MOORLACH UPDATE — LOOK BACKS — December 19, 2009


December 19


The OC Register kept printing Letters to the Editor on the topic.

                “(County Administrative Officer) Ernie Schneider and (Assistant Treasurer) Matthew Raabe need to resign and the Board of Supervisors need to appoint (John) Moorlach.

                John Morrissey


James O. Goldsborough of the San Diego Union-Tribune wrote “Warning signs were there—Orange County’s risky investments should have been targeted earlier.”  In his account he had one interesting sentence, below, the rest is just a repeat of what you’ve seen in other articles.

                Citizens were aghast at Moorlach’s contumely.

Dow Jones News exposed an “Orange County Whistleblower – Knew of Paper Losses In Oct.”  It was becoming clear to many that Peer Swan was not as altruistic as first supposed.

                [Irvine Ranch Water District President Peer] Swan doesn’t see himself as the hero in all of this, but does think he was acting in the public’s interest.  He forced Orange County to begin to address its problems without triggering a run on the fund, he says.

                But that’s not how others see it.

                John Moorlach, who ran for County Treasurer against Citron, tried to make an issue of his concern that the county’s investment pool was overleveraged and at risk.

“During my campaign, (Swan) said I was crying fire in a crowded theatre,” Moorlach says.  “But I knew there was gas on the floor.”  After hearing that Swan had withdrawn $100 million from the county fund in November, “I said to myself, my goodness this guy plays both sides of the street,” Moorlach adds.

Moreover, during the campaign for county treasurer, Swan asserted that the Orange County investment fund was safe, contends Irvine Councilman Barry Hammond.

Swan “was probably one of the most aggressive in getting out and saying that John didn’t know what he was talking about,” Hammond says.  Hammond adds that he respected Swan’s opinions concerning the fund and that that was one of the reasons he decided to keep more than $200 million of the city of Irvine’s funds invested in the Orange County fund.

Indeed, Swan’s public support for the fund continued through early November when he was campaigning for reelection.  His opponent, Scott Peotter, raised questions about the risk involved with the county’s fund and with real estate in which the water district had invested.

But an advertisement for Swan in a local paper on Nov. 3 read, “our opponents say . . . we had risky investments . . .  the truth is . . . the County Treasurer invests most of our funds.”

Some members of the Orange County Sanitation District Board are also upset with Swan.  Swan is a member of the Sanitation District’s Board and yet he didn’t tell it about the county fund’s looming troubles.

Hammond, himself a member of the Sanitation District’s Board, last week called for Swan to resign from his executive positions on that body.  Swan was pulling the water district’s money out of the pool and “at the same time he made absolutely no disclosure to anybody at the Sanitation District about his concerns,” Hammond says.

Weekly publications usually are issued on Mondays.  The Orange County Business Journal started their “The Bankruptcy” column, with this week’s titled “Silva declines to criticize colleagues,” written by Howard Fine.

                Silva, alone among incoming or outgoing supervisors, supported Moorlach, although not actively.

The OCBJ also had a Letter to the Editor, titled “The bond debacle – Bitter taste.”

                Mr. Street vigorously supported John Moorlach in the latter’s futile  attempt to challenge Mr. Citron in his last re-election.

                James Wong

                Senior financial analyst

                Chriss Street & Co.

                Corona del Mar

To show how international the bankruptcy filing was, Der Spiegel magazine, out of Germany, covered it with “Kalifornien — Steuern verzockt – Erstmals mub ein Verwaltungsbezirk Bankrott anmelden, weil sich der Kammerer verspekulierte.”  This is roughly translated as “Tax money gone in gamble – For the first time a county files for bankruptcy because the treasurer speculated.”  It included photos of Citron and Disneyland’s Jolly Trolley.

                John Moorlach, a local accountant and financial advisor, believes that the county can write off $3 to 4 billion thanks to Citron’s poker game.

BusinessWeek was back with “Today, Orange County . . . – The muni mess on Wall Street:  How bad?” by Leah Nathans Spiro, Nanette Byrnes and Zachary Schiller.  I was the closer.

