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Local Heroes ',it,- i,--/ " 9y
<br /> Public Finance Chiefs
<br /> Are Often Very Boring; • _ Also, most government finance direc-
<br /> i tors stay away from the massive leverage•_ .- , ; _-- That's the Good News ! the Orange County d m
<br /> used by ng onager,
<br /> .,-, .- -•-- - -:--- . .:;.- : by borrowing huge sums, he made•his.
<br /> _ - successful bets more successful while his
<br /> • _ .. .•: - • - _s Many Resisted the Pressure losing bets became disasters. .
<br /> •
<br /> g That's not to say there. won't.be a.
<br /> n TO Become Big Shots few more Orange Countys:-The sales
<br /> d pressure from Wall Street-not to mention
<br /> With Risky Investments the pressure in some localities to maximize
<br /> 1, investment returns as an alternative to
<br /> a new taxes — has been enormous over the
<br /> S HOW to Spell 'Derivative' ',. past two years- Toss that together with
<br /> municipal money managers who tend to
<br /> 1 -
<br /> l understand derivatives' potential better.
<br /> A WALL STREET JOURNAL News Roundup than the risk,and you have trouble._ •'<
<br /> li Charles Cox,finance director of Farm- ` Pressure to Regulate •- -.
<br /> • r ers Branch, Texas, a Dallas suburb of e
<br /> 3 24,000,says his office has been deluged in R.K.municipal bond senior vice president y-
<br /> the past year or so with derivatives ped- the d James i bond depsburg, at. ayS
<br /> Y Biers trying to get a portion of the town's his f James in rk St. g with for l Florida,
<br /> a 350 million portfolio.Mr.Cox hasn't given ms firm working with four Flo"ex-
<br /> municipalities that own derivatives to"'ex=.
<br /> I, them a penny under a personal rule that
<br /> 3 says: "If I don't understand it and I don't but he says heir expos re is "far.cities,
<br /> • know how it works,I'm not going to invest but :t says theig.exposure is "wh.less t
<br /> in it." than that of Orange County.And while not.
<br /> Agrees David Brunner,chief executive talking .directly about his clients"•M'r:.
<br /> _ officer of the Retirement Systems of Ala- Johnson adds: "It's were likely many
<br /> - _ -- - -- - - - --- - - . „ [derivatives) buyers:.were soid,'on•using;
<br /> :a ,:"....' -;, _= - _- :`•-. - bama,that states pension fund. There's din ::.the•
<br /> derivatives without understan g
<br /> -e no incentive for someone like me to take ;
<br /> _ . that kind of risk.It didn't make any sense. Indeed. the Orange•County debacle„
<br /> Why should I invest in something I can't and those yet to"unfold,will"absolutely
<br /> ... ; even spell?" increase pressure to tighten,regulation•in'•
<br /> Derivatives have had their ups and the business of investing.trillions of tax-:
<br /> downs on Wall Street.But a larger question payers dollars-by state:and local go}tern
<br /> ments,.says Robert Boyden Lamb,profes-
<br /> The Financial fallout 501 of finance and:management,at:-N_ew; ,
<br /> .York University's.i Stern School:of,Busi
<br /> There was more confusion than answers " ,
<br /> as cities and agencies that have their
<br /> ■ nets.:,Its'a watershed event in.terms of?
<br /> • money tied up is the.
<br /> monitoring denvative-risk exposure•(and]'
<br /> Orange County's$7.5 raises important questions about munid .
<br /> ORANGE billion investment pal oversight,'he says. �''
<br /> fund worried about Derivatives in simple form are linen-,
<br /> ! COUNTY everything floor be- . dal, agreements whose :values. depend;
<br /> ing able to pay em-
<br /> 1 p �C+ �C+ ployees to the future ,upon,.or are derived from,some underly- .
<br /> 1 CRISIS •• of major construction Mg financial asset,, such.as ,stocks.or,
<br /> projects Article on bonds.They are but the latest_if costli
<br /> .) page A3.In other developments: : . est—in a long history of finance wrinkles;
<br /> •Municipal bonds took a coast-to-coast that tempt public treasuries into invest.:
<br /> • - :t beating in the market,CL menu that managers and taxpayers,later.
<br /> . r •Investors in muni bonds and bond. regret.In the 1980s,many munlcipSlitles,
<br /> t tends are urged to hold on,CL •got-burned:when.they invested'In;e3ot c
<br /> •Wall Street firms are scrambling to forms of government zero-coupon ponds:
<br /> u3 sell about$10 billion of securities,A13. that proved highly volatile on interest rate
<br /> r ■For Merrill Lynch,there might be a nevi
<br /> . - Ala. - his tad d
<br /> .,:; swings_Many unsop tics city mo
<br /> Law hangover. that wrote the book on, managers understood the upside potential,,
<br /> - • . 1 skirl s bu ak e .
<br /> municipal-baai¢uptcy law,B5. �" 1.of these zero coupon p t n W
<br /> - y ' y risks- r,,.}ti. s7iw{
<br /> �" 1:0l;ikei-theyrisiiilinaucial,ipstnkor, ; -
<br /> bis Ito they threaten to flatten Ma-n Street?: {ore;them;'ieveragec deripativea ldt
<br /> . no*, .
<br /> )f The ._ti0 i is pertinent o ,tbaEOrange 'other'exdtle instruments"Yaise`a:,cen 5':`'
<br /> Coun f.••has'filed-;for bankruptcy..
<br /> . : . tectio aft r h � .
<br /> 7_. question: WhY.would•any prddent:,c
<br /> P .., n e uge losses in risky 3�e5t= ceded public money manager evgn o f
<br /> merits Including derivatives '-''
<br /> ;--Please7'urmtoPagedtE Eoi7tmI
<br /> r:...:_,_Tile .1*T*13,1.upou.a_broaid.lnfor_: ; 71' '
<br /> oral survey:of government finance direr •.tors and their trade associations,is proba- "".t;',;,;!:.'.:.
<br /> bly.not: Like Farmers Branch and Ala- -----•-- -•—• =
<br /> bama's pension plan,most city,state and .
<br /> regional governments seem to have .,....,:..:,. .:• ... ... .,
<br /> ducked the derivatives frenzy,sticking to
<br /> tried and true conservative investments t
<br /> - ' like Treasury bills and other U.S.govern —
<br /> y
<br /> ment securities. And where they have :_ - ' y:
<br /> • ., ` -: : made derivative investments,those invest-
<br /> ments tend to be more of the "plain
<br /> - vanilla" types that are comparatively
<br /> _
<br /> - safer than the more exotic types that cost -
<br /> - - - ...- -,:_.. Orange County so dearly.
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