SANTA ANA, Calif. -- Orange County became the largest government unit in U.S. history to file for bankruptcy protection yesterday, as its top elected leaders declared that the county had run out of cash after several big investment houses demanded repayment of $1.2 billion in loans they extended to the county's loss-stricken investment pool.
The news that one of the nation's largest and wealthiest counties was seeking protection from its creditors capped a day of political and financial turmoil that shook not just Orange County and its residents but also the nation's financial markets.
"There was no alternative given to us," said Supervisor Harriett M. Wieder.
Until yesterday morning, the county supervisors thought they could work out the crisis, spawned by the disclosure last week that the county's once vaunted investment pool had dropped $1.5 billion in value this year.
"Then, everybody walked." Ms. Wieder said. "The bond dealers -- they walked."
On Monday, the county announced that Treasurer-Tax Collector Robert L. Citron, whose investment practices are blamed for the portfolio's plunge, had resigned after 24 years in office.
The bankruptcy filing came a day later, after 12 hours of closed meetings by the board and other top county officials.
Filing under Chapter 9 of the federal bankruptcy code is a desperate last step for any public entity, because the stigma attached to such a move can lead to a bad credit rating and make it difficult, if not impossible, to borrow for public projects, legal and financial experts said.
"It's rare, it's quite rare . . . for any government to take that step -- and unprecedented for a county of that size," said Bennett Murphy, a bankruptcy expert and partner in the law firm of Latham & Watkins.
Chapter 9 functions much like Chapter 11 of the bankruptcy code for businesses -- it provides a government with protection from its creditors while it attempts to work out a plan for rehabilitating its finances.
Officials said the filing will have no effect on the county's ability to maintain police protection and other basic services.
The rumors of a bankruptcy filing -- an almost unthinkable turn of events for the affluent, conservative county -- spread from Wall Street to Washington to California through the day.
Rep. C. Christopher Cox, a California Republican and former securities lawyer, said he will hold hearings to sort out what happened.
The bankruptcy filing apparently was triggered when CS First Boston Corp., one of several large brokerages that has lent the county money to purchase securities, demanded additional collateral for its loans yesterday after the county failed to make a payment.
When the county was unable to put up the cash demanded, CS First Boston seized $2 billion of the county's securities that had been held as collateral for the loans, according to Wall Street traders familiar with the situation.
The brokerage firm then dumped those securities, mostly U.S. government agency bonds, on the bond market near the close of trading about 5 p.m. EST, a move that stunned traders, dealers said.
CS First Boston officials would not comment on their relationship with the county or on any actions the brokerage might have taken yesterday.
Meanwhile, the brokerage with the closest relationship to the county -- Merrill Lynch & Co. -- said it had not asked for additional collateral and had no plans to cut off credit to the county.
Peer Swan, chairman of the Irvine Ranch Water District -- which had threatened to pull its remaining $300 million investment out of the pool -- learned early yesterday that "a couple of Wall Street firms" had securities coming due and wanted to be paid off immediately.
"This is high-stakes poker," Mr. Swan said. "I can understand from an investment firm's perspective that this is a bad situation and they have shareholders who are very concerned.
"However, investment firms also have to realize that if they pull the plug, that's it. And that's a hard pill to swallow."