Avoiding New Fiscal Debacles : Tools are proposed to aid government investment officials

The federal government’s extraordinarily belated discovery that the largest bankruptcy in U.S. municipal history could offer national lessons is a welcome change from earlier statements by Washington officials that Orange County’s plunge into debt was strictly a local problem. That’s ridiculous.

Last week, Deputy Treasury Secretary Frank N. Newman told an audience that included state and local investment officials that Washington was indeed concerned about the sales practices of brokers and bankers who sell investments to cities, counties and states.

In many quarters there is increasing concern that local investment officials are getting in over their heads. The worry is fed by the growing complexity of financial instruments, especially derivatives, which depend on interest rate swings and borrowed money. Such investments can dramatically increase returns . . . or produce calamitous losses.

Orange County’s former treasurer, Robert L. Citron, who resigned just before the county declared bankruptcy Dec. 6, unconvincingly portrayed himself at a Sacramento hearing last month as a naive money manager led down the primrose path by brokers, including some with Merrill Lynch & Co. The brokerage denied the allegation, contending Citron was a savvy investor, and Orange County has filed a suit against the company. Whatever the legal outcome, public treasuries need more protection from sales practices that may conceal more than they reveal.

Newman said the federal government is likely to adopt tough controls on the marketers of complex securities to localities. However, he also noted that regulators such as the Securities and Exchange Commission want to steer clear of too much regulation. Clearly, striking a balance is essential.

California Treasurer Matt Fong has called for more complete disclosure of investment funds’ profits and losses. Taken together, the various proposals could help other governments avoid debacles like the one suffered by Orange County. The county’s bankruptcy sparked withdrawals from investment funds elsewhere in the nation, evidence that risky investment practices are not just a local problem but a national menace.