Key Senator Calls for Better Disclosure by Bond Brokers

Taking a tough line with the brokerage business over the Orange County bankruptcy, Senate Banking Committee Chairman Alfonse D’Amato (R-N.Y.) called Friday for Wall Street to give more information to investors in municipal bonds or face the threat of tighter federal regulation.

“It behooves the industry, which I have been accused of being too protective of, to do something,” D’Amato said on the second day of a special committee hearing. “I don’t mean the minimum, but . . . to disclose to the greatest dunderhead what the situation is.”

D’Amato wants brokers and their customers to get detailed information about local government investments, financial strategies and the use of instruments such as derivatives, which constituted a large portion of Orange County’s portfolio when it went bankrupt last month.

His comments were the first call by an influential Republican for better self-regulation by an industry responsible for marketing hundreds of billions of dollars of public securities. Previously, most GOP members of the committee--and key regulators--have dismissed calls for overhauling industry practices in the wake of the Orange County debacle.

In other developments Friday:

* Orange County--threatened with lawsuits--agreed to release to cities and school districts $175 million in property taxes that were collected before the bankruptcy filing Dec. 6.

* Nineteen staff analysts, planners and other workers were laid off in the county administrative office--20% of the office’s staff. In all, 95 full-time county employees have lost their jobs so far as a result of the financial crisis.

* University educators were forced to halt two popular programs that train and support nearly 200 teachers at eight county school districts because their funds are entangled in the bankruptcy. The programs, administered by UC Irvine and Cal State Fullerton, offered mentoring and innovative seminars to foster the growth of young teachers.

* The county’s elected leaders told cities, schools and government agencies with money in the county’s investment pool that they all must share in the fund’s $2.02 billion in losses if the county is to survive. But some investors promised a battle if they do not get every dollar back.

“We’re going to fight for that 100%,” said Irvine City Manager Paul Brady, who represents cities on the county’s creditors committee in U.S. Bankruptcy Court. “When I hear comments saying, ‘There’s no way possible--it’s a zero-sum game,’ I don’t believe that.”

* A second major credit rating agency slashed the county’s bond ratings to non-investment grade, the lowest levels possible.

“With the information we received from the county this week, it became much more clear how difficult it will be for them to make debt payments,” said Karen Krop, an assistant vice president with Moody’s Investors Service in New York. “We think they will try to make those payments, but it will be a very difficult thing for them to do.”

Ratings on $1.58 billion worth of Orange County bonds were lowered to non-investment grade levels by another rating agency, Standard & Poor’s Corp., on Dec. 7. The Moody’s downgrade will make it even more difficult for the county to restructure its debt or borrow anew to counter its losses.

“Recent actions are indicative of the continued precarious position of debt holders,” Moody’s said.

In Washington, D’Amato’s call for tighter self-policing by Wall Street reflected his unease with assurances from the nation’s top financial regulators, bankers and investment leaders that the Orange County situation poses no general threat.

The New York Republican wants more disclosure in the area of municipal finance, hoping to prevent a repetition of gambles like that taken by then-Orange County Treasurer Robert L. Citron, who leveraged a $7-billion portfolio into a $20-billion bet that interest rates would fall.

Currently, states, cities and counties are exempt from disclosure rules that require corporations to issue detailed financial reports when they seek to market securities.

Citron borrowed short-term to buy long-term Treasury bonds, a winning strategy when short-term interest rates were falling. But as short-term rates began to rise, the value of the long-term bonds plunged; the combination caused massive losses for the county portfolio.

Like other investors, the county used derivatives--complex instruments linked to other indicators--to make its bets on interest rates. One security in the county portfolio was pegged to a combination of the currencies of Switzerland and Sweden and the cost of borrowing in London.

“It was a strategy politely called highly speculative, more bluntly put, utterly stupid,” Nevada State Treasurer Robert Seale, president of the National Assn. of State Treasurers, told the banking committee.

D’Amato, a man with a reputation for blunt speech, praised Seale for using “stupid” as a description of Orange County’s investment style. “That is the first time I heard anyone put his finger on it,” D’Amato said. “Everyone else beat around the bush.”

Seale said the treasurers association has created a task force to study the operation of local government investment pools like Orange County’s.

In Santa Ana, the county agreed Friday to distribute $175 million in property tax revenues that were frozen in the county treasury when bankruptcy was declared.

The money will go to cities, school districts and other agencies. It represents taxes collected between Nov. 15 and Dec. 6, said Brady, the Irvine city manager.

Brady said representatives of the creditors’ committee and the county will file a joint motion in U.S. Bankruptcy Court on Monday to have the funds released. If the judge agrees, checks could be distributed to more than 100 agencies by the end of next week, he said.

The agreement came on the day Huntington Beach had set as its final deadline before suing the county for its share of the revenues.

“It certainly looks like good news,” said Huntington Beach Mayor Victor Leipzig, whose city stands to receive $2.5 million in taxes. “But we’ll want to hold judgment until after the court action is taken.”

Fountain Valley City Manger Raymond H. Kromer added: “We were set to sue, but if we can get our money, we will save money.” Kromer said that the city is due about $500,000.

Meanwhile, the Grand Jurors Assn. of Orange County, composed of former members of the volunteer grand jury, offered its services as a liaison between residents and county officials. The association recommended that it help draft a county charter or help select a new chief executive officer--reforms that some supervisors have suggested.

Rosenblatt reported from Washington and Platte and Lait reported from Orange County. Times staff writers J.R. Moehringer, Alicia DiRado, Debora Vrana and Nancy Hsu and correspondent Shelby Grad also contributed to this story.