MOORLACH UPDATE — LOOK BACKS — December 14, 2009


December 14


The harried pace started again.  Now the bad news was becoming a stark reality.  The Daily Pilot’s Evan Henerson had the following top-of-the-fold lead headline:  “County to restructure pool – Investors told to expect to lose a percentage of investment.  Loss, at $2.02 billion, will likely soar higher.”  The old “would of, could of, should of” mantra pops up here.  If only Merrill Lynch had stepped in and hedged the pool, the sell-off might have been avoided, as interest rates did go down some six months earlier.  Short of that, you can’t continue gambling like Citron did.

Another sore spot that still bothers me is that the county retained a publicity firm for a month and was charged an incredible amount of money.  Maybe I’ll get into that topic in a future Look Back.

                Costa Mesa CPA John Moorlach, who said that an early estimate by County Treasurer Robert Citron that the pool would suffer a $1.5 billion loss was a conservative guess, agreed the losses will continue to rise.

                “On Dec. 1, I said $3 billion, and it might be higher,” Moorlach said.  “It’s not over yet.”

                [County spokesman Lance] Ignon, who is a member of the publicity firm hired by the county, said that the restructuring effort should not be viewed as a liquidation of the fund.

But Moorlach said the investment pool will not be stable until the entire pool has been liquidated and rid of such high-risk investments as leverage derivatives or structured notes.  As long as the county can receive a fair price on derivatives, the county would do well to liquidate the entire fund, he added.

Agencies such as the Newport-Mesa Unified School District – which borrowed funds to invest in the pool – will be hardest hit by the county’s loss, said George Rendon, senior vice president for RSR Capital Group.

Both Moorlach and Rendon agreed the county had little choice but to assess its losses and move on from there.

To Moorlach, the largest issue at stake is not how high the losses will rise, but whether the county, the pool’s 180 investors or both will bear the loss.  In the only comparable case in recent memory, he said, the county of Cuyahoga, Ohio incurred an entire $130 million loss to its investment fund while “making whole” its investors.

“Until we have a definitive answer from Salomon Brothers, it’s all in limbo,” Moorlach said.  “But whether the expense is borne by the county or by the investors, it will still be borne by the residents of Orange County.”

The LA Times made this topic their lead headline theme, too.  “O.C. to Liquidate Its Portfolio,” with Mark Platte, Matt Lait and Michael A. Hiltzik authoring “Judge approves action to prevent further losses.  Overseer says fiscal mess ‘is going to be a problem for a number of years,’ but county ‘can get out of it.’”  The county brought in Thomas W. Hayes, who liquidated the pool.  Regretfully, since interest rates did go back down in a rather short time frame, and we’re discussing strategies, it may have been better to distribute pieces of the portfolio to the pool participants and let them “hold to maturity.”  This was a form of the strategy that San Diego County Treasurer Paul Boland used.  When Tom Hayes paid him a visit and recommended that Boland liquidate his investment pool, Boland showed Hayes the door.  San Diego County, although in much better shape than the OC at the time, incurred no realized losses.

                “There was a bet made on the interest rates, and the county lost the bet,” said former state Treasurer Thomas W. Hayes, who is directing the county’s efforts to unravel the financial mess.

                Over strong objections from several city and school officials, U.S. Bankruptcy Court Judge John E. Ryan ruled Tuesday that the county can begin selling off its troubled bond holdings.

The Supervisors split up the tasks of trying to repair the county and assess the damage.  Supervisor William G. Steiner met with directors of nonprofit organizations who do business with the county and have outstanding county bills that need to be paid.  Steiner said he would support appointing accountant John M. W. Moorlach, Citron’s opponent in the June election, to become treasurer.

Rep. Christopher Cox (R – Newport Beach) said the Orange County crisis could have been averted if former treasurer Citron had been required to disclose more about the county’s investment portfolio.  As a member of the House Commerce Committee, Cox called for congressional hearings in January on the matter.

Congressman Chris Cox also weighed in with a Letter to the Editor to the OC Register, under the title “Bad, bad advice.”  Chris Cox and Marian Bergeson were the honorary Co-Chairs of my campaign.  After Bergeson withdrew her endorsement, Cox became the Chair.  So, Chris Cox had every right to thump his chest on this matter.

                A recent Los Angeles Times editorial asks:  “On whose advice did Orange County become the largest municipality in U.S. history to file for bankruptcy?”  Whose advice?  The answer is a matter of record:  the editorial page of the Los Angeles Times.

                As the chairman of John Moorlach’s campaign for treasurer, I was impressed with his research and analysis of Citron’s investments.  He made the election a referendum on Citron’s unsound investment strategy.

