February 4


Melissa Balmain was probably the first to question the media’s culpability in the OC bankruptcy drama (see UPDATE – December 9, 2009).  Now others were weighing in.  Jim Wood, of the Coaster, easily endorsed Citron during the campaign in his publication.  Now he was doing some introspection in “Where Was the Media Before the Bankruptcy? – Despite leads, The Times, Register and others did not find cracks in Orange County’s $22 billion bond pool prior to its collapse in early December.  Many are now asking why?”  Jim’s piece included two side panels, “mea culpa” and “In Response:,” providing explanations from those who should have done a better job on this topic. 

I’ll start with Jim’s “mea culpa.”  The Coaster Magazine was a weekly focused mainly on the city of Newport Beach.  I was on their mailing list as a friend had been involved with the publication.  But, I did not consider the paper material enough to include on our list of publications to forward our press releases to.

The main article, “Despite Leads,” was a data driven, scholarly, and honest piece on the subject of local journalistic coverage of the campaign and following.  It covers the clippings that I’ve provided over the last year in the Five-Year Look Backs.  It even covers more than the clippings, including my letter to then-Register publisher David Threshie and others.  My memory is fading, but it seems to me that Jim Wood actually came to my office and spent time going through my files.

The American Journalism Review would also do a lengthy article on the same topic, but it would reach a national audience (expect to see this piece around March 1st).

If you didn’t read the Look Backs in full last year, or are a new subscriber, the work by Jim Wood below will catch you up on the joys I experienced in working with the media in 1994.

Mea Culpa

As part of the Orange County media, Coaster Magazine is also at fault for not looking into Robert Citron’s Orange County Investment Pool prior to December 2, 1994.  In fact, the Coaster endorsed Mr. Citron in the June 7, 1994, primary election.  Further, prior to making the endorsement, we failed to attend any of the candidate forums where challenger John Moorlach presented his warnings of an impending disaster.  Also, the Coaster never covered a NMUSD board meeting where Chriss Street advocated against borrowing funds to invest in the pool.  In defense, Coaster Magazine was never sent a copy of any of the John Moorlach letters or memos referred to in the accompanying article.

                Despite Leads

The storm hit suddenly.  It broke across the front pages of early December and has continued to this day.  It’s a media blizzard that has swirled around Orange County, Robert Citron and John Moorlach with inverse floaters, derivatives and billions of lost tax dollars.  But there was a calm before the storm.  Regarding a tottering $22-billion investment pool involving 187 municipalities, the media was silent in the weeks, even months, before the fund burst.  Why?  A review of local and national publications indicates that prior to its bankruptcy, only 36 articles ever discussed Robert Citron’s Orange County Investment Pool.  And that coverage appeared six months prior to the monetary maelstrom.  More importantly, never was serious inquiry made into what the media now describes as very valid storm warnings.

Basically, the forewarnings came from two sources:  Corona del Mar investment banker Chriss Street and Costa Mesa CPA John Moorlach.  In turn, their concerns were directed at two targets:  politicians and the press.  “Media-wise, I aimed at the Times Orange County and the Orange County Register,” recalls Street.  So why did the two large and competitive newspapers fail to alert readers to what became the biggest story in the county’s history?  With the advantage of retrospection, three answers emerge:


The story was treated as a political, rather than a business or financial issue.  All but one of the articles on the investment pool published by the Times and Register related to the early June Citron-Moorlach race for county treasurer.  The Times ran 18 such articles, but stopped when the election was over.  The Register printed ten pool-related articles, but only one, a short piece on October 13th headlined “Citron says he zigged, Fed zagged,” focused solely on the investment pool.  Also, 98% of both newspapers’ stories ran in the local, rather than front page or business, sections.  The exception was a Times article of April 30th that was given front page status.  Coincidentally, coverage of Moorlach’s accurate May 31st letter to then-OC Supervisor Thomas Riley, warning of the fund’s impending doom, was similarly positioned by both publications on page 7 of their community news sections.


