Firm’s Letter Urged O.C. to Liquidate Portfolio

Brokerage giant Merrill Lynch & Co., which recently offered strong criticism of Orange County’s 1994 decision to declare bankruptcy and liquidate the securities in its investment pool, actually “encouraged” the county to sell off its portfolio just nine days after the bankruptcy declaration, according to court documents.

In a Dec. 15, 1994, letter to Salomon Bros., the county’s financial advisor, Merrill officials said: “We have encouraged both you and Orange County to reduce the county’s exposure to interest rate fluctuations by selling the portfolio, and will be happy to cooperate with the process.”

The letter, signed by Robert W. Williamson, a Merrill senior vice president, and Michael G. Philipp, managing director of Merrill’s global securities division, conflicts with a report last week by Nobel Prize-winning economist Merton Miller, which Merrill Lynch underwrote. It also contradicts December court filings by the brokerage firm.

“It’s about time Merrill started owning up to the cold, hard record,” said Bruce Bennett, lead bankruptcy attorney for Orange County, which has filed a $2-billion lawsuit against Merrill Lynch. “Today, with the benefit of hindsight, it appears Merrill wishes they’ve never said these things. But they did say it.”

A Merrill Lynch spokesman said Monday that the letter was an attempt to cooperate with the county and was in no way a signal of approval for Orange County’s liquidation plan.

“In that letter, it was not our place to agree or disagree with the decision that had already been made, even though we had made recommendations for them to go a different way and not liquidate,” said Tim Gilles, a spokesman with Merrill Lynch, on Monday.

“They chose liquidation. So, it was simply our place to cooperate and help implement the decision that the county had already made,” he said.

Public disclosure of the letter’s contents comes during a round of legal and public relations sparring between Merrill Lynch and Orange County. The county blames Merrill for most of the losses suffered by its investment pool before the unprecedented bankruptcy filing Dec. 6, 1994. Merrill denies any wrongdoing in the county’s bankruptcy and has vowed to defend itself vigorously in court.

Lawyers for Merrill Lynch--the Wall Street brokerage firm that sold Orange County most of its money-losing securities, have said in court filings that the county sold its securities at “premature liquidations at unfavorable prices.”

Earlier this year, Merrill’s lawyers supplied Forbes magazine with data showing that if the county had held on to its portfolio of securities, rather than liquidate, Orange County taxpayers wouldn’t have lost a dime.

And last week, in a study that Merrill Lynch paid him to produce, Miller, a University of Chicago finance professor, criticized the county for selling its pool holdings in fire-sale fashion, rather than sticking to its existing investment strategy.

The study found that the county could have earned as much as $1.8 billion between Dec. 1, 1994, and March 29, 1996, by sticking to its strategy, which was linked to the value of interest rates.

According to the county’s suit, Merrill Lynch sold Orange County 68% of the securities in the $21-billion investment portfolio, which included $14 billion purchased with borrowed money. The county liquidated its portfolio in late 1994 at a loss of $1.7 billion.

Bradford Cornell, a professor at UCLA’s Anderson Graduate School of Management, said the county could not predict which way interest rates would go at the time that it was forced to decide whether to liquidate its portfolio.

“I have no idea where this ‘we should’ve held’ business is coming from,” Cornell said. “That’s like taking a big loss gambling and then going for double or nothing.”

Cornell also said Miller’s premise that the county should have held onto its pre-bankruptcy investments would have violated state laws prohibiting counties from owning certain types of investments.

Merrill officials have previously disclosed that they repeatedly warned former Orange County Treasurer Tax-Collector Robert L. Citron about his risky investment strategy as early as 1992, and even offered to buy back many of the securities in the pool before the bankruptcy.

Gilles said Monday that high-ranking Merrill officials met with county leaders Dec. 12, just three days before Williamson and Philipp wrote their letter, and proposed that the county look at alternatives to restructuring the pool. One of those alternatives was to “broaden the investment pool” by getting existing investors to put more money in.

“We were putting forward proposals to restructure the portfolio in the wake of the county’s unwise decision to declare bankruptcy,” Gilles said.

But the county and its financial advisor decided to liquidate the pool the next day.