MOORLACH UPDATE — Encyclopedia of Municipal Bonds

Joe Mysak, a municipal bond columnist whom I first met in the summer of 1995, has written a book titled Encyclopedia of Municipal Bonds.  If anyone has the portfolio to write a book with such a title, it is Joe Mysak.  The publisher of Grant’s Interest Rate Observer, and a personal friend, James Grant, calls him “Joe Mysak, dean of the tax-exempt press.”  That pretty much sums it up.

The subtitle is A Reference Guide to Market Events, Structures, Dynamics, and Investment Knowledge.  It is published by Bloomberg Press, an Imprint of Wiley.  And it is hot off the press, copyright 2012, and being promoted as we speak in Bloomberg Brief – Municipal Market, a daily electronic newsletter.  Also see http://www.barnesandnoble.com/s/joe-mysak?keyword=joe+mysak&store=book.

Joe Mysak joined The Bond Buyer in 1981 as a copy editor and learned about municipal bonds from the ground up, eventually rising to editor and publisher of the newspaper.  In 1994, he founded a series of municipal market-related biweekly newsletters for the Interest Rate Publishing Corporation.  In 1999, Mysak joined Bloomberg News as a columnist.  He is also the author of the book Handbook for Muni-Bond Issuers.  I find him to also be an entertaining speaker.

The book cover mentions that “topics touched upon throughout these pages include:  The 2008 Jefferson County, Alabama default, the 1994 Orange County, California bankruptcy, and the 1975 New York City crisis.”

For the letter O, here are the topics:  official statement; OPEB; open-end funds; Orange County, California; original issue discount; and out-of-state authorities.  Most of the definitions cover a third- to a half-page.  The attention given to the OC occupies more than eight pages.  Here are some segments of interest (I am mentioned in Frank Partnoy’s book referenced below) to whet your appetite, as Mysak’s writing style is riveting:

                Orange County was the first modern example of municipal bankruptcy by investment practice.

The real problem with the Orange County portfolio was not the various derivatives it held, although many of these were illiquid enough by the end, but the borrowing it had done to improve returns.  In a phrase that was used again and again in 1994, Orange County borrowed short, bet long, and bet wrong.

“Although the trades were complex, most of them – at their core – were bets that interest rates would stay low,” wrote Frank Partnoy in his book Infectious Greed (2003), which chronicles the invention and rise in the use of derivative financial instruments, including those used by Orange County.

“Collectively, these managers had placed the largest secret bet in the history of financial markets,” wrote Partnoy.  “When the Fed raised rates on February 4, they lost.”

These bets weren’t so secret to everyone.  Accountant John Moorlach and one of his advisers, investment banker Chriss Street, were warning everyone they could about the county’s leveraged investment strategy in early 1994, and numerous press accounts appeared outlining the aggressive strategy.  The reverse repurchase agreements, the derivative securities, the massive use of leverage – all these had been written about.  Moorlach ran against Citron for treasurer on this basis, that Citron was mismanaging public funds, in June and lost.

The Orange County bankruptcy was almost a punctuation mark, an exclamation point on a year that had already seen dozens of municipal investors admit to losses, and at least one, the Cuyahoga County, Ohio, Secured Assets Fund Earnings pool, shut down after losing $100 million for its 75 municipal investors.  This was considered a spectacular blowup, until Orange County.  After Orange County, analysts and observers perhaps inevitably wondered about “the next Orange County,” and “how many Orange Counties are out there?”

As for how many other Orange Counties were out there, it turned out (again as it so often does) that while there were other government investors and investment pools holding derivative securities and pursuing similar strategies (like borrowing money to increase the size of the bets), Orange County was indeed an outlier.

In the end, it took Orange County more than 18 months to emerge from bankruptcy, a great deal of its recovery predicated upon making someone else, in this case Wall Street, pay.

Treasurer Citron was later prosecuted by the county.  He was fined and served a year in a work-release program.  Assistant Treasurer Raabe was convicted of five felony counts, which were later overturned.  John Moorlach was appointed to serve out Citron’s term in March 1995.  He ran in June 1996, in 1998, and in 2002, all without opposition.  The county itself was chastised by the SEC for selling securities without disclosing the actual condition of the pool and the risks it ran to investors.  The county eliminated the use of derivatives and reverse repurchase agreements in its investment policy, and now posts all its positions and trades on the Internet.

FIVE-YEAR LOOK BACKS

March 3

1997

The Orange County Business Journal had a small piece by Howard Fine about my former firm, titled “Balser, Horowitz follows clients with move to OC.”   I worked with the firm for eighteen years and was the managing partner of its Costa Mesa office.  So, yes, I have signed the front of the check.  And, yes, I know about putting in long hours.  And, absolutely, I preach proper fiscal stewardship and appreciate the fiduciary responsibilities that came along in my succeeding roles.   And, finally, I do miss the firm, as well as the Treasurer’s Department.

