On Wall Street, Fiasco Is Only a Radar Blip
Wall Street had important things to think about the week before Christmas. First and foremost were annual bonuses. A distant second was the plummeting Mexican peso and its squeeze on American investors. Then there was the subway bombing.
And what about the Orange County financial crisis?
“A blip on the screen,” said Joe Mysak of Grant’s Municipal Bond Observer newsletter.
But Orange County? They’re in bankruptcy out there. Hundreds might be laid off. Schoolchildren could lose an apple with their lunch. Doesn’t anybody care?
On Wall Street there simply was no concern--not to mention remorse.
“No, no, no!” Mysak roared when asked if Wall Street perhaps felt collective guilt over Orange County’s financial pain. “The attitude here is: Those guys were morons. Sure, people like to blame Wall Street for cooking up schemes. But in this case, no, absolutely not.”
Mysak said this wasn’t Wall Street being smug or happy.
“This time out a lot of public officials are going to go down; a lot of heads are rolling; credit ratings are being downgraded,” he said. “But it’s one of those unfortunate things that happen in general when the market turns. . . . And there’s a point where the attitude is: Let the buyer beware.”
In a place where the average day’s trading on the stock market is about $10 billion, the Orange County loss of $2.02 billion in the municipal bond market is taken in stride. It’s referred to as “an adjustment” or “a little swivel.” But mostly it’s “a local problem.”
With the municipal bond market divided up into about eight smaller regional markets, Orange County’s woes are viewed by many in the heart of the world’s financial center as a problem for California firms and California investors. Because the bond market nationally has been resilient in absorbing the shock of Orange County’s problems, Wall Street can afford to be cavalier.
The Securities and Exchange Commission and other government agencies are investigating former Orange County Treasurer-Tax Collector Robert L. Citron’s dealings with several Wall Street brokers. But even if authorities eventually implicate individual brokers or firms in the Orange County financial debacle, most here don’t see Wall Street’s image being seriously tarnished. Whatever emerges from the investigations will be limited to certain individuals and their brokerages, several money managers said. They don’t worry about the crisis exposing a systemic problem with their industry.
“We went through some tough days, actually a bad weekend, trying to decide whether to liquidate when the thing started out there,” said an official with a New York firm that had ties to Orange County. “But that’s history now. We’ve moved on.”
This executive and others, who didn’t want to be named for fear of hurting business, seemed inured to the possibility that Wall Street might get bashed for hawking derivatives and such exotic tonics as “inverse floaters” and “reverse repos” on Main Street. Many argue that municipalities were taking too big a risk in the first place when they decided to become sophisticated investors.
“Listen, this is not a case of Wall Street finding some new arcane way to screw the little guy,” said another savvy investor. “High-yield products like derivatives were never for the little guy. Amateurs should stick to mutual funds, if you know what I mean.”
If high-risk derivatives seem difficult to comprehend to the average investor, to players on Wall Street they are as basic as balancing a checkbook. They have been widely discussed in the media and debated even in Congress.
“I guess the real smart guys aren’t working in Orange County,” said another source, a longtime money manager for a major financial house. “If they were so smart they wouldn’t be making $150,000 a year. They’d be on Wall Street. Making $1.5 million.”
The financial relationship between an Orange County official and a Wall Street broker was hardly one of equals, according to some Wall Streeters. And there was considerable curiosity about conversations that took place between Citron and brokers from Merrill Lynch, the leading underwriter of the county’s bond issues.
“A whole lot of guys got hammered this year with derivatives and so did Mr. Citron,” a successful Wall Street investor said. “The difference is, he shouldn’t have been playing such high-stakes poker. Not with public money.”
One investor said he noticed people at several Christmas parties casting sideways glances about Merrill Lynch for agreeing to deal with Citron. Why didn’t Merrill Lynch pull out?
“Remember,” the investor said, “other firms wouldn’t do business with this guy. Why did Merrill Lynch? Is there something in Merrill’s corporate culture that it gets involved in these situations?”
Richard Silverman, a spokesman for Merrill Lynch, was disgusted by sniping at his company, the nation’s largest investment firm and the biggest player in the bond market.
“Anyone that’s saying Merrill Lynch is to blame for the problems in Orange County ought to be examined for their self-interest,” said Silverman, adding: “When all the facts are sorted out it will be clear that Merrill Lynch acted properly and professionally in all of its Orange County dealings.”
At least one Wall Street executive believes the Orange County fiasco might force the financial community to take stock. William Griggs of the investment firm Griggs & Santow said that if it turns out brokers did not actively keep local officials up to date on the risks, perhaps the financial community should worry.
“Any seller is obligated to indicate what the risks are,” Griggs said. “We should all feel that way.
“But I don’t know who said what to whom. It seems any seller should have said, ‘If rates go up, Mr. Citron, you can’t dismiss that you have a serious problem.’ Perhaps that was said and ignored. Reading his quotes in the paper, Mr. Citron seems like a man with a more than adequate ego. So maybe he didn’t listen.”
Griggs said he believes that in light of Orange County’s losses in the bond market, some top managers of New York firms will reassess for the new year their policies on dealing in derivatives.
“I’m sure they’re saying, ‘We don’t need this kind of nonsense,’ and trying to figure out a better way,” he said.
But he acknowledged that Wall Street is famous for discounting yesterday’s news and looking ahead to the big picture.
And while the media continue to chronicle Orange County’s woes, no amount of attention will force Wall Street to get philosophical about this latest episode affecting public funds. This is a place better known for its macabre humor than its civic-mindedness.
“This was not Alan Greenspan getting hit by a bus or Hillary Clinton getting indicted or the stock market tanking 800 points,” said one Wall Street pundit who has written frequently of its intrigues. “It’s one more replay of the old saying that tragedy is when it happens to you and comedy when it happens to someone else. Orange County, in this case, is the someone else.”
* BANKRUPTCY COVERAGE: Related Orange County stories inside. A20
