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STUDY FAULTS OC FOR CRASH : REPORT SAYS OFFICIALS SOLD ASSETS TOO QUICKLY.

Byline: E. Scott Reckard Associated Press

Orange County's financial state did not justify filing bankruptcy and it could have reversed its $1.64 billion loss by just hanging onto its investments, a Nobel laureate economist says in a study.

The study by corporate finance expert Merton Miller of the University of Chicago, released Thursday, was commissioned by Merrill Lynch & Co.

Merrill Lynch, once the county's main investment house, is now the target of a $2 billion county lawsuit blaming the brokerage for the debacle.

``By filing bankruptcy petitions and liquidating OCIP (the county investment pools), Orange County . . . switched instead to a strategy of investing in low-yield, cash-equivalent securities,'' Miller said in a report from his Lexecon Inc. consulting firm.

``The financial condition of OCIP did not compel this dramatic change in the investment strategy that had greatly benefited the county for many years. Our analysis also shows that Orange County's decision to change its investment strategy turned out to have been a costly one for the county.''

Orange County's lawsuit contends that Merrill Lynch encouraged investments so risky they were illegal under state law.

Miller acknowledged the county's former strategy of heavy short-term borrowing to fund higher-yielding long-term investments was risky at times when interest rates rose. He wouldn't offer an opinion whether it was too risky for tax dollars, saying degree of risk is up to the investor.

``Our job as economists is not to tell you what to have for dinner,'' he said. ``Our job is to tell you how much it costs.''

County officials said Miller's study misrepresents cash available to the county and its ability to keep brokers from selling collateral and investors from creating a ``run'' on its treasury by pulling out funds. The study also ignores Merrill's duty to provide suitable investments, they said.

``The entire analysis is misleading because it envisions a world where you let the bets ride and you start winning them all,'' said Bradford Cornell, a UCLA finance professor and county consultant.

``The county shouldn't have been betting (in the first place).''

Miller said that after the losses the county pool had a net value of $6.1 billion Dec. 1, 1994, and still was generating monthly net income on its investments of $32 million. He said there was $640 million in cash and plenty of other liquid investments that could have been sold to meet demands.

If the pool had been left alone, instead of being sold at a loss by brokerages and the county, the initial loss of $1.64 billion in market value would have dwindled to $243 million by March 29, he said.

Christopher Varelas of Salomon Bros., a county financial adviser throughout its bankruptcy, said the study is ``meaningless and irrelevant given that it did not address the appropriateness of the investment strategy.''

Varelas said he believed that the cities and local agencies with money in the county treasury would have pulled it out even at considerable loss if the bankruptcy hadn't been filed.

``If you found out the money you relied upon to run your business was in a casino you would have cut your losses and taken your money rather than putting it on red once again.''

Paul Sachs of Arthur Andersen & Co., the accounting firm assisting the county, said much of the money in the county pools belonged to other entities and couldn't be used to help the county.

Of the $640 million in cash cited by Miller, for example, $350 million was fresh property taxes from one of two payments made a year.

CAPTION(S):

Photo

Photo: (Color) Merton Miller authored the study on Orange C ounty's finances.

Associated Press
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Title Annotation:BUSINESS
Publication:Daily News (Los Angeles, CA)
Date:Apr 26, 1996
Words:609
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