Tuesday, September 4, 2007

Orange County's Batman and Robin Break Up

(Posted on Huffington Post September 4. See comments posted there.)

As campaigners against waste and fraud, John Moorlach and Chriss Street rode to fame as the fiscal Batman and Robin of Orange County, Calif.

The duo worried publicly that Orange County’s longtime Treasurer, the memorably named Bob Citron, had put County-managed funds (a total of about $20 billion, including funds from other jurisdictions in a pool) at great risk through investments in leveraged derivatives such as repos and floating rate notes. The County lost big time on Citron’s bets when the Fed’s open market committee raised the target fed funds rate from 3.25 percent in February 1994 to 5.5 percent in November 1994. As interest rates rose, the value of the securities fell and the County lost about $2 billion.

Moorlach ran against Citron for the Treasurer post in June 1994 and lost. In December, Credit Suisse First Boston required more collateral from the County, which filed for a Chapter 9 bankruptcy. Moorlach was appointed to succeed Citron as Treasurer, and was subsequently elected through 2006. In that year, Moorlach gave his friend Street a leg up to the Treasurer job by appointing him to the civil service post of Assistant Treasurer after posting the job for just one day.

Street was elected to the Treasurer post in June 2006, his ballot statement unabashedly tied to Moorlach’s coattails: “Orange County Treasurer John Moorlach trusts Chriss Street to replace him…” His bio reports that “Chriss Street has been among John [Moorlach]’s closest advisors.”

Moorlach was at the same time elected one of Orange County’s five supervisors. Upon taking office in December 2006, he called for more accountability for the deputy sheriffs’ funds. Orange County has an estimated unfunded pension liability of more than $2 billion, of which a big piece is for law-enforcement pension benefits. Union leaders responded that Moorlach’s interest stemmed improperly from their opposition to his campaign for supervisor.

What a difference a few months make! The Dynamic Duo has broken up. Moorlach has disowned his protégé Street in the wake of a growing series of investigations of Street’s actions before and since taking office. The Justice Department is investigating Street's previous work as a bankruptcy trustee for Fruehauf Trucking Corp. So is the Department of Labor and Pension Benefit Guaranty Corp. The Orange County District Attorney joined the investigating troops in August. Moorlach became aware of Street’s having falsified data and privately asked Street to resign. Moorlach was rebuffed and has publicly called for Street’s resignation. Street has defended himself in a videotaped press conference.

Apart from the specific charges of malfeasance, one worry is that Orange County’s $7 billion funds have again been mismanaged, for example by buying subprime paper. The troubled Countrywide Financial Corp. is the nation’s largest subprime mortgage lender and is based in Los Angeles. New Century Financial was until April the second-largest subprime lender, based in Irvine (Orange County), and has been in Chapter 11 proceedings since April. At the August meeting of the Orange County Republican Central Committee, Moorlach was asked if the County has investments in mortgage debt.

Orange County’s troubles will doubtless one way or another come to the attention of Governor Arnold Schwarzenegger, who played Mr. Freeze in the ill-fated 1997 movie version of the Batman and Robin story.