NEW YORK -- Orange County's loss on its investment portfolio is creating a bonanza for those brokerages and investors who snapped up bonds at depressed prices.
The Southern California county, which lost about $2.02 billion on its investments in the debt of government-related agencies, is unloading the bonds to avert further losses.
Although the county has stressed it won't hold a "fire-sale" of the securities, investors expect it to sell bonds at bargain prices to get them off its books.
"It's an excellent opportunity, as evidenced by the fact that about $1 billion of [agency bonds] came out last week and it was sold in a matter of minutes," said Tom Atteberry, who oversees $850 million at Fifth Third Bank in Cincinnati. "The bonds don't stay on the shelf long."
As soon as the news broke on Dec. 1 that the county sustained losses, investors began assessing how to make a profit from the county's pain.
"It's something where you can quickly conclude that this is a stressed situation you can take advantage of," said Zane Brown, who directs the management of about $10 billion in fixed-income securities for Lord Abbett & Co. "Your ears perk up."
Mr. Brown took advantage. On Friday, he bought as much as $40 million in five-year callable bonds issued by the Federal Home Loan Banks, bonds which the county owned and pledged as collateral for loans from Wall Street.
The yield was as much as 45 basis points more than five-year Treasury notes, bigger than the usual spread of about 33 basis points, he said. A wider spread means agency securities trade at a cheaper price relative to Treasuries.
Securities firms have sold $11.5 billion in securities, mostly federal agency debt, that backed loans they made to Orange County. Tuesday, the county received court approval to liquidate the rest of its investment pool, which totals about $8 billion.
Demand was so brisk for the agency debt owned by Orange County that some investors' bids went unfilled. "We put bids on some of the [non-callable] issues and we didn't get them," said Mary Werler, who helps manage $6 billion of bonds at the Bank of Boston.
Not to worry. So many bonds were for sale that the yield spread on new agency debt issues also widened. Bank of Boston bought on Friday a portion of a $250 million issue of two-year debentures priced Thursday by the FHLB. The bank got a yield that was 25 basis points more than the two-year Treasury note, compared with 13 or 14 normally, Ms. Werler said. "We're taking advantage of this," she said.
Wall Street isn't running away from the tidal wave of selling.
Lehman Brothers said that it bought last week more than $3 billion of what turned out to be securities that Orange County pledged as collateral for loans from rival firms. Lehman bought the securities Dec. 6, when its competitors first put them up for sale.
Brisk demand from a cross-section of investors ranging from mutual funds to insurance companies helped the firm sell all but about $150 million of the securities by this week, traders said.
Traders said the firm may buy even more securities from the investment pool if it turns out that doing so doesn't violate provisions of Orange County's bankruptcy filing.
Merrill Lynch & Co., J. P. Morgan Securities and Bear Stearns Cos. also are looking to obtain parts of the portfolio, a person close to Orange County said. Merrill underwrote many of the securities the county owns, and it is the only Wall Street firm that hasn't unloaded the securities, pledged in return for a loan.