For Merrill, O.C., It’s Just Like Old Times -- Almost

Orange County’s financial managers and brokerage giant Merrill Lynch & Co. have not wasted much time getting reacquainted.

Six months after the county renewed ties with the firm faulted by many for the 1994 county bankruptcy, Merrill Lynch became the second most active brokerage in the county’s $5-billion investment pool.

In June, a divided Board of Supervisors voted to add Merrill Lynch to the list of the county’s approved broker-dealers. The move came more than eight years after the collapse of the county’s investment pool, a $1.6-billion disaster. The company played a key role in the county’s failed strategy to invest borrowed money.

Merrill paid $437 million to resolve lawsuits with Orange County and other investors who lost money in the failed investment pool. It paid an additional $30 million to avoid criminal prosecution for its dealings with the county before the bankruptcy.

The county’s relationship with Merrill is far different today than before the bankruptcy. Orange County Treasurer John M.W. Moorlach buys investment products from Merrill but does not borrow from the firm. The product most often purchased is commercial paper -- short-term promissory notes issued by large corporations with impeccable credit ratings.

Moorlach’s staff completed 77 trades -- primarily of commercial paper and other low-risk investments -- with Merrill during the last half of 2003 for more than $1.38 billion, second only to JP Morgan, according to county records. JP Morgan did $2.1 billion in business with the county.

By using Merrill Lynch when it offered a better investment return than other brokerages, the county generated an estimated $21,000 to $25,000 in additional revenue, Moorlach said.

The treasurer said he did not believe it was right to exclude Merrill from those transactions, particularly when the firm was offering a better price than other brokerages.

“It’s really been very beneficial,” Moorlach said. “When you’re running a money market fund, there’s no way to hit home runs. You can’t do what my predecessor did.... I’m looking for bunts and singles.”

Still, one supervisor said he doesn’t think Moorlach should be dealing with Merrill at all.

“We were told at the board meeting they were going to do a little bit of trading [with Merrill]. Now they’re No. 2. Something isn’t right,” said Supervisor Jim Silva, who along with Supervisor Tom Wilson voted against the plan in June.

“We still have over a $900-million debt as a result of Merrill Lynch’s illegal activity,” he said. “This is another cruel trick that has been played on the Orange County taxpayers.”

Supervisor Bill Campbell said it makes sense to allow Moorlach to use Merrill Lynch when the firm can provide a better return without additional risk. And even in a county with a $4.8-billion budget, he said, a $25,000 gain is welcome.

“With what the governor is doing to us right now, I’m happy to have him save us that much. We’re going to have to find pieces like that all over the county,” Campbell said.

Moorlach runs a $5-billion investment pool for the county and other local government agencies. Instead of the high-risk derivatives that former treasurer Robert L. Citron used, Moorlach is bound by county policy to such low-risk products as commercial paper, bonds and certificates of deposit. Last year the fund generated a 1.22% return after expenses, Moorlach said.

Given those parameters, it makes sense to give Moorlach as many options as possible, Supervisor Chris Norby said.

“Certainly there’s some history with Merrill of some bad blood and bad experiences,” he said. “You don’t hold grudges forever.”

A Merrill spokesman said the company makes no commissions from the county and profits only when it sells the commercial paper at a higher price than when it purchased it. He estimated that the company earned about $25,000 before expenses in its transactions with the county.

“We value the opportunity to participate in offering competitive prices to the county,” Merrill spokesman Bill Halldin said. “We do think [we] enhance the competition for the county’s business. If the county is getting four bids today instead of three bids, generally that’s going to be beneficial to the county.”

Moorlach said he’s happy that he’s been able to increase revenue without raising taxes. He said he has every confidence that the transactions are safe.

“Merrill Lynch is going to be so squeaky-clean with us,” he said. “They’re not going to make any errors or do anything silly. So we’re going to get really great service.”