From today’s LATimesÃ‚Â
The man who called attention to county’s shaky investments now is defending his own.
By Christian Berthelsen, Los Angeles Times Staff Writer
December 6, 2007
In 1994, Chriss Street was hailed as a hero for helping to blow the whistle on high-risk holdings in Orange County’s investment portfolio, presaging the largest municipal bankruptcy filing in U.S. history.
But now, in his year-old role as the county’s treasurer, Street finds himself in the awkward position of having to defend some of his investment decisions.
Street made a startling presentation to the Orange County Board of Supervisors this week, warning that $460 million in debt securities the county holds face a potential credit-rating downgrade — raising the possibility that the county could lose money on them.
Street appeared before the supervisors at their regular Tuesday board meeting during the public comment session — usually a forum for gadflies to harp on obscure points of policy — to announce that nearly 8% of the county’s investments had been placed on “credit watch” by Moody’s Investors Service.
To Street, the move was an overture of openness and honesty, a way to bring a potential problem to the board’s attention. Supervisors had criticized his communication style earlier this year, saying Street’s private business dealings and county spending decisions had given them too many unpleasant surprises.
Street’s announcement, some supervisors said Wednesday, was appreciated, but it also followed the same pattern of abrupt revelations that has eroded their comfort level with him.
A particular critic is Supervisor John M.W. Moorlach, Street’s erstwhile ally in sounding the alarm over Orange County’s investments in the 1990s and predecessor in the treasurer’s office.
He questioned why Street did not bring the matter to the board’s attention earlier, as problems with the investment portfolio built, rather than waiting until Moody’s announcement that the bonds faced a possible rating downgrade.
“I think it would have been preferable for Chriss to build a case . . . over a period of time through his monthly report to the board,” Moorlach said. “Why did we have to find out the percentage because of Moody’s doing something? We’re a team, we’re all working together. The No. 1 rule in management is we don’t like surprises.”
Supervisor Bill Campbell said he had no inkling that Street would be making such an announcement.
“It was a surprise, but having said that, I’m glad he came forward,” Campbell said. “The thing that kind of frustrates me a little bit is that he came and gave us that pitch, but he has never put anything in writing to us.”
Board Chairman Chris Norby said he found Street’s approach “unusual,” but also said the circumstances — Street learned of the rating agency’s move Friday, too late to be placed on the weekly agenda — may have made it necessary.
Despite the warning of a possible downgrade, Street’s office said the assets are highly rated and continue to perform.
Orange County remains hypersensitive about its finances in the wake of its $1.7-billion bankruptcy in 1994, and Street’s reversal of fortune could not have come at a more precarious time for him. He faces a previously scheduled board vote next week on whether to strip him of his authority over the county’s $6-billion investment pool.
The fund invests the cash balances of the county and many of its school districts, usually in high-quality, short-term debt securities.
Street has faced a cascade of questions over his personal and public dealings in his first year in office, ranging from a $750,000 office remodel and handling of county contracts to redesign the outside of his building, to lawsuits and federal investigations into his oversight of a bankrupt trucking company before he took office.
He survived a board vote on the same proposal in August; supervisors cited the investment fund’s positive performance as a reason to allow Street to keep his powers, even as they urged him to be more forthcoming.
Now, questions loom about some of those very same investments, and supervisors are absorbing yet another surprise disclosure.
Street’s announcement to the board “was unusual because the circumstances were unusual,” said Keith Rodenhuis, a spokesman for the treasurer. “We approached it in an open and transparent manner, and did so at the first opportunity. We’ll continue to address the matter in that way.”
Street declined a request for an interview.
Supervisors and their aides Wednesday said it is too early to tell how serious the potential problems with the investments are — and, ultimately, there may be none. But the issue raises questions about why county funds were still locked in an investment vehicle months after they fell out of favor in the markets, creating potential problems with their liquidity and value.
At issue is a type of short-term debt instrument known as a structured investment vehicle. Since summer, SIVs have become Wall Street’s latest problem child because in many cases the capital generated by the notes was used to invest in the troubled sub-prime mortgage market. As home loan defaults soared, the value of securities tied to sub-prime mortgages plunged.
Street’s office said the type of SIVs the county holds have almost no underlying sub-prime assets. The securities in question held the highest-possible quality rating. The other rating agencies have not followed Moody’s lead in placing the issues on credit watch, and the investments have not actually been downgraded.
Still, the Moody’s report last week called into question the entire SIV sector and said the firm would begin using more cautious evaluation methods, raising the possibility of a downgrade of the securities held by Orange County.
The county holds nearly $850 million of SIV debt, about 14% of its total portfolio. Of that, $460 million in notes maturing in the next two years are subject to the possible rating downgrade.
Unlike Orange County, investment officers in Imperial, Los Angeles, Riverside, San Bernardino, San Diego, and Ventura counties said Wednesday that their short-term investment funds held no SIV debt and no securities in danger of being downgraded.
“Our job is to preserve capital, not to reach for yield,” said Dick Larsen, treasurer of San Bernardino County. “For Orange County to do this is unconscionable.”
San Diego County’s $4-billion investment pool had owned some SIV debt, but the last of it matured Nov. 7, said Treasurer Dan McAllister. At most this year, SIVs accounted for 1.25% of the fund’s assets, he said.
Street’s office said it remains confident in the investments and the county’s overall portfolio performance, which the office says is the best justification for allowing Street to keep his investment powers.
“The vast majority of the county’s assets under management continue to outperform,” said Rodenhuis, the treasurer’s spokesman. “That was our truism then and that’s our truism now.”
Times staff writer Tom Petruno contributed to this report.
Let’s see what the OC Board of Supes does next week.