Bankruptcy’s Nagging Question : Was It Really Necessary to Seek the Court’s Protection?

The public relations component of the legal battle between Orange County and the brokerage giant Merrill Lynch & Co. Inc. stepped up in recent days. The catalyst was the assertion from Merton H. Miller, a University of Chicago finance professor and Nobel laureate retained by Merrill Lynch, that Orange County really didn’t have to declare bankruptcy in late 1994.

The county’s post-bankruptcy investment strategist from Salomon Bros., Chris Varelas, quickly disputed the premise and the methodology. Merrill Lynch later was called to task by Bruce Bennett, lead county bankruptcy attorney.

The Miller remarks came at a time when the county appears headed out of bankruptcy. Shortly after the flap, word came that the county will be able to get insurance for an $800-million debt issue. The pain of bankruptcy has continued to be felt, however, as the squeeze was put on county bus drivers to accept reductions in compensation or risk replacement.

Miller’s remarks clearly were released as part of Merrill’s strategy, and there was an undeniable quality of Monday morning quarterbacking to his observations. However, they should not and cannot be easily dismissed.

The wisdom of the bankruptcy declaration has always been a good question, and the implications of that decision have been serious for the county’s operations and services. They also have been significant in how the county is perceived in financial markets and by distant observers. Not only has the decision been costly and disruptive locally, but it has subjected Orange County to serious embarrassment and even ridicule.

Miller correctly observes that the question of a declaration of bankruptcy and the liquidation of the portfolio are really separate. Liquidation, he says, might have been one strategy in the repositioning of the county’s finances even if a bankruptcy declaration was rejected. The county, he argues, did have cash with which it might have maneuvered. In a direct challenge, he asks, “What was the point of bankruptcy other than to generate legal fees?”

Twenty-twenty hindsight and a favorable turn in the markets make second-guessing attractive. There are questions about how much the county really could have done with the cash. But as the county moves ahead, the question of whether bankruptcy was needed at all is not likely to go away.