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Brokerage Goes Hunting for Goodwill

Finances: Eight years after O.C. bankruptcy, Merrill Lynch courts business. Supervisor says the firm is donning 'white hat' prematurely.


With Orange County's historic bankruptcy in 1994, Merrill Lynch & Co. became the Darth Vader of public finance. Now, the giant brokerage--which the county sued after losing $1.7 billion in its financial collapse--wants back into the same halls of government from which it was banished eight years ago.

For months, company officials have been going hat-in-hand around Orange County, trying to rebuild Merrill Lynch's credibility, as well as its former client list. The firm, they say, has done enough penance and deserves a second chance.

"We'd love to do business with the county again," said Richard Meister, a senior banker with Merrill Lynch's municipal bond division. "We have great resources we can bring to bear."

For Merrill Lynch, it would be a remarkable turnaround. The brokerage was a major player in the county's financial collapse, blamed roundly for dreaming up the risky and self-indulgent investment strategies that the county is still repaying.

Hoping to reverse its fortunes in Orange County, Merrill Lynch has made overtures to a variety of civic leaders and government officials, including county Chief Financial Officer Gary Burton and Treasurer-Tax Collector John M. W. Moorlach. Some officials have responded favorably, even though county government continues to pay $93 million interest a year on the $1 billion in bonds it sold to climb out of its financial crater.

Moorlach, a critic of Merrill Lynch's county representatives at the time of the bankruptcy, said he wants to do business with the company again--something he first proposed in 1998 after the firm paid $420 million to settle the county's lawsuit.

Other government agencies have already thrown back in with Merrill Lynch. The Santa Ana Unified School District hired the brokerage in 1999 to underwrite a $13-million bond issue. The Irvine Ranch Water District has used the brokerage for two years to remarket short-term debt.

Others are less receptive. The Orange County Transportation Authority, which has projects on the books worth billions of dollars, has declined Merrill Lynch's request to meet.

"When Merrill Lynch reimburses the county of Orange for the losses it suffered in the Orange County bankruptcy, then they can talk about being benevolent," said OCTA board chairman and county Supervisor Todd Spitzer, elected two years after the bankruptcy. "It's premature for them to put the white hat on."

In December 1994, the county's two investment pools lost $1.67 billion in value, most of it because of high-risk securities bought by former Treasurer Robert L. Citron through Merrill Lynch. The loss triggered the largest municipal bankruptcy in the nation's history and rippled through every city, school district and special district in the county.

In 1998, Merrill Lynch agreed to pay the county $420 million to settle a lawsuit alleging the company and its chief Orange County contact, Michael Stamenson, encouraged Citron to make risky investments that violated state law. The firm also paid a $30-million fine levied by the Orange County district attorney's office to resolve a potential criminal case.

Statewide, the firm was knocked from its perch as the top municipal-bond underwriter as its market share plunged from 18.4% to 6.5% in a three-year span.

"I don't think there's any question that after the bankruptcy, there was a great feeling that they'd failed to perform their proper role as investment advisor for the county," said Gary H. Hunt, who chaired a three-member committee of business executives that recommended recovery strategies.

The lingering hard feelings aren't surprising, he said.

"I don't think it's appropriate today to look back eight years and expect that Merrill hasn't made changes," said Hunt, a former Irvine Co. executive and now a government consultant. "I'm sure they have. They're a very good firm."

Stan Oftelie, who chaired the creditors' committee for the government agencies that lost money, said there were people within Merrill Lynch who deserved more blame than the corporate entity.

"There are some rings of hell that some people in Merrill Lynch should never get out of," said Oftelie, now president and chief executive of the Orange County Business Council. "I wouldn't say the same thing for the nation's largest brokerage house."

Since the bankruptcy, Merrill Lynch has worked to rebuild its image. It earmarked about $250 million for charitable and community-oriented programs in California, providing educational opportunities for minorities, loans to small businesses, and financial assistance to low-income families.

In April, Merrill Lynch distributed about $3.2 million to financial education programs for minority youth, roughly a fourth of it flowing through county government. Officials deny suggestions they are trying to buy their way back into governments' good graces.

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