Orange County Case Summary
An experienced treasurer named Robert Citron was in charge of managing Orange County’s
investment pools whose value is around $7.5 million. Thanks to Orange County’s vivid
economic activities and remarkable excess returns, it attracted large amount of money from
county itself as well as various local government authorities.
However, due to good track record of Robert Citron and county’s good past fund management
performance, there was no questioning on how this excess return works? And how Orange
County started to make instead of managing it. It did not pay attention but there was some
weakness in the system such as weak financial reporting, complexity of the instruments
1
, lack
of strict written procedures.
The value of the investment pool continued to grow until February 1994, it was the time FED
made the first of a series of interest rate hikes. This triggered the series of bad events because
due to moving from short rate secure borrowing to medium term risky borrowings make
Orange County more vulnerable to the changes in economic conditions. Following this
increase in interest rate, some counterparties prepaid to seize/liquidate investment pool’s
collateral
2
. Besides, other government entities that had invested in the fund started to
withdraw their money. This cause a loss of nearly $1.5 billion. Eventually, to prevent further
loss, Orange County declared bankruptcy after unprecedented loss.
Subsequent to this big failure, series of measures were introduced so as to stay away such big
losses in the system and to make tax payer sure that their money is managed in a proper way.
These measures included an oversight committees, new Moody’s rating system, some policies
ensuing the safety first, prohibiting repo, borrowing for investment, structured notes
3
,
derivatives as well as other measure like treasurer’s monthly reporting and the one preventing
conflicts of interest. Robert Citron got his own share: he paid $100.000 fine and spent less
than a year under house arrest.
3
Structured note is a debt obligation that also contains an embedded derivative component
that adjust the security’s risk/return profile.