippled investment portfolio.
Overall, he said, although the sale of $3.3 billion in portfolio holdings by Salomon Bros. had succeeded in sharply curtailing the portfolio’s riskiness, it is still highly exposed to losses from increases in prevailing interest rates.
So far, the ultimate investment loss suffered by the pool still appears to be fixed at his Dec. 13 estimate of $2.02 billion. “It’s still very risky, it still has derivatives, and it’s still leveraged,” he said. “But it’s less leveraged and less risky than one week ago.”
Hayes said that the county might soon be turning its attention to whether it needs to return to the capital markets for new loans or help in restructuring its debt.
Salomon Bros. has asked several Wall Street firms to propose how they might underwrite a new issue of Orange County debt securities if the county tries to raise fresh cash from investors. The firms, which included such leading underwriters of municipal debt as Goldman, Sachs & Co., Lehman Bros. and Morgan Stanley & Co., were asked to respond to Hayes by Tuesday.
Hayes said no specific type or dollar amount of offering was being considered but he wanted to screen potential underwriters now so that their services would be available as needed. “It’s another arrow in our quiver,” he said.
But he warned that given the bankruptcy and the county’s default on existing debt, a return to the credit markets “is going to be a very difficult situation.”
“We’re not even close” to estimating what the cost to the county might be of floating a new debt issue, he said.
As for the so-called “bond pool” and “commingled pool,” the distinction has become an issue in Bankruptcy Court and elsewhere as the 13 investors in the smaller bond pool contend that they should shoulder a lesser loss than the municipalities and agencies in the larger fund.
Among other things, they argue that Citron and his assistant, Matthew R. Raabe, implied that they were receiving a lower rate of return on their money because they tolerated less risk in their money.
But Hayes said Thursday that he has seen no evidence that the investments in the two pools differed in nature.
“The contention that there were only ‘safe’ investments in the bond pool is not borne out by the records that are available,” he said.
Hayes said he could not explain why Citron paid a lower rate of interest to the smaller pool’s investors. “The accountants are looking at where the money went,” he said.
For their part, treasurers of some of the agencies with money in the bond pool expressed outrage Thursday at learning that their funds were invested so imprudently.
*
“I’m just dumbfounded,” said Orange County Transportation Authority Finance Director James Kenan, whose agency was the largest investor in the bond pool, with $560 million.
“No one in their right mind would leverage a pool where there’s no demand for yield and it’s short-term duration,” he said. “A short-term pool you have to be able to snap your fingers and get out. These derivatives, by definition, you can’t get out. That’s just suicide.”
“Those of us in the bond pool assumed that it was in safer, lower-risk investments and that’s why we were getting a lower rate of return,” said Vicki Baker, finance director of Yorba Linda, which had $6.5 million in the pool. “Now I’m sitting here thinking: ‘Gee, we’re going to take the same loss as the commingled and we got less interest?’ That makes it even worse. You think that you’ve heard the worst through this whole thing, and every day there’s something new.”
But she and other officials said they never obtained written assurances from Citron or Raabe that the money would be specially handled.
“I remember saying, ‘Do you have anything in writing?’ ” she said. “And they’d say no. And I remember thinking they never really got their paperwork act together. Now it all makes sense.”
Asked whether Citron may have misled investors into believing the bond pool was invested conventionally, David Wiechert, Citron’s attorney, said investors should have known that the bond pool was leveraged and tied up in derivatives. That’s because, although it earned less interest than the county’s commingled fund, it earned more than the state’s conservatively run investment pool, he said.
“Mr. Citron didn’t intend to defraud anyone with regard to the two funds,” he said. “Bob never made it a secret from anybody how he was trying to make his money.”
Times staff writers Jeff Brazil in Orange County and James F. Peltz in Los Angeles contributed to this story.
