SANTA ANA, Calif. -- The problems with the Orange County investment fund drew mounting concern and scrutiny yesterday as investors, members of Congress, federal regulators and credit monitors assessed the full implications of a stunning $1.5 billion plunge in the value of the fund's holdings.
Four local government agencies that are among the fund's top investors said they would move to oversee the county's future financial dealings on behalf of the more than 180 cities and special districts that pool their funds for investment purposes.
A major Wall Street credit rating agency signaled that it may lower the ratings of Orange County bond issues, an action that could make it more costly for cities and agencies to borrow money.
Meantime, the federal Securities and Exchange Commission launched an inquiry into the situation, and the new chairman of the Senate Banking Committee said hearings will be held on whether there should be limits on investing public funds in the kinds of complex financial instruments that have driven down the value of Orange County's previously high-flying fund.
County treasury officials still were reeling from their disclosure Thursday that risky investment maneuvers combined with sharply rising interest rates to produce losses equivalent to 20 percent of the money invested by various agencies.
"I'm not going to make any dire predictions," said County Administrative Officer Ernie Schneider, who has hired an outside investment adviser to assess the potential damages. "I think we're telling people the straight situation. We're not trying to hide it from anyone."
Although no agencies had pulled out of the fund yesterday, some city officials with money in the portfolio say they now wish they had withdrawn earlier this year, when interest rates began rising and it was apparent the fund's bets were wrong.
SEC officials would not be specific about the nature of their inquiry.
"In general, we look for a lack of disclosure from whoever is marketing the securities to a government entity or a lack of disclosure from the government entity to its bondholders," said Commissioner Richard Roberts. "My current concern is that state and local governments are using too many volatile financial instruments."
At issue is the county's use of "derivatives" -- investments that typically involve complex bets on the direction of interest rates. Like many large institutions, the county essentially borrowed money short-term to invest in longer-term bonds, using its agencies' funds as collateral.
That strategy earned big returns of up to 10 percent a year while interest rates were declining. But the tactic backfired when rates rose.