ORANGE COUNTY IN BANKRUPTCY : Wall Street Sees Increased Pressure for State Takeover

Wall Street observers Wednesday speculated that the stunning resignation of Orange County Chief Executive Officer William J. Popejoy could increase the pressure for a state takeover of the bankrupt county.

“It looks like the supervisors are back into their same political game, and that is not a good message to be hearing,” said Hugo Quakenbush, a spokesman for Charles Schwab & Inc., which holds $41 million in Orange County notes.

“It will be interesting to see if the state, which hasn’t been directly involved up until this point, will see this as showing that the county is really unable to manage its own house,” said attorney Robert Darby, whose clients hold about $80 million in Orange County notes.

“It gives me great concern on that level. We’re now back to having policy set by a committee, and the committee in this case has not been able to show unanimity of purpose,” Darby said. “And that’s necessary for maintaining the confidence of the markets.”

But county bankruptcy attorney Bruce Bennett argued that Popejoy’s departure shouldn’t have a dramatic impact on the county’s relationships with investors.

“I hope it doesn’t send any message to [noteholders and Wall Street], other than that there will be a change of personnel,” Bennett said. “I think the county very much needs to find a qualified replacement, and it’s my impression that the process for achieving that is already in motion.”

Popejoy’s resignation came just two days after Standard & Poor’s Corp., one of the nation’s leading bond rating agencies, determined that the county was in default despite a hard-fought rollover agreement covering the $800 million in debt that comes due this summer. Moody’s Investors Service earlier had slapped a default rating on the county’s outstanding debt.

Popejoy’s resignation, coupled with the county’s failed attempt at passing a sales tax increase June 27, could result in supervisors “losing control in the county,” said Sherman Swanson, a San Francisco-based bond trader. “I’d say that this is a pretty serious vote for that. Maybe the state says, ‘If you’re going to backpedal on all this stuff, we’ll just take it out of your hands.’ ”

Another attorney who has represented holders of county bonds argued that the “negative development casts a further cloud over Orange County’s ability to resolve this matter short of state intervention.”