ORANGE COUNTY IN BANKRUPTCY : Repeated Warnings Ignored, Panel Told

The special state Senate committee looking into Orange County’s bankruptcy plans to hold yet another public hearing to delve into reports that Orange County failed to heed repeated warnings of a looming financial crisis from the New York firm hired to analyze the county’s investment pool, a state official said Friday.

During a three-hour meeting with a committee aide Thursday, two attorneys for Capital Market Risk Advisors said the firm cautioned the county repeatedly during November that the fund was extremely vulnerable and in danger of collapse but that county officials did not act on the warnings.

“They were working very hard to convince the county that something needed to be done, but they felt that urgency wasn’t being heeded,” said Scott Johnson, chief counsel to the committee, which has already held three hearings on the county’s Dec. 6 bankruptcy, and has scheduled a fourth in Orange County for March 3.

“This was a very, very vulnerable portfolio but nobody did anything,” Johnson said, adding that no exact date had been set for the newly planned fifth hearing, which will look into issues surrounding Capital Market’s warnings to the county.

The Thursday meeting was held in Orange County at the Irvine office of attorney David Grant, who with New York attorney Gil Porter represented Capital Market Risk Advisors.

Porter declined to reveal details of the three-hour meeting, saying, “it is CMRA’s policy not to discuss client matters.” He added, however, that he had “informed Mr. Johnson that if the Senate wishes for CMRA to appear that CMRA will do so.”

The county’s longtime bond counsel hired Capital Market on Nov. 3. Within a week, Capital Market had alerted the counsel, Jean Costanza, and Assistant Treasurer Matthew R. Raabe about the fund’s impending crash in several conference calls, according to a knowledgeable source who spoke on the condition of anonymity.

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Capital Market issued a written report detailing a $1.5-billion loss in the portfolio Nov. 16, followed by another conference call with Costanza and Raabe. The source said there were about half a dozen more conference calls in which Capital Market again sounded the alarm to Raabe and Costanza over the next two weeks.

But the warnings went unheeded until it was too late to follow any of the range of options short of bankruptcy that Capital Market was recommending, Johnson said he was told.

On Dec. 3, Costanza organized a secretive dinner at Prego, a posh Irvine bistro, where some top county officials said they learned for the first time of the investment pool’s likely collapse and a projected $2-billion loss to pool participants that provoked the county’s bankruptcy three days later.

Johnson said he was told that Capital Market analysts “did everything they possibly could to communicate urgency. There were unanswered phone calls and considerable delays, so that would lead you to believe that (the county) they didn’t feel the same sense of urgency.”

Costanza testified in Sacramento that she hired Capital Market so its work for the county, protected by attorney-client privilege, would not become publicly known before the evaluation was complete.

“If the information got out early . . . it could (have been) disastrous,” she told lawmakers during a mid-February hearing.

Costanza testified that Capital Market told her in mid-November the portfolio had lost $1.5 billion. But she said the firm assured her if three conditions held steady--interest rates did not rise, investors stayed in the pool and brokers kept calm--the fund could make it through the year.

Johnson said, however, that Capital Market’s attorneys told him the firm was also pushing several alternatives for salvaging the pool that might have made the bankruptcy filing unnecessary.

“Our interest in this as a committee is to find out why the county would chose a Chapter 9 bankruptcy filing when there were all these other alternatives on the table,” Johnson said. “Capital Markets certainly didn’t recommend bankruptcy, and there were other ways to deal with this.”

Times staff writer Jodi Wilgoren contributed to this report.