                The accounting firm of Balser, Horowitz, Frank & Wakeling has relocated its headquarters and most of its employees to Santa Ana and turned its Long Beach home of 60 years into a branch office.

                The January move was prompted by an increasing migration of the firm’s clients to OC and the firm’s outgrowing of its existing Costa Mesa branch office.

“So many of our clients moved to South OC, yet we still want to maintain ties to those clients remaining in Long Beach, Santa Ana seemed the perfect in-between-choice,” said Balser, Horowitz managing partner John Laudadio.  “We especially wanted to be closer to the Irvine Spectrum, where a lot of our clients are.”

Balser, which has a total of 30 employees and seven active partners, serves clients in real estate, construction, manufacturing, restaurants, non-profits and closely-held businesses.

The firm gained notoriety after the OC bankruptcy as then-partner John Moorlach rose in stature for having predicted the collapse of the county investment pool.  Moorlach has since been appointed county treasurer, replacing Robert Citron, Moorlach now holds the status of retired partner with an option to rejoin the firm as an active partner when his term ends.  Meanwhile, his name remains on Balser, Horowitz’ letterhead.

2002

The LA Times printed a Letter to the Editor, “Measure V:  Local Control vs. Expediency,” by the campaign manager of the Yes on Measure V efforts.  Awkward.  The LA Times never mentioned me during the campaign in relation to Measure V.  But the letter writer, Tom Mullen, introduced me in his opening sentences, provided below.  The running joke back then was if the LA Times took a position on an Orange County ballot measure, the opposite was sure to happen.  So, why bother writing a letter?

                Re “Not So Fast on Measure V,” Editorial, Feb. 24:

                Your analysis of Measure V was woefully shortsighted and politically indefensible.  You prefer to expound upon Treasurer-Tax Collector John M. W. Moorlach’s dismissive position that Measure V is nothing more than an exercise in political expediency.

March 4

2002

Rick Reiff’s “OC Insider” column in the Orange County Business Journal contained the following insight (this was during the time of the 2002 Enron scandal fallout):

                OC Treasurer John Moorlach sent the insider a 1985 copy of Congressional testimony, “On the Quality of Independent Audits,” with note attached:  “The more things change, the more they stay the same.”

March 5

1997

The Daily Pilot provided a front-page article on “Moorlach’s investment pool gains highest financial rating – But the good news doesn’t erase Newport Beach official’s memories of $1 million loss in bankruptcy,” providing another look at the Fitch rating.

                “They were here, they interviewed everyone, they put us through the rigors, and we’re performing Justas well as the big boys out there in industry, if not better,” [Moorlach] said.

                “It’s a nice way to say to the community, ‘Hey, this is a new shop.’  We’re trying to restore the credibility of the county with the citizens.”

                John Schiavetta, a spokesman for Fitch, said the firm based its rating on the credit quality of securities, low market risk and solid oversight, management and operational controls.

                “(Moorlach) is managing this pool as one of the safest portfolios in California,” Schiavetta said.

                “What we’re doing is we’re running a money market fund, and we’ll compare our performance to any market fund,” Moorlach said.  “We’ve been very competitive, even with our very conservative investment policy statement.

                “I think we’ve done a very good job, all the while knowing we were under the microscope,” he said, noting the intense scrutiny that the treasurer’s office endured following the bankruptcy.

                Moorlach said the pool’s success owes to the philosophy that “we can achieve competitive yields without having to kill ourselves or overreach.”

                “For Newport Beach, we’re actually being very cautious about participation in pools,” said Newport Beach City Manager Kevin Murphy, recalling that the city lost more than $1 million in the financial collapse.

                “It doesn’t surprise me that (Moorlach) would have turned it around,” Murphy said.  “In order for the to be credible in the marketplace they had to do a very, very good job.

                “What’s the old saying?  ‘Once burned, shame on you.  Twice burned, shame on me.’”

March 6

2002

On Tuesday, March 5th, I received the highest votes of any of the countywide electeds running for reelection.  I received 351,092 votes,  Sheriff-Coroner Michael S. Carona received 348,619, Auditor-Controller David E. Sundstrom received 312,337, and Superintendent of Schools William M. Habermehl garnerd 293,669.  Receiving the most votes meant that I had to buy lunch.

The Measure V vote was a tight one.  It prevailed with 211,988 votes, representing 52 percent of the vote.  Martin Wisckol of the OC Register covered the results in “Supervisor-successor plan leads.”  Now that we have Charter-light, it’s time to form a Charter Commission and do it right.  The conclusion of the piece:

                County Treasurer John Moorlach, a Republican activist, campaigned ardently against the change, arguing that general law historically had served the county well and that the measure could lead to unnecessary difficulties.               

