That’s the question Peter Brennan put to many of the players in the bankruptcy, and to a few prominent observers. Opinion was almost evenly divided; many people gave reflective, qualified answers. We think you’ll find their responses fascinating. We present them here in no particular order.
CHRISS STREET
Newport Beach-based financier, then a Moorlach backer and Citron critic
YES in capital letters. They were on a trajectory to cause not only loss and harm to themselves but to other entities. If they were to avoid bankruptcy and double down, the tragedy would have been much worse. In the five years since the filing, we didn’t need a tax increase and the strong economy has helped the county recover.
WALTER KREUTZEN
CEO of the Transportation Corridor Agencies and a member of the Orange County Investment Pool Committee
The county had $1 billion coming due. I would have put all the large investors and people on the other side who were holding the paper and effectively said, “We’ve got a major problem. What can we do?” I believe we could have worked something out,we could have restructured the deal. I truly believe that the global banking folks didn’t want this to happen and we would have figured out a way out.
GARY HUNT
Executive VP, Corporate Affairs, The Irvine Company, who championed the ill-fated sales tax increase
Hindsight is a low-risk tool to rethink tough decisions. What we don’t really know is what the impact might have been had there been a run born of panic on the parts of investors in the county investment pool. That was a great risk with potentially devastating consequences. Should Orange County have declared bankruptcy? Maybe, maybe not. But like so many great lessons in life, from this crisis came a stronger and better result: an Orange County that will not make the same mistake twice.
JOHN MOORLACH
County treasurer and then Citron’s unsuccessful 1994 election opponent
Not declaring bankruptcy is Merrill Lynch’s argument. That will be a point that will be debated forever. The issue was one of cash flow and getting a sense of leadership and order at the time. I don’t see the filing of bankruptcy as the big issue. The big issue was whether we should have liquidated the pool. We never should have been where we were,the Merrill Lynches of the world knew better.
BRUCE BENNETT
Attorney for the Orange County bankruptcy litigation fund; he saw the county into bankruptcy and his firm collected about $43 million in fees
(Message left with his secretary. No response.)
PAT SHEA
General counsel to the Orange County Investment Pool Committee, which represented all investors other than the county
It could have been avoided if the county had stepped up and said ‘we will honor the claims and you will be paid 100% of your deposits’. It also could have been avoided if the supervisors entered into immediate discussions with their financial consultants and advisors including Merrill Lynch and created a strategy for immediately protecting the remaining value of the pool. I believe there was an opportunity in December of 1994 for intensive discussions to address the issue of honoring the deposits. The reason those discussions didn’t happen is because at the time of the crisis, the Board did not fully understand what the Treasurer was doing with the pool and didn’t appreciate the complexity of what had happened with the pool. At the moment of crisis, you needed some bold leadership and there was nobody there in the County of Orange because the Treasurer was isolated and the Board of Supervisors was unable or uninformed to take over that role. The difficult discussions that needed to take place didn’t take place.
STAN OFTELIE
CEO of the Orange County Business Council, then executive director of the Orange County Transportation Authority and a member of the Orange County Investment Pool Committee
There are two answers. From a technical viewpoint, the bankruptcy provided a good framework for resolving problems. But it didn’t make sense from an image perception. We see that perception problem lingering.
BOB CITRON
Then-County Treasurer, was convicted of four counts of fraud
(Message left with his lawyer, no response.)
CHRISTINA SHEA
Mayor of Irvine, then a councilwoman who dissented from putting city money in Citron’s pool
According to the experts, no. But hindsight is 20-20. I always try to look for the silver lining. Out of this strategy, cities looked for stricter financial controls, created financial oversight committees and restructured their portfolio with less risky investments, so good did come out of the bankruptcy.
ERNIE SCHNEIDER
Then County Administrative Officer, now executive director with the engineering firm Hunsaker & Associates Irvine Inc.
No. Because in my opinion, it didn’t achieve the stated objectives to prevent the financial institutions from disposing of the county’s collateral. The board never asked me for myrecommendation on whether to declare bankruptcy. They did it on advice from the bankruptcy counsel.
WILLIAM ‘BILL’ GROSS
Managing Director of Newport Beach-based Pimco; widely regarded as the leading authority on bond investments
(Two messages left, no response.)
CURT PRINGLE
Then-Assemblyman from Garden Grove, now principal of Curt Pringle & Associates
No. The caveat is, it is awfully easy to say that now. We see in hindsight how the markets went. But the way the car was moving drove the supervisors into the position of believing bankruptcy was the only option. The supervisors had a fear of violating the Brown Act. The county staffers were so overly cautious that they didn’t help the supervisors on one of the most significant votes they have ever had.
