“It has come to light that Orange County, California, no stranger to investment problems in its taxpayer’s investment pool, might be in trouble again.
The current Orange County Treasurer, Chriss Street is being investigated since this summer for allegedly using funds from a bankrupted trucking company for his personal use. This has prompted John Moorlach, a County Supervisor who was the predecessor to Street as the County Treasurer, to call for his ouster. Moorlach held the Treasurer’s job from 1995 to 2007 succeeding Robert “Bob” Citron whose bad bets on risky bonds landed him in jail and the county with a $1+ billion loss and a bankruptcy. Moorlach ,who was one of the most critical opponents of Citron’s investment strategies before the county endured any problems (and lost to “Bob” in a landslide election during that time), took over quickly after the large losses ensued to help “clean up the mess”. And clean up he did. The pool performed fine during Mr. Moorlach’s tenure allowing him to take a bigger job as a County Supervisor.
Mr. Moorlach had felt that the outside “influences” with regard to the trucking fund investigation would be too much to handle for Mr. Street to capably handle his Treasurer duties and thus should be removed. But not many would have predicted what happened next.
The SIV, Structured Investment Vehicle, market was breaking down due to the credit crunch started by the subprime crisis. SIVs were simply bank’s off-balance sheet vehicles that held many highly rated (at time of purchase) primarily subprime bonds. These vehicles funded themselves by selling highly rated commercial paper to big money market funds, pension funds, and yes, State and County Treasurers. However, in California it appears that only 2 counties participated, San Diego County and Orange County. San Diego County held 1.25% of its entire pool in this type of commercial paper and has reportedly sold their entire position. Orange County has purchased 14% of their entire pool ($820mm) and has reportedly sold none. This appeared to be the last straw for John Moorlach. He demanded the removal of Mr. Street. However, the Orange County Board of Supervisors wanted to “wait things out” and would not give Mr. Moorlach the authority to get rid of Street.
Flash forward to January 2008 where the subprime crisis is in full bloom dominating the news and paralyzing the financial markets. The County decided to hire an independent advisor named PFM Asset Management from San Francisco to determine whether the investment pool Mr. Street’s office was running was safe and stable. In the meantime, a group of 5 Supervisors would vote whether to keep Mr. Street on until the report from PFM Asset Management was released at the end of January 2008. The vote came in 4-1 that Mr. Street remained Treasurer with Mr. John Moorlach being the lone dissenting vote.
On January 29, 2008 the report from PFM Asset Management was released. They determined that the $6bn Orange County, California investment pool was safe. Undoubtedly, a huge victory for Chriss Street, but is it?
The report was 87 pages in length and one of the remarks that stood out was “While the $820mm bonds are not marked to market we feel the investments are safe given their AAA ratings”. Marked to market is a term used on Wall Street helping to determine if one had to sell his bonds what would be the value he would get for them. The market value if you will. One Wall Street veteran trader when hearing about this situation said, “they’d be lucky to get out of the $820mm at ANY price right now. That’s how frozen the market for SIV bonds are.” Another trader when asked what he thought Wall Street firms were marking their SIV positions he said, “50 cents on the dollar……maybe.”
So, if the numbers are correct Orange County may be down at least $400mm on their SIV bonds alone but it appears not many are following up on the PFM Asset Management report and asking what “Safe and stable” means exactly. This has kept Mr. Street in place for now and Mr. Moorlach most likely perplexed as history has shown Mr. Moorlach to be 1 win and 0 losses what it comes time to figure out whether or not the Orange County Investment Pool is in trouble. One comment on a blog referring to the $1+billion loss of Mr. Citron said, “Yeah they told us not to worry 13 years ago and look what happened.” Are you going to bet that Mr. Moorlach loses or “wins” this”
