Brokerage Goes Hunting for Goodwill

With Orange County’s historic bankruptcy in 1994, Merrill Lynch & Co. became the Darth Vader of public finance. Now, the giant brokerage--which the county sued after losing $1.7 billion in its financial collapse--wants back into the same halls of government from which it was banished eight years ago.

For months, company officials have been going hat-in-hand around Orange County, trying to rebuild Merrill Lynch’s credibility, as well as its former client list. The firm, they say, has done enough penance and deserves a second chance.

“We’d love to do business with the county again,” said Richard Meister, a senior banker with Merrill Lynch’s municipal bond division. “We have great resources we can bring to bear.”

For Merrill Lynch, it would be a remarkable turnaround. The brokerage was a major player in the county’s financial collapse, blamed roundly for dreaming up the risky and self-indulgent investment strategies that the county is still repaying.

Hoping to reverse its fortunes in Orange County, Merrill Lynch has made overtures to a variety of civic leaders and government officials, including county Chief Financial Officer Gary Burton and Treasurer-Tax Collector John M. W. Moorlach. Some officials have responded favorably, even though county government continues to pay $93 million interest a year on the $1 billion in bonds it sold to climb out of its financial crater.

Moorlach, a critic of Merrill Lynch’s county representatives at the time of the bankruptcy, said he wants to do business with the company again--something he first proposed in 1998 after the firm paid $420 million to settle the county’s lawsuit.

Other government agencies have already thrown back in with Merrill Lynch. The Santa Ana Unified School District hired the brokerage in 1999 to underwrite a $13-million bond issue. The Irvine Ranch Water District has used the brokerage for two years to remarket short-term debt.

Others are less receptive. The Orange County Transportation Authority, which has projects on the books worth billions of dollars, has declined Merrill Lynch’s request to meet.

“When Merrill Lynch reimburses the county of Orange for the losses it suffered in the Orange County bankruptcy, then they can talk about being benevolent,” said OCTA board chairman and county Supervisor Todd Spitzer, elected two years after the bankruptcy. “It’s premature for them to put the white hat on.”

In December 1994, the county’s two investment pools lost $1.67 billion in value, most of it because of high-risk securities bought by former Treasurer Robert L. Citron through Merrill Lynch. The loss triggered the largest municipal bankruptcy in the nation’s history and rippled through every city, school district and special district in the county.

In 1998, Merrill Lynch agreed to pay the county $420 million to settle a lawsuit alleging the company and its chief Orange County contact, Michael Stamenson, encouraged Citron to make risky investments that violated state law. The firm also paid a $30-million fine levied by the Orange County district attorney’s office to resolve a potential criminal case.

Statewide, the firm was knocked from its perch as the top municipal-bond underwriter as its market share plunged from 18.4% to 6.5% in a three-year span.

“I don’t think there’s any question that after the bankruptcy, there was a great feeling that they’d failed to perform their proper role as investment advisor for the county,” said Gary H. Hunt, who chaired a three-member committee of business executives that recommended recovery strategies.

The lingering hard feelings aren’t surprising, he said.

“I don’t think it’s appropriate today to look back eight years and expect that Merrill hasn’t made changes,” said Hunt, a former Irvine Co. executive and now a government consultant. “I’m sure they have. They’re a very good firm.”

Stan Oftelie, who chaired the creditors’ committee for the government agencies that lost money, said there were people within Merrill Lynch who deserved more blame than the corporate entity.

“There are some rings of hell that some people in Merrill Lynch should never get out of,” said Oftelie, now president and chief executive of the Orange County Business Council. “I wouldn’t say the same thing for the nation’s largest brokerage house.”

Since the bankruptcy, Merrill Lynch has worked to rebuild its image. It earmarked about $250 million for charitable and community-oriented programs in California, providing educational opportunities for minorities, loans to small businesses, and financial assistance to low-income families.

In April, Merrill Lynch distributed about $3.2 million to financial education programs for minority youth, roughly a fourth of it flowing through county government. Officials deny suggestions they are trying to buy their way back into governments’ good graces.

“We are trying to be a good corporate citizen,” said Pete Case, a Merrill Lynch managing director and former president of the Orange County Business Council. “We are making a significant effort in California to help these communities.”

But sources close to Merrill Lynch say the company’s minority programs and charitable donations serve a dual purpose. The firm, they say, is trying to burnish its image. Rebuilding its municipal finance operation in Orange County would be both symbolic and substantive for Merrill Lynch--bond experts say such a move is key to the brokerage’s effort to restore its credibility throughout the state.

So far, Merrill Lynch has found some support locally, even with the one public official who was most critical of the relationship between Citron and the brokerage.

Moorlach, who blew the whistle on his predecessor’s risky investment strategy, first came to Merrill Lynch’s defense in 1998, just days after the firm agreed to settle the county’s lawsuit. There is nothing in Orange County’s investment policy that keeps the treasurer from doing business with Merrill Lynch, but Moorlach has demurred, pointing to the lingering reluctance by county supervisors.

Recently, Moorlach began meeting with Merrill Lynch, suggesting ways the company could help governments deal and reestablish itself as a team player.

“Of any personality in the entire county of Orange, I should be the most adverse to using Merrill Lynch, but that’s not the case,” he said. “The case is that I’m being shut out from the largest inventory of [financial investments] in the world. They’re the General Motors of the investment industry. So do I do business as the treasurer based on my head or my emotion?”

The Irvine Ranch Water District began working with Merrill Lynch two years ago after the investment house asked for a chance to prove itself. The district sued Merrill Lynch for losses after the bankruptcy and collected $18 million, while promising that it wouldn’t ban the company from future business, said Peer Swan, district board vice president. “It’s a chance to let them show what they could do,” Swan said. “Our agreement is: Do a good job and they can come out of purgatory.”

Merrill Lynch’s performance for the district has earned it the right to be considered for an upcoming $50-million bond issue, he said.

Yet the company still has its work cut out. Two weeks ago, Merrill Lynch’s Meister showed up at a meeting at which the Transportation Corridor Agencies was considering consolidating its three toll roads, a deal that could lead to the refinancing of a $4-billion debt.

“What is Merrill Lynch’s role here?” asked Orange County Supervisor and the agencies’ board member Tom Wilson. Spitzer joined in, asking what relation Merrill Lynch had to the merger proposal. Meister, an experienced municipal banker who has been with Merrill Lynch less than a year, stepped to the podium. “We understand the hard feelings toward Merrill Lynch,” he said.

While elected leaders praise Merrill Lynch’s efforts, some, including Linda Lindholm, a Laguna Niguel city councilwoman and a board member of the Transportation Corridor Agencies, said it’s important to remember that eight years later, the county still hasn’t recovered from the bankruptcy.