What coverage was given to the billion-dollar investment pool centered more on the messengers than the message.  Typical was the Times story of April 15th headlined “OC Treasurer Says Critics Peril County’s Credit Rating.”  The piece noted that Moorlach and Street had expressed their concerns to Wall Street prompting Citron to say, among other things, “These kinds of people are dangerous.”  In turn, Street implied Citron was “a gambler.”  Street was also quoted as saying, “The fund should receive greater scrutiny.”  But little of the 912-word article, or future articles, performed that function.  Instead, it focused on political accusations.  A review of all 1994 articles indicates this reporting trend continued almost to the fund’s collapse.  In May, the media’s emphasis on political accusations contributed to Citron announcing this would be his last campaign.  Then on September 15th, three months after the election, the attack the messengers not the message mentality moved the seemingly accommodating Moorlach to appeal directly to Register publisher David Threshie.  In a four-page letter Moorlach restated his qualifications and specific concerns; he then requested that Register reporter Chris Knap no longer call him.  Moorlach felt Knap had been “on a personal crusade” throughout, and even after, the campaign.  According to Moorlach, neither Threshie, nor anyone at the Register, ever responded to the letter.  Knap never called Moorlach again.


That media coverage of the Orange County Investment Fund failed to capture attention could be attributed to the fact that funds in the pool were consistently and drastically understated by the local media.  Prior to its collapse, only the Wall Street Journal, in their section C of April 15th, ever stated Citron had “leveraged the $7.5 billion fund into a total investment portfolio of $19.5 billion.”  At the time, and through to its collapse, the Times and Register were reporting an apparently unencumbered fund of $7.5 or $8 billion.  It wasn’t until the December day the pool’s $1.5billion loss was announced that the local media used the number that was two and a half times, or 160% greater than what had been previously reported locally.  Only on December 2, 1994, did the Times’ lead, for the first time, clearly indicate that the pool had been “highly leveraged” and was now “worth $18.6 billion after falling 7% since January.”  The Register had a similar opening paragraph.

Yet Moorlach, after analyzing Citron’s portfolio with six other financial advisors had made that point very clearly in his May 31st letter to then-Supervisor Riley.  On page two he wrote:  “Citron has now borrowed an additional $8 billion, bringing the total funds under management to $22 billion.”  Unfortunately, Supervisor Riley never read that far.  “That first page struck me as not a good way to gain friends,” Riley has since been quoted as saying.  However, gaining friends has never been a concern of investigative journalism.  And the Register’s Knap, along with Times reporter Kevin Johnson, were both sent copies of the eight-page Moorlach to Riley letter.  Johnson has since moved on to USA Today and was unavailable for comment.  But Knap, the Register’s political writer, acknowledges receiving the document and writing an early-June article about it.  A reading of the 789-word story indicates approximately 160 words related generally to Moorlach’s concerns.  A significantly larger portion of the article dealt with political rancor generated by the campaign.  In turn, Knap points out that, earlier, he had two noted municipal bond experts review the county’s portfolio.  He then used their concerns to specifically question Citron about millions in collateral calls, Newport schools borrowing to invest, and his (Citron’s) worst case scenarios.  Citron refused to reveal his escape plan and the subject was never raised again.

Another Moorlach warning was addressed to Orange County Auditor-Controller Steven Lewis.  This letter referenced the Wall Street Journal’s “leveraged to $19.5 billion” article of April 15th, and questioned the county’s policies of borrowing and investing in derivatives.  Along with copies to Congressman Chris Cox, all county supervisors and administrators, this three-page letter was copied to 12 members of the media.  The list included Knap and Johnson plus four additional reporters for the Times and Register along with Howard Fine of Orange County Business Journal and attorney/commentator Hugh Hewitt of KFI radio.  Fine recently said, “I don’t recall seeing that letter.  If I had, I would have written something about it.”  Hewitt also claims he never saw the letter.  “But it wouldn’t have mattered,” he stated last week.  “I interviewed John, endorsed him and voted for him.”  But regardless of the reason, none of the 12 journalists receiving copies of the Moorlach to Lewis letter ever wrote that the Orange County Investment Pool was highly leveraged and involved approximately $20 billion in managed funds.  Nor did any of them carefully investigate the issues Moorlach had raised.  “I’m a commentator, not an investigative journalist,” was Hewitt’s rationale for not digging deeper.

