MOORLACH UPDATE — 25th Anniversary Commemoration — December 6, 2019

Happy Anniversary

The OC Register requested my observations on the 25th anniversary of the County of Orange’s filing for Chapter 9 bankruptcy protection. Read more about it in the first article. 

Investing in Greenhouse Gas Reduction

Gov. Newsom recently issued a confusing executive order that encourages the state’s three major defined benefit pension systems “to reconsider how they spend the public’s money with an eye toward investing in projects that could help Californians prepare for climate change.”   

Observing that backup power generators are selling like hotcakes in Northern California, thanks to PG&E’s Public Safety Power Shutoffs (PSPS), I recommended that the pension systems should have invested in the manufacturers of these alternative and temporary power providers.  For more on PSPS, see MOORLACH UPDATE — PSPS Opening Remarks — November 30

While being interviewed, I did a quick search for a publicly traded generator seller and found Generac Holdings Inc. (NYSE: GNRC).  At the beginning of 2016, this Wisconsin corporation’s stock was trading around $30 per share. A year later, it was around $40 per share, up one-third in twelve months!  A year later, it was up to $50 per share; another 25 percent increase! It didn’t move much during 2018. Since the beginning of 2019, its price is now around $100 per share!  It skyrocketed 100 percent in one year! Now that’s how to invest in climate change. It is no surprise so many hedge funds have acquired significant holdings of Generac.  

I’m not making any stock tips, as it’s probably a year too late, but pension fund investment managers should manage their portfolios and elected officials should be careful about giving investment directives.  The anniversary of Orange County’s bankruptcy filing should be proof enough of this advice.

The California Globe addresses this Executive Order in the second piece.

25th Anniversary Look Back

The media frenzy continued, keeping me very busy with calls and requests from around the country.  Especially into the evening, as the Board of Supervisors had approved the filing late in the day of December 6th.  For more, see MOORLACH UPDATE — LOOK BACKS — December 6, 2009.  

For the last two Look Backs, see  MOORLACH UPDATE — 25th Anniversary Reflections — December 5, 2019 and  MOORLACH UPDATE — Life Changing Press Release — December 2, 2019.


When the sky fell down on Orange

County’s finances

By John M. W. Moorlach

Dec. 6 marks the 25th anniversary of one of Orange County’s darkest moments, when the economy hammered an inappropriate investment scheme and the county filed for bankruptcy protection. It was the lead story for weeks and months to follow. Before it, the last event to dominate the Orange County Register’s headlines for such an extended period was World War II.

The historic implosion was caused by a reckless investment strategy condoned by most elected leaders in Orange County. Even the credit-rating agencies, bond lawyers and independent auditors said there was no need for concern. Treasurer- Tax Collector Bob Citron assured the media, “The sky is not falling.”

In my campaign against Citron that year, I was the only political candidate who, along with my supporters, was ringing alarm bells — to no avail. There also were earlier warnings from other market-impacted municipalities.

In 1984, the city of San Jose had to address the use of leveraging, with reverse repurchase agreements, in its cash-management portfolio. This technique allows one to borrow against the face value of the bond for a brief period. Interest rates on the short end of the yield curve rose and this city lost $60 million when it had to pay off the loans by selling bonds at a lower market price.

Municipalities should safely invest short-term cash balances and keep them highly liquid. The old KISS admonishment applies: Keep It Simple, Stupid.

In 10 short years, San Jose was forgotten. There is always someone who believes they can outsmart the market. Citron would borrow money at the short end of the yield curve for 90 to 180 days using the failed San Jose financing method. He took $7 billion in fixed-income instruments and borrowed against them twice, building a $21 billion portfolio of four-year bonds.

Since interest rates were falling for years, the strategy worked. Borrowing at 3% and buying longer term investments at 5 percent is a fascinating way to enhance yield. The New York Times called him a “wizard” because governments that invested with him got extra money they could use to balance tight budgets.

By 1994, the marketplace had also developed a variety of derivatives, or structured notes, designed to provide formulaic outcomes based on other available indexes. For instance, an “inverse floater derivative” would pay a higher yield if interest rates went down.

