Panel Urged Not to Over-Regulate Munis Market : Congress: Despite testimony in wake of O.C. debacle, House committee may seek legislation requiring greater risk disclosure.

WASHINGTON — Holding out the expectation that Orange County’s historic financial failure is the exception and not the rule, government finance officers and securities buyers, brokers and insurers on Thursday urged Congress to not over-regulate the municipal bond market.

Expressing indignation and a lack of confidence in Orange County in the wake of its $1.7-billion investments loss and subsequent bankruptcy filing, witnesses testifying before a congressional panel generally agreed that the episode has already created a cautious market and greater scrutiny of municipal investment practices.

Despite reassurances, members of the House Banking subcommittee said they may seek legislation requiring increased disclosure of the risks associated with government bond issues. Also under consideration is a tightening of federal bankruptcy laws so that other governments cannot follow Orange County’s example and seek protection from creditors.

The Securities and Exchange Commission has repeatedly argued against further federal intervention and has said it already has enough authority to deal with situations like Orange County’s.

But subcommittee Chairman Richard H. Baker (R-La.) expressed frustration that neither the SEC nor the municipal bond rating agencies detected the instability of the Orange County investment pool.

He called the Orange County crisis a “political meltdown” because of the lack of oversight by local officials and he insisted on federal legislation requiring more disclosure. He also suggested that a further review of the SEC’s procedures in the Orange County case is warranted.

“The only hope I think we have in this process is uniform disclosure requirements . . . and then hope the market sees” the information, Baker said during the hearing. “We simply cannot allow this to continue.”

Rep. Ken Bentsen (D-Tex.) urged Congress to proceed slowly. His primary concern, he said at the conclusion of the two-day hearing, is Orange County’s hasty retreat into Bankruptcy Court just as its investment pool was collapsing.

“A very big concern in the marketplace, and probably a big concern here, is whether or not Orange County is using Chapter 9 [the bankruptcy filing] in the same way that a corporation would use a Chapter 11 in order to avoid its debts, and whether or not it’s abrogating its responsibility,” Bentsen said. “And if that’s the case, that’s a problem.”

While Orange County has pronounced its intention to eventually repay its debt, its legal strategy in court has reserved the county’s right not to pay certain bonds, said Robert Genader, chairman of the Assn. of Financial Guarantee Insurers, which guarantees repayment of government bonds.

That legal maneuver “has angered the markets and brought Orange County’s character into serious question,” Genader said.

Philip M. Dearborn, director of the independent Advisory Commission on Intergovernmental Relations, said his studies of past municipal fiscal problems show that cities were able to avoid bankruptcy with state intervention.

“There should be a requirement that [a local government] cannot even file [for bankruptcy] until you have discussed this and dealt with a state agency,” Dearborn told the committee.

Nevada State Treasurer Robert Seale commented on the investment gamble taken by former Orange County Treasurer Robert L. Citron. “He would have done well to bring the portfolio to Nevada and put it on the pass line” on a crap table, he said.

Seale, who testified on behalf of the National Assn. of State Treasurers, said the group has developed new guidelines to prevent future debacles like the one in Orange County, including recommending that public investment pools be monitored by an independent advisory board.

“For [Citron] to do what he did, I think has given us all a great deal of heartburn,” Seale said.

While agreeing that Congress should not overreact to the crisis--leaving further guidelines in the hands of local and state governments and the SEC--the different special interests disagreed on whether aggressive bond dealers should be controlled.

Timothy Riordan, the finance director for Dayton, Ohio, who also serves as president of the Government Finance Officers Assn., complained of the “constant barrage of telephone calls” that local officials receive from bond salesmen.

“There ought to be responsibility on the part of the broker-dealers to understand our policies and to know what the risk is,” Riordan suggested as a possible reform.

But members of the securities industry balked at suggestions that they assume greater responsibility for the investments issued by governments or purchased by investors.

“Investors, especially institutional investors, must bear responsibility for their decisions,” said Robert McKnew, chairman of the Public Securities Assn. “Efforts to shift investment losses to securities dealers carry ominous implications for our markets. A dealer must know with certainty that as long as a transaction was undertaken lawfully and in good faith, it is binding.”

Marc E. Lackritz, president of the Securities Industry Assn., added that government officials who “commit a municipality to a financial obligation that they do not understand merit neither sympathy nor a remedy when losses result.”

In Orange County’s case, officials have filed a lawsuit against their broker, Merrill Lynch & Co., as a result of the investment losses.

During questioning of the securities bankers and dealers, Baker pointedly suggested that maybe there should be a notice posted on securities documents similar to the surgeon general’s warning on cigarette packaging.

Lackritz agreed. “Enter at your own risk,” he said.

Charles Fish, an Orange County money manager who labeled himself the only witness representing “investors,” suggested there is enough blame to go around to all major parties in the Orange County crisis.

Fish criticized the local political failures, the shortcomings of state laws and an apparent willingness by the market to set aside existing guidelines in Orange County’s case.

“Even if a public treasurer wants to shoot himself in the head, [Wall] Street shouldn’t be allowed to help him,” Fish said.