2007

The OC Register’s second editorial, titled “Get a ticket, pay a new tax — Board considers 20 percent surcharge on fines for moving violations,”  concurred with my position on the matter.  Here it is in full:

When asked the meaning of tax reform, former Louisiana Sen. Russell Long famously said, "Don’t tax me, don’t tax thee, tax the fellow behind the tree." The flippant remark has more than its share of reality as an observation of modern public policy. Legislators constantly seek revenue by looking for "the fellow behind the tree" – tax targets the legislators hope won’t raise a stink.

A case in point: The Orange County Board of Supervisors, at the urging of the county’s Health Care Agency, today is considering taxing drivers charged with moving violations to fund emergency medical service costs, which pays for trauma centers, emergency care for children and funds for physicians and hospitals that pay such care.

No one wants to deprive anyone of health care, even if it shouldn’t be the government’s responsibility to pay for it. The question is who pays.

Typically, such costs – the county says it needs another $3.5 million – should come out of the county’s general fund budget, but with such a huge portion of that budget going to pension and other retirement-related costs for county employees, other things get crowded out. Hence, officials are looking behind metaphorical trees to find easy marks.

They seem to have found some. Beginning in April, a state law goes into effect that allows counties and cities to impose a 20 percent tax on fines and penalties collected for certain criminal offenses. So the board is considering a plan to impose this 20 percent tax on drivers cited for moving violations. If you’re caught speeding, you would pay at least another $50 on top of the already high fine. This would further turn police officers into revenue-collectors, and give them additional incentive to pull over more speeders.

It’s another way of sticking it to the other guy. And, yes, this is a tax increase even if not everyone will have to pay it.

Last month, Supervisor John Moorlach suggested that, instead of taxing motorists, the money should be found by taxing illegal immigrants charged with a crime. That caused a backlash. Fortunately, Mr. Moorlach is opposed to the new tax-hike proposal, as is Supervisor Bill Campbell, who told us that he wants to fund these costs out of the existing budget.

The best solution is to cut costs and find the money in the general fund. Government should live within its means rather than spend its energy finding new people to tax.

The LA Times provided the latest wrinkle in Janet Nguyen’s election travails in “Judge asks O.C. supervisors to postpone swearing in new colleague — At least two board members say they will honor the request by the jurist hearing the lawsuit over the recount dispute between Janet Nguyen and Trung Nguyen,” by Mike Anton.

At least two of the four Orange County supervisors will vote to again delay swearing in a new board member today after a judge Monday requested more time to hold a trial on a contested recount.

Last week, supervisors voted to wait until today to swear in the winner of the Feb. 6 election to fill the board’s 1st District seat — enough time, they reasoned, for a court to sort out the recount in which Janet Nguyen bested initial top vote-getter Trung Nguyen by seven votes.

On Monday, Orange County Superior Court Judge Michael Brenner set March 21 as the trial date for Trung Nguyen’s lawsuit seeking to invalidate the recount. Nguyen says some ballots were improperly disallowed and that the recount wasn’t complete because the paper audit of election day electronic votes wasn’t counted by hand.

Brenner stopped short of ordering supervisors to postpone swearing in a winner but did ask the board to hold off until he rules. A trial is expected to last up to three days.

Supervisors Bill Campbell and John Moorlach said they would vote for another delay.

"But once he rules — wherever he lands — I go. If [the losing side] wants to take it to an appeals court, fine. But we’ve got to move on here," Moorlach said

Peggy Lowe and Larry Welborn of the OC Register covered the story in 1st District seat still cold – Officials will heed a judge’s call to delay naming Janet Nguyen to post.”

Janet Nguyen probably won’t be seated as the 1st District supervisor today because at least two board members say they will follow a judge’s recommendation to hold off until later this month.

On Monday, Superior Court Judge Michael Brenner said he hoped that the board would refrain from declaring Janet Nguyen the winner until he holds a trial on March 21 in a lawsuit filed by Trung Nguyen. Trung Nguyen claims the recount that certified Janet Nguyen as winner by seven votes was done improperly.

Supervisors Bill Campbell and John Moorlach said they were ready to vote in favor of swearing in Janet Nguyen today, but decided to respect Brenner’s remarks made during a Monday morning hearing. Supervisors Chris Norby and Pat Bates said they hadn’t yet made a decision. If the vote of the four-member board ends 2-2, the issue fails.

"If we swear someone in and then the judge reverses and catches us all off guard, then what do we do?" Moorlach said. "Do we review every 3-2 vote and do it again? Do we fire all of Janet’s staff and Trung gets to hire new staff? There’s so many messy issues."

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