Merrill Lynch rebounds from 1994 scandal

Merrill Lynch, which fell from favor in California for its central role in Orange County's historic 1994 bankruptcy, has repaired its image in the state and is now a leading competitor for the job of financing California's unprecedented debt.

Today, Merrill Lynch ranks second among the banks selling long-term bonds in California. It assisted with last year's $11 billion in state borrowing and an earlier deal to help the struggling Los Angeles Unified School District.

Market observers said the reasons Merrill Lynch has made a quick comeback from a scandal that received global attention are two-fold: The sheer size and customer base of Merrill Lynch, which is one of the top five banks in the United States, allows it to offer competitive interest rates. Also, the bank has been aggressive in pursuing large deals, such as a $2 billion bond issue last year with the Los Angeles Unified School District.

When Orange County filed for bankruptcy protection, Merrill Lynch was blamed for its role in facilitating and encouraging a risky investment strategy. In 1994, then Orange County Treasurer Robert Citron invested $20 billion, including $13 billion in loans from Merrill Lynch, in derivatives -- an investment product that's tied to another factor. Citron tied his investments to interest rates, betting they would stay low.

When interest rates rose, the county lost $1.7 billion of taxpayer money and subsequently filed for bankruptcy protection. The unprecedented controversy fueled a Securities and Exchange Commission investigation, a criminal investigation and a rash of lawsuits against the county and banks associated with the deal, including Merrill Lynch, Citron's primary banker.

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