Despite the magnitude of Orange County’s losses, the fund’s risky investment strategy should be no surprise, either to investors or to voters.  John Moorlach, the Costa Mesa accountant who challenged Citron’s reelection this past spring, made a major campaign issue of the investment strategy.  “There was no exit plan,” says Moorlach, who lost decisively.  “If you want to make a killing, you’ve got to be prepared to be killed.  But when you do it with my tax dollars, the question is:  Why were you able to do that?”  On Dec. 6, investors, regulators, and Wall Street started asking the very same question.

TIME Magazine covered the story in “The California Wipeout – Orange County files for bankruptcy after losing big on high-risk investments,” by John Greenwald.

                “He had a technique that worked for 15 years, and he didn’t see the cycle change,” says James Moorlach (sic), an accountant who ran against Citron this year.


The Las Vegas Review-Journal had an editorial by Doug French, titled “Public workers’ pension plan offers dubious reassurances—Even impossibly high stock returns won’t cover future liabilities.”  It was good to know that I wasn’t alone.  The author questions the Public Employees Retirement System of Nevada and its confidence of becoming fully funded (they were 81 percent funded as of June 30, 2003).  His piece was very prescient and he quoted me to prove a point.  Below are the three paragraphs he used to warn that upcoming stock market returns were not going to be high (which looks eerily accurate in hindsight) and his concluding paragraph (which should also be taken seriously, now that he was correct with his first prediction).

Many investment experts believe that stock market returns going forward will be muted.  Ed Keon, quantitative market strategist with Prudential Equity Group, recently told Barron’s:  “I suspect that over the next several years, we’ll get positive returns from stocks, on average, but they’ll be well below the historic average.  Instead of getting 10 percent or 11 percent, the mid-single-digits is a more reasonable expectation.”

Other stock market analysts are not even that positive.  Robert Arnott, editor of Financial Analysts Journal, and Peter Bernstein, author of “Against the Gods,” believe that the stock market, even “on the hopeful side,” faces a 50 percent drop in coming years.

Orange County, Calif., Treasurer John M. W. Moorlach, who predicted the 1994 Orange County bankruptcy, doesn’t believe the financial assumptions made by public employee retirement systems are sustainable.  The Orange County PERS system assumes a 7.5 percent annual return.  “That’s quite an assumption,” writes Steven Greenhut in The Orange County Register.  “Moorlach compares it to banking that the Angels will be in the playoffs every year for the next 30 years.”

                Unless PERS is transformed from a defined-benefit plan into a cash-balance or defined-contribution plan – as the IBM pension plan was a few years ago – Nevada taxpayers will be delaying retirement into their 70s and 80s – to allow government employees to retire at 50.

The North County Times, out of San Diego, had another follow up piece on Proposition 71 by Bradley J. Fikes, titled “California’s ambitious embryonic research program gets going.”  This endeavor made it to the news this month, December 2009, with the Proposition 71 committee tripling the salary of one of its vice chairmen, former state Democratic Party chief Art Torres.  The more that time passes the more proud I am of having opposed this poster child of ballot measure boondoggles.

                Even aside from moral objections, Prop. 71 is a bad investment for the state, said John Moorlach, Orange County’s treasurer/tax collectorMoorlach famously warned 10 years ago that Orange County was in danger of bankruptcy, a warning ignored by the voters and the news media.

                “It’s financially unsound,” Moorlach said in a Friday interview.  “It doesn’t have a guaranteed revenue stream other than the state budget to pay off the bonds.  The state’s budget as of yesterday is already under water by $8 billion.  To add another $3 billion over 10 years is poor stewardship.”

                Arguments that government funding is needed to do research private companies aren’t willing to tackle are a “rationalization,” Moorlach said.

                “If the pharmaceutical companies conclude it is too long a time or there is a high risk that we won’t see a benefit, that should be telling the rest of us something really loud and clear,” Moorlach said.

                Moorlach said the oversight committee should at least include some members who opposed the initiative.

                “You need some skeptics on the oversight committee . . . they should be on this panel keeping everyone honest,” Moorlach said.  “There’s no one arguing the opposing view.  The discussion will be, if he gets $50 million I should get $50 million.  That’s not good, healthy debate.”

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