O.C. Made Last-Ditch Bid to Bank : Crisis: Despite knowing of $1.5-billion loss, former assistant treasurer allegedly said county pool was sound while seeking guarantee of $110-million bond repayment.

Weeks after a small group of Orange County officials learned that their investment pool had suffered $1.5 billion in losses--and just days before they told the world--former Assistant Treasurer Matthew R. Raabe was pushing a deal that would have left a Swiss bank holding the bag for $110 million of the county’s debts.

Teetering on the verge of collapse, the county’s ill-fated investment pool was vulnerable to a demand that it hand over $110 million that it did not have to investors who had purchased some rather exotic Orange County pension bonds only two months earlier. Any nervous owners of those bonds, known as “weekly floaters,” could demand that they be redeemed for cash on one week’s notice.

So, anxious county officials, knowing that some nerve-shattering news was just over the horizon, were scouring the financial markets, looking for a protector.

They thought they found one in the Union Bank of Switzerland, one of the world’s leading banks. Because of the county’s good credit history and the high ratings it enjoyed on its bonds, the bank all but agreed to guarantee repayment of the bonds, unaware that the county was only days away from declaring bankruptcy.

But curious as to why the county was willing to pay a bank for guarantees it could provide virtually cost-free with assets in its investment pool, a bank official demanded a conference call with the county treasurer’s office and a representative of the county’s financial adviser at the time, O’Brien Partners of Los Angeles.

When the call was made just after Thanksgiving, Raabe spoke for former Treasurer-Tax Collector Robert L. Citron, and Jerold S. Gold was on the line for O’Brien.

“When I asked him about the pool, Raabe said everything’s fine,” the bank official recalled. “He said there was no risk of withdrawal by pool participants. He told us that while pool performance was down, that was to be expected because of interest rate hikes.”

There was no mention of the $1.5-billion investment pool loss that Raabe had learned about two weeks earlier from a New York firm that had been secretly hired the previous month to plumb the depth of the county’s losses.

Reassured by Raabe, the official had already forwarded the credit application toward approval by the credit committee at the Swiss bank’s Park Avenue office in New York when the news broke Dec. 1 that the Orange County investment pool had lost $1.5 billion through dead-wrong interest rate gambles.

When news of the county’s stunning loss appeared on financial wires, the shocked bank official in New York ran to the credit committee to pull the county’s application.

“I’m still very angry,” the official said.

Raabe’s attorney, Gary Pohlson, said his client would not be available for comment.

The transaction has come under the scrutiny of a federal grand jury in Los Angeles, investigators for the U.S. Securities and Exchange Commission and the Orange County district attorney’s office, according to one county official who has been questioned about the matter. An official at O’Brien Partners said it had surrendered all of its documents concerning the transaction to the SEC.

At the time of the call with the bank official, Raabe knew the extent of the investment pool’s losses. He and other county officials had known for weeks that the pool faced calamity because Citron’s risky and complex investments had plunged in value, and brokerage firms that had nearly $12 billion in outstanding loans to Citron were getting edgy.

If any of the pool participants made a large withdrawal, or the brokerage firms demanded more collateral on the loans, collapse was unavoidable.

Raabe had voiced doubts about the pool’s condition since early October at least, he testified to state lawmakers in January.

“We were meeting around the clock with people who were experts in the investment business,” Raabe testified before a state Senate committee. “Their counsel was that this thing was moving away from us and demanded quick reaction, and that the longer we waited to react upon it, the greater the losses were going to be.”

But the event that hastened the county pool’s collapse was that special, “seven-day put” feature in the complex $110-million floating rate pension bonds that had been issued in September. The seven-day feature, designed to make the bonds more attractive to risk-averse buyers, allowed investors to get all their money back from the county with just one week’s notice.

As the pool’s problems mounted, county officials looked for a way to keep the bondholders from pulling the trigger and demanding that their bonds be redeemed. A new source of credit was needed.

“The county came to us after the bonds were sold and asked us to find another (credit) provider, because they were worried the pool wasn’t enough,” said Margaret L. Chan, a principal at O’Brien Partners, the financial adviser on the pension bond deal.

According to officials at the Swiss bank, on Nov. 29, two days before the county announced it had suffered a $1.5-billion “paper loss,” Eileen Walsh, the county’s former finance director, signed the initial term sheet--in effect a credit application spelling out the county’s obligations and the guarantees sought from the bank.

On the advice of her legal counsel, Walsh declined to be interviewed.

Robert Austin, a staff attorney in the county counsel’s office, said he was aware of the county’s credit application. “I reviewed some documents,” Austin said, adding that he did not participate in the conference call and was not aware of anything Raabe told the bank.

When word spread on Wall Street that the county’s investment pool was in trouble, the pension bond investors, mostly large institutional funds such as Kemper Securities in Chicago, decided to cash in.

“After the Dec. 1 press conference, Kemper and the others panicked” and took steps to cash in their bonds, said one county official familiar with the deal.

Orange County approached Los Angeles County and the California Public Employees Retirement System to see if they would buy the bonds for just two weeks, until the county could come up with cash to secure the bonds. “We tried to find a way to save the bonds,” the official said.

But both declined the offer. Those deals were “politically undoable,” the official said, adding that the Orange County Retirement Board was considering the risky purchase for its portfolio.

Over the weekend, before the county filed for bankruptcy, investment bankers from CS First Boston and O’Brien Partners continued to ask the Swiss bank and other top banks to help secure the bonds.

But their efforts failed. Before the bondholders could cash them in, the county filed for bankruptcy Dec. 6 and two days later defaulted on the pension bonds, sending the investors to wait in the long line of creditors in the county’s bankruptcy action.

After the bankruptcy, state auditors and accountants discovered that the treasurer’s office improperly siphoned $93 million in interest earnings to the county from other pool investors and transferred $271 million of the county’s losses to all pool participants.