EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Case Study 2: Orange County, CA


Robert Citron was the Treasurer for Orange County, California, in the early 90s. He was solely responsible for investing several of the county’s funds, which totaled about $7.5 billion USD. Despite having no background in trading financial instruments, he decided to invest in risky interest rate swaps that were tied to the US Treasury Department’s rates.

Citron was a County Tax Collector with no college degree who was later elected to the position of Orange County Treasurer. In this capacity, he was able to push for California legislative approval for county treasurers to increase their use of financial instruments for investment and fund management.

He was attempting to arbitrage the difference between short-term and long-term interest rates. His position was sound, and he could make money so long as short-term rates remained low. During his tenure, the average return on county investments was a healthy 9.4%, but interest rates had been low for that long. The position he took would lose money if interest rates rose. And, he inflated the county’s volumetric position by entering into other derivatives that would also be negatively impacted by higher interest rates.

Beginning in February 1994 the Federal Reserve Board made the first of six consecutive interest rate hikes. Between February and May of that year, the County had to produce $515 million in cash (margin) to cover its position. Further margin calls would occur throughout the year, leaving the County's cash reserves at only $350 million by November 1994.

When word got out about the County's troubles raising cash, investors sought to retrieve their money, and by December 6, 1994, the County declared bankruptcy and lost $1.64 billion.