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O.C. to Liquidate Its Portfolio : Bankruptcy: 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.'


Despite the turmoil, Hayes said the county retains "an underlying strength" of job growth, low unemployment rate and high household income.

"I want to urge all of you: It is important we don't panic," Hayes said. "There's a diversified economy, and . . . basically, you have good people in this county."

In federal Bankruptcy Court on Tuesday, city managers and school district officials objected to the county's plan to sell any of its $5.4 billion in securities that remain.

One attorney who represents Brea and Buena Park said her clients had "been kept in the dark the entire time."

"It's remarkably cavalier of the county to waltz into court and say that the wishes of the smaller investors must all be pushed aside," said attorney Nanette Sanders.

Bennett, the county's bankruptcy lawyer, urged Judge Ryan to approve the plan during the Santa Ana hearing.

"If we do nothing, the casino stays open and the dice will keep rolling," Bennett said. "This court needs to help us close the casino and put the dice away and start dealing with the substantial problems."

Ryan said he would not do anything to "undercut the county's ability to get control of the situation. It's important that what happens here reinforces a positive market perspective."

The hearing was the first since the county filed for federal bankruptcy protection on Dec. 6.

An analysis of the county's investment portfolio by Salomon Bros. provided the most comprehensive look yet at how much the county's holdings have deteriorated since early this month, when county leaders announced the investment troubles.

Structured notes--exotic securities that are likely to be the hardest holdings to sell--now comprise 60.1% of the pool, up from 47% as recently as a week ago. The probable explanation is that investment bankers sold a large share of the pool's better-grade securities as they redeemed their collateral last week on unpaid loans to the county.

Salomon officials said the average maturity of holdings in the pool is now about four years, sharply higher than the 2 1/2 years reported by former county Treasurer-Tax Collector Robert L. Citron as recently as September. Portfolios tend to be much more sensitive to fluctuations in interest rates as their maturities lengthen; with rates going up, the value of longer-term securities tends to get pummeled. County officials said they hope to slash the average maturity to less than six months.

Hayes and William D. Rifkin, a Salomon managing director, hinted in an interview that investment firms that dumped the county's holdings onto the market last week may not have gotten the best price for them.

They said the more conventional securities among the holdings were currently valued at 95-96% of their face values, but that the investment firms sold the county's collateral at an average of only 90%. Rifkin later declined to say specifically that the firms had undercut the market, but he did note: "Clearly they sold the securities quickly."

Residents Angry

The emerging financial fallout has angered many citizens, some of whom addressed the board at Tuesday's meeting, the first public session to address the situation.

"You were negligent," Tustin attorney Stephen Johnson told the supervisors. "What won't work is the current board. Stop blaming others."

Teddi Alves, a local broker, directed her outrage at Ernie Schneider, the county's top administrator. "I'm not here to shoot fish in a barrel, but I think there should be layoffs and they should start with you, Mr. Schneider," she said.

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.

Supervisor Roger R. Stanton offered a proposal to identify potential budget cuts and restructure county government operations. Supervisor Gaddi H. Vasquez called a news conference to announce advances in state money for the Orange County Transportation Authority. But he kept reporters waiting for 2 1/2 hours and eventually canceled the briefing because his office was unable to confirm the development.

Supervisor-elect Marion Bergeson, now a state senator, issued a statement calling for the county to adopt a charter ordinance, which would allow the county to privatize certain services and departmental roles, such as the treasurer's office.

On Monday, county officials cut off all but essential spending related to health, safety and welfare because of the cash crunch.

Vendors still had no idea Tuesday whether they would be getting paid.

At one point, the vendor who supplies toilet paper to the county jails had balked at delivering until he received money up front.

"There's been a lot of confusion," said Sheriff Brad Gates, who said the toilet paper was later delivered.

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