Orange County Funds Hold SIV Debt on Moody's Review (Update2)
By Michael B. Marois and William Selway
( Congrats Ten! The credit crisis has found YOUR county. )
Dec. 5 (Bloomberg) -- Orange County, California, bankrupted in 1994 by bad bets on interest rates, bought structured investment vehicles similar to those that caused a run on funds invested by local governments in Florida.
Twenty percent, or $460 million, of the county's $2.3 billion Extended Fund is invested in so-called SIVs that may face credit-rating cuts, said Treasurer Chriss Street. In all of its funds, the county holds a total of $837 million of SIV debt, including $152 million in its $3.5 billion of money-market funds that isn't under ratings review, said his spokesman, Keith Rodenhuis.
Orange Country joins a growing list of state and local governments at risk of losing money from investments sold as high-yielding havens that have been contaminated by the collapse of the subprime mortgage market. Florida, Connecticut, Massachusetts, Montana, Maine and King County, Washington also have disclosed investments in SIVs.
``We'll find out real quick if we have a problem,'' said the county's former Treasurer John Moorlach, who is now a county supervisor. ``But for now I need to be patient and wait and see.''
Cities and school districts in a $27 billion Florida local- government investment pool withdrew almost half of their deposits last month after they learned the fund held downgraded and defaulted commercial paper sold by SIVs. Florida officials froze the pool Nov. 29 to prevent a further run on assets.
BlackRock Hired
Much of the debt held by the Florida local government fund is worth less than 100 cents on the dollar and the rest is so troubled that its value can't be determined, according Chris Stavrakos, co-managing head of cash management for BlackRock Inc., the New York-based company hired to turn around the fund.
``I don't think there are very many securities in this market we can liquidate at par,'' Stavrakos said in an interview yesterday.
Finance officials with the Orange County Treasurer's office said its SIV debt continues to meet obligations. The securities have top credit ratings and limited exposure to risky mortgages.
``We don't have the same kind of debt that Florida has,'' said Paul Cocking, the chief portfolio manager for the county. ``They're all highly rated assets.''
SIVs are typically offshore companies created by banks and other firms to sell low-yielding short-term debt, using the proceeds to buy higher-yielding securities, backed by subprime mortgages, credit card receivables and finance company bonds and other assets.
Whistlejacket, Tango
Orange County's money is invested in commercial paper under review by Moody's that was issued by Centauri Corp.'s CC USA Inc., Citigroup Inc.'s Five Finance Inc., Standard Chartered Plc.'s Whistlejacket Capital Ltd. and Tango Finance Corp., according to Rodenhuis.
Whistlejacket sold assets, reducing the fund by 40 percent to $10.8 billion since August, London-based Standard Chartered said in a statement today. Moody's is evaluating $105 billion of SIV debt as the declining value of their investments impairs their ability to pay obligations.
Whistlejacket's net asset value, the amount that would be left after selling assets and repaying senior creditors, fell to 69 percent from 80 percent in the past three months, Moody's said last week.
Orange County, home of the Disneyland resort, became the biggest municipal bankruptcy in 1994 after then-Treasurer Robert Citron made a wrong-way bet on interest rates. Moorlach, who warned about Citron's gamble before the bankruptcy, replaced him in 1995 and held the job until he was elected to the county's board of supervisors last year.
Citron's Gamble
Citron used money in the county's investment pool to bet on the direction of interest rates by purchasing longer-maturity derivative securities. The strategy, which generated high returns initially, backfired as rates rose in 1994, resulting in losses of $1.6 billion. A derivative is a financial contract whose value is derived from stocks, bonds, currencies or commodities, or linked to events such as changes in interest rates or the weather.
``It's nothing like what happened in 1994,'' Rodenhuis said, about the county's SIV debt holdings.
Rodenhuis said the county was told by Moody's on Nov. 30 that the securities were placed on credit watch. The information was disclosed by Street at a board meeting yesterday.
Moorlach, Street
Moorlach sought to have Street stripped of his authority to manage the county's $6 billion of investments in September amid federal and local corruption probes. He said Street was too distracted by the probes to manage the county's money.
The U.S. Justice Department is investigating Street's spending from a bankrupt trucking company, allegedly for his personal use. He was its court-appointed trustee before taking office. He also faces civil lawsuits associated with his management of the operation. The county district attorney also is looking into whether Street improperly awarded a government contract while treasurer.
The board rejected Moorlach's proposal, instead deciding to consider the issue during the annual review of the treasurer's powers. They will consider changes Dec. 11.
To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net . |
