Street’s Risky Investments

On Tuesday, The Orange County Board of Supervisors chose to ignore the warnings and renew the investment authority of County Treasurer/Tax Collector Chriss Street for another year. Even with fire alarm bells literally going off in the Hall of Administration, the Board still couldn’t tell if another shoe had dropped.

The drip, drip, drip of disturbing news and; the thump, thump, thump of subpoena’s dropping all around town could not awaken the Board from its restless slumber. Street kept them asleep with his tales of good fortune, saying go back to sleep there’s no need to worry, no need to worry at all.

UPDATE: Maybe part of the reason Supervisors Norby, Nguyen, Bates and Campbell voted to continue supporting Street has something to do with this tidbit reported by the LATimes this morning:

Lawyer to key Orange County Republicans was disciplined by state bar
Phillip Greer, who advised a county official to set up a secret fund later ruled illegal, had twice been ordered to take ethics classes.

Janet Nguyen was barely losing the February election for county supervisor. When she decided to ask for the recount that would eventually put her ahead, she did what many Orange County Republicans do when they need election law advice. She hired Phillip Greer.

The attorney’s client list reads like a Who’s Who in county Republican politics. Besides Nguyen, among those Greer has represented on election matters are county Supervisors Bill Campbell, Pat Bates and Chris Norby. He also represents Treasurer Chriss Street, who is under scrutiny in his role as a bankruptcy trustee.

Ron Campbell explains in his OC Register article yesterday that…

“Soon after taking office, Orange County Treasurer-Tax Collector Chriss Street nearly tripled the county’s stake in controversial securities that other local governments avoid.”

The securities, known as structured investment vehicles or SIVs, almost cost Street his investment powers this week. County supervisors voted 4-1 Tuesday to let Street continue investing the county’s spare billions – but they ordered a consultant to weigh the risks of his bets.

Street says the SIVs are safe and secure. He also says they’re old news: The county began buying them at least six years ago under his predecessor and principal critic, Supervisor John Moorlach.

The problem, as Campbell reports, is that…

They comprised 4 percent to 5 percent of the county’s $6 billion investment pool from 2003 to 2006. Today SIVs account for 14 percent. Click Here to view a chart of the investments in SIVs.

Street was buying while other big investors were getting nervous. By July 30, when the county bought its last SIV, heavy losses on mortgage-backed securities had given some on Wall Street a severe allergy not just to mortgages but to all types of asset-backed securities, including SIVs.

The investments came under fire earlier this month when Moody’s Investors Service threatened to downgrade more than half the SIVs in Orange County’s portfolio. A downgrade would have undercut the value of those securities, for which the county paid $460 million.

Citigroup and Netherlands-based Rabobank subsequently agreed to take most of the SIVs onto their books, giving them their own gilt-edged credit rating. Just one issuer in the county portfolio remains under threat, and its sponsor is planning to restructure the SIV to avoid a downgrade.

Because of the big banks’ maneuvers, Street told county supervisors Tuesday, the SIVs may be better investments now than when he bought them.

“By luck of the draw, he’s right,” said Joseph Mason, a SIV expert and finance professor at Drexel University in Philadelphia. “That still does not justify his activity.”

At first glance a SIV looks like a perfect deal for both the bank and the investors. The bank moves assets off its balance sheet, making it look stronger on paper, but still gets paid to manage those assets. The investors get top-A rated securities that pay better interest than most highly rated securities.

“Invariably,” SIV expert Mason said, “the investors claim they were attracted by the high yield and were told they were risk-free.”

Moorlach agreed: “You almost got the sense you would always get paid,” he said.

The perfect deal broke down late this summer when the Wall Street mortgage panic spread to other types of asset-backed investments.

SIV managers no longer could get cheap short-term loans. That endangered the SIV’s credit ratings. Rather than face angry investors, banks took the assets back onto their books.

The banks didn’t have to take the SIVs back, Mason said. The SIV assets were, after all “off the balance sheet.” That means they weren’t the bank’s responsibility.

One of the lessons here, Mason said, is that “ratings don’t mean what we thought they meant, and we shouldn’t be surprised by our predicament.”

So what will it take to get the Orange County Board of Supervisors to cancel the making of the sequel to Chriss Street’s Risky Investments?