SCOTT HART
Principal in Ellis/Hart Associates, political consultants who worked with Merrill Lynch
Personally, I don’t think they should have filed for bankruptcy. But I have the benefit of hindsight. There were a number of investment banks, including Merrill Lynch, that were willing to buy back the entire investment portfolio at that time. Or if the county had just held on, they would have been back in the black within two years because interest rates went down. Unfortunately, instead of working out a financial solution, the county opted to call a bankruptcy attorney. So what do you expect a bankruptcy attorney to tell you, other than file for bankruptcy?
TOM HAYES
Representative of the Orange County Litigation Fund; the “bankruptcy czar” who oversaw litigation for the county and other pool investors
In financial terms, I don’t think they had any choice. Their financial conditions were such that, at that point in time, they would have had trouble paying salaries. It was questionable whether they could have kept the county operating without bankruptcy protection.
GEORGE ARGYROS
Businessman, with Hunt urged passage of the sales tax increase
They never should have been in that position. Once they were in the problem they were in, they couldn’t avoid it. If they had enough time, interest rates came down and their portfolio went up. But it was so highly leveraged that they started getting calls and were forced to sell out. None of the supervisors had enough overview and supervision.
MIKE WARD
Then Mayor of Irvine and still a council member
I don’t think it was necessary. Based on the grand jury testimony, several brokerage firms had offered to help Orange County and Orange County acted in haste. Lawyers told the county they had go into bankruptcy. If you look at who made the most money out of the bankruptcy, it was the attorneys. If the county had waited six months, it would have been in better shape than prior to the bankruptcy. It was just a quick and easy way out. To my dying day, I’ll believe the county didn’t have to go bankrupt.
BOB POOLE
President, LA-based Reason Foundation
Hindsight is wonderful. Orange County’s booming 1999 economy makes it hard to believe that bankruptcy could have occurred just five years ago. But at the time, the county government really was in real financial trouble, and bankruptcy was probably the only realistic course. Those of us who argued that a new sales tax was unnecessary can certainly say, “I told you so,” even as we still lament the county government’s failure to take advantage of a unique window of opportunity to downsize and privatize.
BILL STEINER
Then-Supervisor, now retired in Arizona
I know there’s been a lot of debate and hypothesis that the county overreacted and didn’t need to file for bankruptcy. As someone who was there in the middle of this thing every step of the way, there was no question that we had to file for bankruptcy. We simply did not have the cash to meet county obligations, which were significant. People seem to have forgotten that. We couldn’t freeze things in time and wait for the financial markets to strengthen or interest rates to change. There literally weren’t the resources for the county to operate with the obligations that the county was facing.
PEER SWAN
Then-President of the Irvine Ranch Water District, still a director
It’s been my position all along that we shouldn’t have. We had more than enough time. The only thing they needed was liquidity. They should have gotten a restraining order to prevent people from liquidating the collateral, which they didn’t do. They had more assets than liabilities. It wasn’t terribly smart.
When they hired a bankruptcy attorney, what’s he going to say, “Don’t go bankrupt”? Bankruptcy protects you but assures that you have a $1.6 billion loss. The day that they were going to declare bankruptcy, Bank of America called me to say it would help. By then it was too late. A number of people tried to point them in that direction. They did not go there. It was an incredible tragedy. What the supervisors could have done is call up and asked. At the most, I think they would have lost $400 million versus a billion-six. Big difference.
ART LAFFER
Economist in San Diego
Oh yes. People around the world thought, “What are these guys doing”? The Citron case was a classic example of people paying off people. What happened turned out to be very good. The Sturm und Drang, the whole political upheaval, the Citron out, the Moorlach in,all that needed to happen. The vote came along and people are smarter than anyone gives them credit for. That sales tax needed to be defeated and Don Bren needed to be ashamed (of pushing for the tax increase). We needed the bankruptcy to be a violent example of how county government can go wrong. I love, every now and then, to have a blowup.
JAN MITTERMEIER
Then-director of John Wayne Airport, now CEO of the OC government, who, with the help of the booming economy, has been credited with restoring the OC government
By the time the board knew there was a problem, it was too late to do anything except declare bankruptcy. The county didn’t have enough cash to make the next payroll and collateral calls were being made which were further depleting cash. Pool participants were also demanding their cash be returned immediately. County departments, such as the Sheriff, had critical operational costs, such as food for inmates, for which there was no cash. None of the parties, whether bankers or pool participants, was willing to work out a solution which would have enabled the county to pay its debts off over time.
Of course, if everyone had known months before December 1994 how extensively the pool was leveraged, and how vulnerable it was to a change in interest rates, a workout solution could have been developed providing everyone cooperated. However, I don’t have a lot of confidence that the pool participants would have been willing to wait for their cash while the county worked its way out of the leveraged pool or until interest rates turned around again. Bankruptcy is never a good solution but it did force everyone to the table to craft a viable workout plan.