Borrowing to invest is like drinking alcohol and derivatives are like taking sleeping pills. You can consume one or the other, but both at the same time could be lethal.

In the summer of 1994, Odessa Junior College in Texas lost half the value of its $22 million portfolio because, according to the state auditor, it invested in “high-risk derivative investments without implementing investment management controls.” But if the yield curve changes direction it can confirm that you’re a gambler, as short-term borrowing rates began to exceed 5%.

By October, Cuyahoga County, Ohio, where Cleveland is located, incurred a $115 million meltdown when the issuers of reverse repurchase agreements demanded Cuyahoga increase their collateral. That’s what happens when the bonds you borrow against decline in value below the amount you borrowed. Heading toward December 1994, the Federal Reserve Board raised interest rates. Lenders then made collateral calls on the County of Orange. The county tried to stop the necessity of selling assets to make the margin calls by using a unique strategy. It filed for Chapter 9 bankruptcy protection, a section of the federal bankruptcy code only available to municipalities.

The lenders were not amused and sold the collateral anyway to repay their loans, resulting in more than $1.6 billion in realized losses. The sky fell.

Orange County became international news with the largest municipal bond portfolio loss and the largest municipal bankruptcy protection filing in United States history to that point.

Some journalists who covered my campaign against Citron just a few months prior would claim the implosion came as a total surprise. Moody’s and Standard & Poor’s, the two dominant rating agencies that publicly protected Citron’s scheme, had egg on their faces, something that would reoccur with the subprime mortgage debacle less than 15 years later.

After the bankruptcy, the Board of Supervisors appointed me treasurer-tax collector, a position in which I served for 12 years.

John M.W. Moorlach, R-Costa Mesa, represents the 37th District in the California Senate.

Gov. Newsom’s Climate Change Executive Order Looting Road Funds Short on Details, Long on ‘Social Investing’

‘The Governor is creating more greenhouse gas emissions with idling cars stuck in traffic’

By Katy Grimes

‘There’s a growing understanding that climate change is a material risk to investors and companies
just like cyber-terrorism or inflation.’

Recently California Gov. Gavin Newsom signed an Executive Order authorizing the looting of voter-approved gas tax funding for road repairs and highway expansions to be used to fight “climate change” via the high speed rail he promised to shut down. Voters felt duped. Again.

The Executive Order by the Governor requires state government to “redouble its efforts to reduce greenhouse gas emissions and mitigate the impacts of climate change while building a sustainable inclusive economy.”

Through the Executive Order, California Governor Gavin Newsom has redirected gas tax money to fund railway systems and other projects. The gas tax revenue would have repaired and upgraded the state’s broken highways and roads, California Globe reported in October.

“Newsom’s order directs the state’s Transportation Agency, pension funds and the department that manages government contracts to reconsider how they spend the public’s money with an eye toward investing in projects that could help Californians prepare for climate change,” the Sacramento Bee wrote.

What exactly does this mean?

“Social investing is dicey,” Sen. John Moorlach (R-Costa Mesa) explained in a California Globe interview. “We are supposed to invest for value.”

Moorlach suggested that the governor may not be looking at the big picture. Sen. Moorlach explained that California is emitting far more greenhouse gas by using the old electricity infrastructure all over the state, which caused the wildfires, according to CalFire. The greenhouse gas emissions from the fires far exceeds any GHG reductions all year.

And on top of the high greenhouse gas emissions, millions of California residents were forced to purchase diesel or natural gas generators to keep their power on during the utility power outages. “He should tell CalPERS and CalSTRS to invest in backup generators!” Moorlach said laughing, noting that stock prices for generator manufacturers have doubled in two years.

The Executive Order effectively ignores money earmarked for road improvements, and pension obligations, redirecting it to “climate change” projects designed to “reduce fuel consumption.” The governor wants roads and lanes reduced, wants people out of their personal cars, and instead using public transportation or bicycles.

Specifically, “the governor issued an executive order that, among other things, directed the State Transportation Agency ‘to leverage the more than $5 billion in annual … spending for construction, operations and maintenance to help reverse the trend of increased fuel consumption and reduce greenhouse gas emissions,’” as the Los Angeles Times reported.

