Wall Street to Return $120 Million to O.C. : Bankruptcy: The money involves the sale of bonds held as collateral for leveraged loans.

Major Wall Street investment banks are expected to turn over about $120 million to Orange County, part of the billions of dollars in collateral they unloaded when the county filed for bankruptcy protection.

Smith Barney Inc. said Friday that it has agreed to pay back about $25 million the firm made last December when it rushed to cash in securities held on loans to the county. Other major firms are expected to finalize their settlements in coming weeks, a move that will assist the county’s recovery efforts, county attorney Bruce Bennett said.

“It’s a terrific development, but we always expected to recover these amounts,” said Bennett, who said the funds are already factored into the county’s latest bankruptcy recovery plan. “Basically, these firms sold excess securities and are returning the funds.”

Joan Guggenheimer, attorney for Smith Barney, said after the county’s bankruptcy filing Dec. 6 that the firm sold about $800 million of collateral. About $25 million of that was excess funds owed back to the county, plus interest, she said.

“There was never any dispute about this. We’re really paying the county its own money back,” Guggenheimer said, blaming the delay on the county’s bankruptcy, the largest of its kind in U.S. history.

After losses in its investment pool pushed Orange County into bankruptcy, anxious investment firms went on a selling binge, rushing to unload more than $9 billion worth of U.S. government securities that the county had pledged as collateral on loans.

The securities were held under complex “reverse-repurchase” agreements that allowed the Wall Street firms to lend money to the county so it could buy bonds for its giant investment portfolio.

As collateral, the county gave the firms bonds worth more than the amount of the loans. As the value of former county Treasurer Robert L. Citron’s portfolio dropped in 1994, the investment banks became increasingly nervous about their loans. Once the county filed bankruptcy, many decided their loans were too risky and rushed to sell their collateral.

Smith Barney was just one of many firms that unloaded the collateral last year. Others include Morgan Stanley & Co., Prudential Securities, CS First Boston Corp. PaineWebber Inc. and Nomura Securities, according to the county.

According to sources familiar with the new agreements, CS First Boston Corp. is not included. The firm would not comment. Other firms also declined to comment.

Last December, the county authorized its attorneys to file lawsuits against the firms, arguing that the bankruptcy filing should have frozen the sale of any securities held under the agreements. Lawyers said the county is still considering suing the securities firms.

Merrill Lynch & Co., which was the county’s largest lender, did not liquidate the $2 billion of securities it held under the reverse-repurchase agreements until January when the county asked it to, said Merrill spokesman Tim Gilles.

In an issue unrelated to the collateral sales, Orange County has filed a $2-billion lawsuit against Merrill, accusing it of selling the county unsuitable securities. Merrill strongly denies those charges.