the OC bankruptcy: Big newspaper stories. A symposium put on by John Moorlach. Another put on by the Orange County Forum. An “Inside OC” show on the subject. And so on.
It’s been a reunion of heroes, victims and penitents. There have been recollections, apologies, closure. “I think we’re better, not bitter,” said Moorlach, the doomsayer turned legend.
Some thoughts:
The media, having missed the bankruptcy before it occurred, can’t get enough of it now that it’s long over. I chuckled as I read the dailies’ accounts of the supposed toll the bankruptcy still takes on OC,roads only resurfaced every seven years instead of every five, an unopened wilderness park, dirtier carpets in government buildings, just generally smaller government. Oh, the horror!
What wasn’t noted was that essential services have continued apace,not a single cop, fireman or teacher lost his or her job because of the bankruptcy.
Not to excuse what happened,the bankruptcy was stupid, scandalous, even criminal, painful for some and ruinous of careers. But OC was lucky. It’s a rich county whose government briefly was thrown into disarray, but whose citizens largely went unscathed and whose economy roared on.
OC has fared so well since the bankruptcy that 80% of residents remember little or nothing about it, according to a survey by the Public Policy Institute of California and UCI. The poll found residents very satisfied with government, services and quality of life,84% approval of parks and beaches, 64% satisfied with freeways and roads. Some parks must be open and some roads must be getting resurfaced.
The county’s net loss was the better part of a billion dollars ($1.6 billion and fees, minus $900 million in recoveries from Merrill Lynch and other investment bankers.) But that net loss roughly was offset by the better part of a billion dollars in above-market gains that Treasurer Bob Citron earned for his investment pool participants in the decade before he went bust.
The $90 million a year the county is paying to service its bankruptcy debt represents a transfer payment from the county,the “loser” who was left holding the bag and who has had to cut some programs,to school districts, water and sewer districts and other pool participants,the “winners” who reaped the above-market gains and were made whole on their principal in the post-bankruptcy workout.
Who still won’t talk about it 10 years later? Citron. His assistant Matt Raabe. Michael Stamenson, the Merrill Lynch broker and Citron confidante. Michael Capizzi, the county district attorney now in private practice, who was criticized for settling with Merrill while prosecuting supervisors. Chris Knap, the fine Orange County Register reporter who burned himself by writing a story headlined “O.C.’s Sky Didn’t Fall”,just three months before it did.
What did the media learn? Be less trusting of official sources. Don’t be so quick to dismiss the gadfly or the “fringe” candidate. Learn financial fundamentals. Follow the money.
Ignoring John Moorlach’s warnings was a sin, but one the media almost can be forgiven for. Too many journalists are financially illiterate. And even the best of them have trouble finding the story when almost every insider, authority and expert is buying the con (Enron and the dot-com craze being recent examples).
The media’s bigger sin was ignoring Bob Citron. He was a phenomenon,and a weird personality to boot. He was great copy, but the media missed it.
“He was the Big Kahuna,in Orange County, in San Francisco, in New York, in Hong Kong, in London,” said Chriss Street, the Newport Beach investment banker and early Citron critic. “He was the guy. This man had a $26 billion bat to swing. He generated every day of the year, $500,000 in interest earnings, and just how popular is that?”
Citron’s strengths, quirks and risk-taking should have been documented, analyzed, celebrated, derided and debated years before the bankruptcy.
Citron should have been front-page news, a household word, a known quantity. But while he was well-known in financial circles, celebrated by fellow municipal treasurers and easily reelected every four years, he operated in isolation from naive fellow OC officials and a disinterested local media.
A Factiva search of news stories from 1980 through 1993,14 years during which Citron often defied market logic with spectacular returns,turns up a mere 104 mentions of him. Bonds must be boring. For the first 11 months of 1994, covering the contentious campaign with Moorlach and the first hints of trouble in the portfolio, there were 71 mentions of Citron. Bonds still are boring. For the seven months from Dec. 1, 1994,when OC’s losses hit the press,through June 30, 1995, Citron was mentioned 2,802 times.
Disasters, they ain’t boring.
The bankruptcy’s happiest legacy isn’t tighter financial controls, more skeptical journalists or less gullible politicians,though those are welcome,it’s Moorlach. Citron’s replacement since four months after the bankruptcy, Moorlach has built the treasurer’s office into a national model of professionalism and safe investing,as opposed to a model of spectacular but reckless investing.
And he’s a rebuke to the fixers and the sharpies who no longer have their run of the county the way they used to. Just one example: While he had help, Moorlach’s intervention was critical earlier this year in killing the proposed $4 billion merger of the South County toll roads. Wall Street firms were deprived of a fee-rich deal that likely would have sailed through in the pre-bankruptcy days.
Can a financial disaster occur in OC government again? Moorlach said the seeds already have been planted, in the supervisors’ 3-2 vote earlier this year granting,over his objections,hefty pension benefit increases to county workers.
What’s the probability that such a bankruptcy could happen again, somewhere?
“I would say it’s tremendous,” investment banker Street said. “Do people really learn from their past mistakes? Do the smart new people really listen to history?”
,Rick Reiff
