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Orange county bankruptcy

1994 . 12 (County of Orange) 6 16 q 9

. 75 5~6% . q , ,

Robert citron 187 1991~1993 9.4% 5 1994 q


: 60% : 3% 25% 35%




q A. 1980
Reverse repo . Inverse FRN Robert Citron 5 . 90 .

Inverse FRN ,



FRB , ,

. Repo

10 8 6 4 2 0

1month 3month 6month

1year 2year 3year


<Market yield on U.S. Treasury securities> -

Timeline: Pips Begin to Squeak in Orange County

February 1994: Fed makes the first of a series of interest rate hikes, and so threatens the directional bet on interest rates built into the Orange County investment pool. September 1994: Orange County treasurer Robert Citron tries to calm growing fears among investors. November 1994: Auditors find that the pool has massively lost value. December 1, 1994: Citron confirms that the pool faces $1.5 billion loss. December 3, 1994: Citron resigns. December 6, 1994: Prompted by due date of certain repo transactions, Orang Country e files for Chapter 9 protection. May 2, 1995: US Bankruptcy Court endorses settlement of what is left in the investment pool. Some 241 participants get 77 cents in each dollar of their investment balance as a cash distribution. November 19, 1996: Citron is sentenced to a year in jail and $100,000 fine. December 17, 1997:Moodys Investors Service rewards the countys recovery and new investment policies with an investment grade rating for key county borrowings.

June 2, 1998: Orange County reaches a $400 million settlement of its lawsuit against Merrill Lynch. February 25, 2000: Some 200 municipal and governmental agencies finally made good in a disbursement of $864 million. But Orange County continues to pay off the recovery bonds it issued in 1995/6 to fund the bulk of the pools losses.

Lessons Learnt:
- Beware the unconstrained star performer, even when he or she has a long track record. Where theres excess reward, theres risk though it might take time to surface; - If the organizational structure, planning and risk oversight mechanisms of an institution are fractured, it is easy for powerful individuals to hide risk in the gaps; - Borrowing short and investing long means liquidity risk, as every bank knows; - Risk-averse investors must tie investment objectives to investment actions by means of a strict framework of investment policies, guidelines, risk reporting and independent and expert oversight; - Risk reporting should be complete, and easily comprehensible to independent professionals.Strategies that are not possible to explain to third parties should not be employed by the risk averse. B%E7%C0%DA%B7%E1/Rs0103_003.pdf