Muni Bond Business Down, Merrill Says

Merrill Lynch & Co. on Tuesday acknowledged for the first time that it is losing municipal bond business because of mounting legal problems stemming from its role in Orange County’s bankruptcy.

The nation’s largest brokerage and investment house said the spillover from the Orange County matter,” together with a slower municipal market in California, cut into its share of the national market.

In California alone, Merrill’s market share as lead underwriter for state and municipal bonds plummeted from 12.1% for the first nine months of last year to 5.5% so far this year, dropping it from third to seventh place.

That dragged its national ranking down a notch from second to third, according to Securities Data Co., a Newark, N.J., company that tracks municipal and corporate financings.

Previously, the brokerage has maintained that its business had not suffered from its entanglement in the 1994 collapse of Orange County’s $21-billion investment pool and the $2.4-billion lawsuit the county filed against the firm to recoup its losses.

But Merrill doesn’t plan to abandon the municipal field. It labels as “temporary” the effect of the Orange County litigation and the dearth of deals.

“We are committed to the business,” said Alice McGillion, a spokeswoman for the New York firm.

She pointed out that Merrill’s bond business increased elsewhere in the nation and that its big drop in California--the nation’s largest market for municipal bonds--simply pulled down the company’s overall numbers.

However, analysts said the damage could be deeper.

“California is the biggest issuer of municipal bonds, so it does hurt them,” said Richard Lehmann, president of Bond Investors Assn. in Miami Lakes, Fla. “Whoever uses them has a sales job on his hands explaining why he wants to use Merrill when it’s being sued in California for giving bad advice.”

In its lawsuit, Orange County accuses Merrill of selling it complex, esoteric securities unsuitable for it and concocting an elaborate and unlawful investment scheme that led to the county’s bankruptcy, the largest municipal failure in U.S. history.

The firm and two senior executives have been notified by the Securities and Exchange Commission that the agency is prepared to bring charges against it for failing to disclose the riskiness of the securities it sold the county.

In the wake of such events, some state treasurers across the nation, including California’s, have halted or limited their dealings with the brokerage, at least until they see the outcome of the lawsuit and any SEC action.

The California treasurer’s office curtailed its use of Merrill because of the pending lawsuit and because Orange County is one of the state’s largest counties, said Stan Devereux, assistant state treasurer.

In Maine, Treasurer Sam Shapiro said he’s had it with the firm. The Orange County lawsuit and the SEC probe came on top of a series of problems the state has had with Merrill, he said.

“It was the cumulative weight of everything,” Shapiro said. “It seems to be a firm that is constantly getting into problems in various states. There are 15 or 20 firms that can do just as well as Merrill.”

But other public finance officials have no problem with Merrill Lynch.

“We’re not severing our ties with Merrill,” said Larry Monteilh, Los Angeles County’s treasurer. We simply look for the best deal for county.”