The governor ordered the agency to “reduce congestion through innovative strategies designed to encourage people to shift from cars to other modes of transportation.” He directed it to “fund transportation options that … reduce greenhouse gas emissions, such as transit, walking, biking and other active modes.”

“Instead of building capacity on our highways to move people and freight, Governor Newsom is funding his pet rail projects throughout the state,” Assemblyman Jim Patterson (R-Fresno) said in October. “This theft of funds meant to improve our roadways is a glimpse into the future of transportation in our state and Newsom continues to execute his September 2019 Climate Change Executive Order. The Central Valley is just the beginning. Other road projects will likely be next.”

“This is theft of our gas taxes by Executive Order,” Patterson continued. “Governor Newsom is intentionally starving us out of our roads. Voters approved SB 1 with the promise that our crumbling highways would get the attention they deserve. Instead of building capacity, our gas tax funds are being siphoned off to fund Newsom’s favored pet-projects,” Patterson said. “Governor Newsom’s promise not to forget about the Central Valley is full of hot air, just like his climate plan.”

However, Sen. Moorlach notes that transit usage is declining nationally, and in California, as well. Moorlach also discussed Gov. Newsom’s announcement that he would no longer buy cars from auto manufacturers who side with President Trump’s relaxation of emissions standards. The auto makers targeted by Newsom are General Motors, Fiat Chrysler, Toyota and several others that sided with the Trump administration in the ongoing battle over tailpipe pollution rules.

“Have you seen the Capitol parking basement lately?” asked Sen. Moorlach. “It’s full of Toyotas,” assigned to and driven by members of the Legislature.

Gov. Newsom posted a Tweet about his directive: “Carmakers that have chosen to be on the wrong side of history will be on the losing end of CA’s buying power. CA will stop purchasing vehicles from carmakers that have refused to protect our air & chosen to follow the regressive ways of @realDonaldTrump.

However, nowhere in Gov. Newsom’s Executive Order does he state what and how “climate change” will be reduced in California. What the order says is:

“Maximize reduction of greenhouse gas emissions.”

“Develop and implement sustainable purchasing policies.”

“Consider strengthening or adopting new regulations…”

“Align the state’s climate goals with transportation spending…”

“Leverage the state’s $700 billion investment portfolio to advance California’s climate leadership… the Department of Finance shall create a Climate Investment Framework.”

There is nothing concrete in the Executive Order to describe how, or explain specifically what needs to happen to “redouble efforts to reduce greenhouse gas emissions and mitigate the impacts of climate change while building a sustainable inclusive economy.”

“Did he even read the directive he signed?” Sen. Moorlach asked.

“How much greenhouse gas emissions is created by powering high speed rail?” Moorlach asked. And, Moorlach said by refusing to improve and expand Interstate 5 and Highway 99, the Governor is creating more greenhouse gas emissions with idling cars stuck in traffic. We discussed the cities and counties with local councils and boards of supervisors approving “lane diets” and “traffic calming,” which has served to create epic traffic back ups and more idling cars spewing greenhouse gas emissions.

More Newsom Administration ‘Climate Change’ Talk

“Climate is a material risk to companies, both in terms of physical liability, like PG&E and wildfires and also when you talk about the transition to a carbon neutral economy because some assets will no longer be as valuable,” said Kate Gordon, Gov. Newsom’s director of the governor’s Office of Planning and Research, the Sacramento Bee reported. For instance, “electric vehicles are a solution and a player in the market,” she said. “We should be thinking of investing in electric vehicles. You want to avoid stranded assets as an investor and you want to avoid physical risk. There’s a growing understanding that climate change is a material risk to investors and companies just like cyber-terrorism or inflation.”

Sen. Moorlach questioned where the power will come from for all of the electric cars if California’s utility companies continue with scheduled power outages on windy days. And with the state’s current renewable energy mandate of 33 percent, 50 percent by 2025 and 100 percent by 2045, the electricity grid will not be able to withstand 40 million electric cars with intermittent power and rolling blackouts.

California purchases one-third of its electricity out of state – a figure that is bound to go up with each renewable energy mandate increase.

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