                Christopher Cox

                Newport Beach

                Mr. Cox, a Republican, represents California’s 47th District in the U.S. House of Representatives

I made it to the top-of-the-fold, with the OC Register’s awful photo, of the San Francisco Chronicle in Michelle Quinn’s piece “Candidate Predicted Fund Losses – Politics obscured CPA’s warnings.”  The lead headline was “Orange Starts Asset Sale to Cut Losses.”  This article provided an outsider’s view of the activities I was dealing with post-implosion.  Television outlets would call from New York and ask me to drive to a studio in Burbank for a four-minute interview.  They would look at the map and determine that it would be a short drive for me.  Wrong.  It would be hours.  “If you want to interview me, come here.”  So, my firm’s parking lot had a steady stream of large mobile studios in motor homes for a week or two.  There was one error that I’ve left out below, I graduated from California State University at Long Beach.

                John M. W. Moorlach is an unlikely prophet.  A fan of Mickey Mouse ties, the low-keyed accountant with a small, neighborhood office predicted Orange County’s bankruptcy months ago in letters to newspaper editors and politicians.

                In a May 31 letter to the Orange County Board of Supervisors seemed almost clairvoyant.

                Moorlach . . . has become a media star with a possible political future. 

                “I was portrayed in the press as a vicious young punk beating up on an old man,” said Moorlach, 38.  “My integrity was challenged and I watched as people whispered in rooms when I entered.”

                Moorlach was born in Holland and emigrated to the United States with his parents at the age of 4.  His family moved to Orange County.  Even before graduation, he started working at the small firm of Balser, Horowitz, Frank & Wakeling where he works today.

                “We tell our clients to keep overhead low and don’t borrow to invest,” said the accountant, who has a license plate that reads “Dull CPA” in his office.

                For Moorlach, one week after the county filed for bankruptcy, the vindication is bittersweet.

                “Half of me is happy that I don’t have the job but I have a lot of grief that we lost so much money,” he said.

                For the time being, Moorlach is an international media star, although he refuses to drive to Los Angeles to be filmed by television crews.  They must come to him in his office.


The toll road issue continued as Megan Garvey and Meg James of the LA Times informed us that the “91 Express Lanes Owner Abandons Plans to Sell—State will investigate the company’s ties with Irvine-based group that planned to buy the toll road” on their front-page.

                “It’s great.  This deal needed to stop.  This was not a legitimate transaction,” said Orange County Treasurer John M. W. Moorlach.

Jenifer B. McKim, Kimberly Kindy and Kate Berry of the OC Register summed it up with “Critics hail death of plan to sell toll lanes – Officials and commuters alike breathe a sigh of relief.  But some urge further action.”

                Another critic, Orange County Treasurer John Moorlach, said Caltrans should re-evaluate a noncompetition clause in the contract that prohibits the state from making improvements on the adjacent freeway. 

                Moorlach says government officials should get together to create a sale that the public can stomach.

                [Riverside County Supervisor Bob] Buster and Moorlach said they are hoping for sweeping reforms within the bank so such questionable deals will never be approved again.

Jennifer Bowles of The Press-Enterprise informed readers as to how our day trip to Sacramento went in “Sale of toll lanes halted – As officials meet to quash bond sales for the Highway 91 lanes, the deal is pulled.”

Members of the Riverside County delegation, which included Orange County Treasurer John Moorlach, called the full day of meetings a success.  The delegation met with [Peter J.] Siggins [chief deputy attorney general of legal affairs] of the attorney general’s office and with Linda Adams, the governor’s deputy legislative secretary on water and transportation issues.

Jenifer B. McKim, Kimberly Kindy and Kate Berry of the OC Register also addressed my next foray into this transaction with “Single law firm worked for all three parties in bond deal—It advised the state bank financing the sale, and did paid jobs for the seller and proposed buyer.”

                “That’s certainly not appropriate,” said Marian Bergeson, the Newport Beach politician who helped create the state bank in 1994.

                “It is definitely a conflict of interest,” Orange County Treasurer John Moorlach said from Sacramento on Monday.  “Why is one law firm representing three different parties?”

                Because of Moorlach’s concerns, the county’s three-member Public Financing Advisory Committee on Monday voted to postpone a decision to hire the two firms as part of a financial team to manage the multimillion-dollar windfall coming to the county as part of the national tobacco settlement.

The Foothills Sentry had a brief commentary going after then-Sheriff Mike Carona’s proposal to add decals on Sheriff’s vehicles bearing his name.  A small segment of the piece, quoting Robert H. (Bob) Fateux of Villa Park:

                “An early move was made by Mr. Moorlach after he assumed office to remove his personal identification as the County’s Treasurer on tax payment documents.

                “Orange County does not need any more political ‘cult of personality’ identifications, whether it be the County Treasurer, or the Sheriff, be it Brad Gates or his successor.”


Speaking of the Foothills Sentry, the covered “The Orange County Bankruptcy – 10-Year Anniversary at Nixon Library.”  And, now columnist Bob Fauteux commented in “The Gadfly’s Corner – If it’s too good to be true, then…”

Bob Citron used a lot of smoke and mirrors to hide how his phenomenal investment returns were being earned.  There were questions asked, but the majority accepted his answers and enjoyed spending the money.  Only Moorlach, Chriss Street and a few savvy money managers asked the right questions.

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