ORANGE COUNTY IN BANKRUPTCY : County Wins Broad Authority to Sell Pool Securities : Courts: Bankruptcy judge’s interim ruling is made over protests from agencies with funds invested.

Over the objections of many of the cities, school districts and water districts that have money in the Orange County’s bankrupt investment pool, U.S. Bankruptcy Court Judge John E. Ryan gave the county broad leeway Tuesday to sell any of its remaining $5.4 billion worth of securities in favor of more stable investments.

But Ryan’s ruling will only remain in force until Friday afternoon, when he scheduled a second hearing to reconsider the matter. The “interim ruling” will give the 187 governmental agencies that invested in the pool more of a chance to review the county’s request for unfettered control over the troubled fund, a request that the county submitted just hours before the hearing.

Several public agencies that invested millions of dollars in the fund filed a motion opposing the county’s urgent plea, which the county said was needed to minimize its mounting losses. Both sides asked Ryan for a ruling.

During the contentious, two-hour court hearing--the first since the county filed for bankruptcy Dec. 6--attorneys representing investors asked the judge to postpone any ruling for at least several days. They complained that most of the county’s 187 investors had been given less than 24 hours’ notice of the county’s sudden push for authority to sell all or part of the investment pool’s assets.

The courtroom was filled beyond capacity, and the bankruptcy attorneys were so numerous that they had to wear number tags for easy identification.

Attorney Nanette Sanders, representing the cities of Brea and Buena Park, said her clients had had almost no opportunity to study the proposal, or come up with alternatives.

“We have been kept in the dark the entire time,” Sanders said. “It’s remarkably cavalier of the county to waltz into court and say that the wishes of the smaller investors must all be pushed aside,” she said.

She and other attorneys representing public agencies complained that they had been excluded from a meeting earlier Tuesday between the fund’s top 11 investors and county officials in which the investors had been informed of the county’s intentions.

Ronald Rus, a lawyer representing Newport Beach, Fountain Valley and the Yorba Linda Water District among others, said he opposed allowing the sale of the fund’s holdings until his clients could assess the true worth of the fund. He said he wanted additional time to review the findings of Salomon Bros., the New York investment banking firm hired by the county to analyze the fund’s investments and come up with a strategy to stem the hemorrhage of losses. “My clients tell me that given a brief opportunity to analyze (the portfolio) themselves, they would like to make their own decisions,” Rus said.

But Orange County bankruptcy lawyer Bruce Bennett argued that the county needs the ability to sell securities and make more appropriate, stable investments immediately. The county must have the ability to sell certain investments if signs foretell more interest rate increases by the Federal Reserve, Bennett said. Every percentage point increase in the interest rate, he said, would result in another $300-million loss to the fund.

“If we do nothing, the casino stays open and the dice will keep rolling,” Bennett said. “This court needs to help us close the casino and put the dice away and start dealing with the substantial problems.”

Ryan noted that the market’s confidence in the county’s ability to deal with the financial crisis is critical to the county’s success in stabilizing its fund. He said he is loathe to do anything that would “undercut the county’s ability to get control of the situation.”

“It’s important that what happens here reinforces a positive market perspective,” Ryan said. Under Ryan’s ruling, the county now will be able to:

* Sell all or substantially all of the securities in its fund over the next 180 days to one or more bidders.

* Restructure its securities with agencies such as the Federal National Mortgage Assn. and the Student Loan Marketing Assn. and other federal agencies.

* Sell all or substantially all of the securities in the county’s fund by class and/or type of securities over the next 180 days.

* Take actions such as purchasing financial instruments to lock in the current value of the county’s fund and prevent further loss of value to the fund by any increase in interest rates.

The authority to sell off securities was particularly pressing, Bennett said, because of the upcoming holiday season during which Wall Street transactions grind almost to a halt. Bennett said the county needs to be able to seize any good opportunities for restructuring its portfolio this week.

Access to the fund was also needed to protect the county’s investments from upcoming market announcements about various economic indicators that could affect its value, he said.

Among the events and announcements that county officials feared could have an adverse impact are: today’s auctions of two-year and five-year U.S. Treasury notes; a Dec. 20 auction by the U.S. Treasury of two-year government notes and the meeting of the Federal Open Market Committee that sets interest rates, and the Dec. 21 U.S. Treasury auction of five-year Treasury notes, court documents say.

Neither Bennett nor former state treasurer Thomas W. Hayes, the county’s financial adviser, could predict what county securities might be sold most immediately.

“If tomorrow we found a good deal, we would execute it. But we won’t move so quickly that we’ll make a mistake,” Hayes said.

Bennett said that one of the county’s main priorities for payment of debts will be school districts, though he stressed that keeping schools running will be one of many priorities.

During the hearing, Salomon Bros. Managing Director William D. Rifkin, who is leading his firm’s efforts for Orange County, said his firm could potentially earn as much as $15 million in agent fees in a sell-off of Orange County’s investments. County bonds, he said, will probably sell at an 8% discount on average.