O.C. may buy auction-rate munis

Orange County, once bankrupted by wrong-way interest-rate investments, is looking to buy auction-rate notes sold by other municipalities as higher interest rates cost those governments millions of dollars.

County Treasurer Chriss Street told the Board of Supervisors on Tuesday that his staff was researching whether investing in auction-rate bonds would be permissible for the county’s $7-billion investment pool.

Interest costs for some public entities have almost doubled after the $330-billion auction-rate bond market broke down last month amid losses tied to sub-prime mortgage bonds and related securities that threatened bond insurers’ AAA ratings.

Rates on Port Authority of New York auction debt, for example, rose to 20% on Feb. 13 from 4.3% a week earlier after an auction failed.

Banks that ran the periodic bidding to set yields on the auction-rate debt refused to buy unwanted securities last month, driving borrowing costs higher. Yields are typically determined every 7, 28 or 35 days.

“We are looking at auction note resets and are working with county counsel to make sure variable-rate notes and auction-rate resets are consistent” with county investment principles, Street said.

He said the county would be better served if the pool invested in auction-rate bonds sold by other California municipalities because they would be easier to research.

Orange County, the nation’s fifth-most populous county, filed the biggest municipal bankruptcy in 1994 after then-Treasurer Robert Citron bet wrong on interest rates.