MOORLACH UPDATE — LOOK BACKS — December 13, 2009


Please come to our Third Annual Christmas Open House on December 16th, from 3 to 5 p.m.

10 Civic Center Plaza

333 West Santa Ana Boulevard

Fifth Floor, Second District

(Park in the lot off of Ross Street)

To RSVP, please call Margaret Chang at 714-834-3220


December 13


As you can see, I finally had a day where I was not in the news in December of 1994.  But, the toll road topic still had legs in December of 1999.

If my memory serves me correctly, it was Meg James of the LA Times who first wrote on this issue.  She was with the Miami Herald and new in town.  She requested rating updates for all of the cities, and in the pile she received was the sale of the 91 Express Lanes.  She found out by accident.  She called them, and they scrambled, appearing to have been caught flat-footed, to get some information to her.  It was Jenifer McKim of the OC Register that followed the scoop and pulled me in.  They both received the “Moorlach Award” for great journalism for their efforts.  I figured, sense I’ve been so hard on the journalism industry that I should recognize good work when I see it.  All other journalism awards were named after someone, so why not do the same thing?  More on this effort in February.

James B. Kelleher, Jenifer B. McKim and Kate Berry were back with the OC Register’s front-page story “Road to tollway deal paved with problems – Creators underestimated public perception, and now critics look to permanently kill sale.”

                It was 1997.  [Kevin] O’Brien, a senior vice president at Lehman’s Los Angeles office, had a problem to solve for the California Private Transportation Corp., a client that had built the 91 Express Lanes and opened the tollway to Orange County and Riverside County commuters in late 1995.


                “They gave the impression that they were sneaking it through, that this was a stealth deal, said Orange County Treasurer John M. Moorlach.

                Today, O’Brien’s plan is in disarray and a group of top officials from Orange and Riverside counties is headed for Sacramento to try to make sure it dies.

                The delegation includes Moorlach and Riverside County Supervisor Bob Buster.

                From the very start, the executives and investment bankers failed to appreciate how their activities might be construed or misconstrued by outsiders.

                “The perception stunk,” said Moorlach.

Rick Reiff of the Orange County Business Journal was back with a very nice column in the “Comment” section, titled “Other People’s Money.”

                GOD BLESS JOHN MOORLACH.

                The man who called Bob Citron’s bluff got his dander up again in recent days, and decried to all who would listen the impending scheme to issue $274 million in tax-exempt bonds so that a non-profit agency could take out private investors and take over operation of the 91 toll lanes.

The fact that the county treasurer was conducting his tirade on the fifth anniversary of the OC bankruptcy made the whole spectacle more poignant.  And maybe we have learned a lesson, after all.  This time around, some people in responsible positions seemed to actually hear what Moorlach was saying.  The Times and Register were diligent in bringing eye-opening disclosures to light, ranging from suggestions of cronyism and conflicts of interest to overly ambitious financial projections to a stunning absence of due diligence.

So one potential boondoggle down and one – light rail – to go.


Rick Reiff of the Orange County Business Journal was back this year with his “OC Insider” column.  The timing and coincidences with our 1999 topic and players, and our 2009 pension crisis, are incredible.  (More fun, his column included this piece of trivia:  “Sighting:  Tiger Woods, dropping into the Starbucks in Corona del Mar on Dec. 4 before heading off to play a round.”)

Jan Mittermeier has gone from planes (John Wayne Airport) to train wrecks (OC government) to automobiles.  She’s now senior VP in charge of the 91 Express Lanes for Cofiroute USA, reporting to Gary Hausdorfer.  Mittermeier spent five years as OC’s reformer CEO in the wake of the bankruptcy.  Ten years after the event, the county’s Iron Lady shares John Moorlach’s concern that another financial crisis is looming:  “In reading the articles about the latest pension benefit enhancement, it appears future funding is based on employee unions forgoing raises.  I don’t know how realistic that is.”

And Rick Reiff was back with a full-length piece in the “Comment” section, titled “Lessons.”  Here it is in its entirety.

            THERE HAS BEEN LOTS OF REFLECTION ON THE 10TH ANNIVERSARY OF 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

The OC Register’s Martin Wiskol’s column “The Buzz” had an interesting account of Supervisor Tom Wilson.  Wilson is probably one of the two most expensive supervisors this county has ever had, based on the costs of his votes in a number of areas, including pension enhancements.  So, I guess he was feeling the heat that I was putting on the Board at that time.

                At Tuesday’s board meeting, Wilson erupted, crediting Moorlach ally Chris (sic) Street for discovering the investment problems and criticizing Moorlach for his concerns with the pension plan.

                “(Moorlach) took the (bankruptcy) idea and ran with it and has been basking in the sunlight ever since,” Wilson said.  “Mr. Moorlach is also running for office again, so it’s necessary for him to get some attention on this.”

                Moorlach lost his 1994 bid to unseat Treasurer Bob Citron, but was later appointed to the post and has since been elected and re-elected.  He is considering a 2006 bid for supervisor.

                Moorlach said he was surprised by the personal nature of Wilson’s attack and defended his reflections on the bankruptcy and his criticisms of the pension plan.

                “If you don’t self-reflect, you’re in denial,” he told the Buzz.  “(And) one of the big flaws that keeps coming out about 1994 is that we did not have confrontational government.  They all rallied around Citron.  Ten years later, we’re providing a little confrontation on an issue.”

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