O.C. to Recover Money Held by Brokerages
Major Wall Street investment banks are expected to turn over about $120 million to Orange County, part of the billions of dollars in collateral that they unloaded when the county declared bankruptcy.
Smith Barney Inc. said Friday it has agreed to pay back about $25 million the firm made last December when it rushed to cash in securities held to back loans to the county. Other major firms are expected to finalize their settlements in upcoming weeks, a move that will assist the county’s recovery efforts, said county bankruptcy attorney Bruce Bennett.
“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 that after the county’s bankruptcy filing Dec. 6 the firm sold about $800 million of collateral. About $25 million of that was excess funds owed 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.
After losses in its investment pool catapulted Orange County into bankruptcy, anxious investment firms went on a selling spree, rushing to unload more than $9 billion worth of U.S. government securities that the county 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 that were worth more than the amount of the loans. As the value of former county Treasurer-Tax Collector Robert L. Citron’s portfolio dropped in 1994 and the county filed bankruptcy, the investment banks got increasingly nervous about their loans. Once the county filed bankruptcy, many firms decided the loans were too risky and dumped the securities they held.
Now most of the firms plan to return excess collateral plus interest, county attorney Mike Swartz said.
Bennett said, however, that he anticipates that the county will file suit against at least one of the firms not included in the agreements to recover the funds. He said the county has already settled with another, Bank of America, for a “small amount.” He would not elaborate.
Smith Barney was one of many firms that unloaded collateral last year. Other firms include Morgan Stanley & Co., Prudential Securities, CS First Boston Corp. PaineWebber Inc. and Nomura Securities, according to the county.
While most of the firms sold collateral after the county filed bankruptcy, CS First Boston Corp. sold $2.6 billion of securities only hours before the Dec. 6 filing. Some said that move led to the county’s plunge into bankruptcy.
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 securities held under the agreements. However, the Wall Street brokerages say they were entirely within their rights to sell the securities once the county went into default.
Lawyers said the county is still considering suing the securities firms, possibly after the county and pool participants finalize the county’s recovery plan next year.
Orange County filed a lawsuit early last December against Nomura after the firm began selling securities being held as collateral, but later dropped the suit. The county said it plans to file a more comprehensive suit later.
Merrill Lynch & Co., the county’s biggest lender, didn’t sell the $2 billion of securities that it held under the reverse-repurchase agreements until January, when the county liquidated its entire investment pool, said Merrill spokesman Tim Gilles.
In action unrelated to the collateral sales, Orange County has filed a $2-billion lawsuit accusing Merrill Lynch of selling the county unsuitable securities. The brokerage has vigorously denied the charges.
County officials hailed the recovery of funds, which are described as “withheld funds” in the county’s comprehensive settlement with the pool participants.
Board of Supervisors Chairman Roger R. Stanton said Friday that he was pleased the agreement had been signed.
“What this represents is the very hard and difficult work that’s been going on in the trenches for quite some time to resolve this, and what we hope are other similar issues, and avoid a lengthy court process,” Stanton said.
Times staff writers Rebecca Trounson and Matt Lait contributed to this report.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Collateral Sale
Estimated amount of securities held by Wall Street firms last year as collateral against repurchase agreements with Orange County. According to the county, most firms, except Merrill Lynch, sold the collateral last December. Amounts in billions of dollars: *--*
Firm Amount CS First Boston $2.60 Merrill Lynch 2.00 Morgan Stanley 1.60 Prudential Securities 1.00 Nomura Securities 0.90 Smith Barney 0.80 PaineWebber 0.65 Paribas Corp. 0.62 Sanwa Securities 0.54 Fuji Securities 0.50 Bank of America 0.35
*--*
Source: Times reports; Researched by DEBORA VRANA / Los Angeles Times