A third Moorlach expression of concern went exclusively to the Orange County Register.  This 2,985-word memo was sent more than four months after Moorlach had lost the treasurer’s race.  However, it was still 45 days before the pool collapsed.  Again Moorlach analyzed the fiscal situation and his concerns for its stability.  The lengthy document stated the fund’s net worth as:  “Investment funds:  $7.4 billion; borrowed funds:  $14.6 billion; Total fund $22 billion.”  The memo also accurately estimated that, already, the fund had lost 17% and its true value was:  “$18.6 billion; less the borrowed funds of $14.6 billion leaving the value of invested funds at $2.7 billion.”  Moorlach recalls specifically sending the memo to Harold Johnson, an editorial writer for the Register.  His purpose, Moorlach now recalls, was “if the local papers won’t print this, maybe he’ll know who will.”  But Johnson never responded to Moorlach’s inquiry.  When contacted recently, Johnson admits reading the lengthy document, but then sending it to the news department for possible coverage.  He recently commented:  “People think I can get things published, but that’s not my job.  I write, not decide what’s printed.”  Ironically, on December 8, 1994, just after the pool declared bankruptcy, Moorlach says he was contacted by Register Editorial Page Editor Ken Grubbs for an analysis of what went wrong with the fund.  Moorlach recalls his response to the call was, “I sent you an analysis last October; it’s still valid.”  Eventually Grubbs found Moorlach’s two-month old analysis and ran it with only minor alterations on the Register’s editorial pages of December 11, 1994, a week after the fund was placed in bankruptcy.

While clear-cut indicators of the financial calamity awaiting Orange County never appeared locally, numerous clues to a debacle-in-waiting can be found in publications throughout the country.  The first was press coverage of San Jose’s 1985 loss of $60 million from leveraging  to invest in Merrill Lynch-sold reverse repurchase agreements.  Even the salesperson involved, Merrill Lynch’s Michael Stamenson, was the same person who sold Citron hundreds of millions of dollars in similar securities.  Then, in November of 1992, Derivatives Week, after hailing Citron’s profit performance, wrote, “Faint-of-heart municipalities could also point to dangers in Orange County’s strategies.”  The technically worded article mentioned that Merrill Lynch, “the most aggressive seller of bonds to Orange County,” was also “rumored to have structured rescue bonds to help stem potential losses.”  Recently, CdM investment banker Street said he always included a copy of the article, with explanatory notes, whenever he submitted articles to local media detailing his concerns about derivatives as municipal investments.

Then, in late-September of 1994, The New York Times headlined a front page story “Local Governments Lose Millions in Complex and Risky Securities.”  The story related losses of $10 million in Sandusky, Ohio;  $22 million in Odessa, Texas; $5 million by an Indian tribe in Wyoming and $96 million by the City Colleges of Chicago.  The article was not picked up the Register even though by contract they can reprint any N.Y. Times story they chose.  Another story not tracked by local media was the Cleveland Plain Dealer’s expose of Cuyahoga County, Ohio’s, $1 billion investment pool.  In October of last year, after reporters disclosed enormous investments hinged to interest rates remaining low, the fund was shut down and monies returned to investors with total loss to date of only about 12%.  The Ohio fund’s collapse was covered in detail in the October 13th Wall Street Journal, but never noted in any Orange County publication.

Would early-on media exposure of Robert Citron’s shaky Orange County Investment Pool have had a similar lessening affect on local losses?  “Oh, are you kidding?” answers former-County Supervisor Harriett Wieder.  “The media wields a two-by-four when it comes to getting our attention.”  But the one-time Chairman of the Board of Supervisors admits that in the local financial meltdown, Moorlach’s credibility wasn’t established and she, along with others, looked at Citron as “a sun god.”  But in her defense, she feels the media has a role as the community’s watchdog.  And in that regard, Wieder stated, “The media never mentioned anything about concerns over the investment pool.  If they had, it would have made a very big difference.”  Another major participant affected by the pool’s collapse is Peer Swan.  As president of the Irvine Ranch Water District Board and vice chairman of the Orange County Sanitation District Board, he oversaw some $850 million invested in the county pool.  “The media got sidetracked because John Moorlach ran a faulty campaign,” Swan concluded recently.  “And obviously, if they’d assigned a business reporter to the story or hired an expert, they would have gotten a better handle on it.”

In Response:

Martin Baron, Editor, Orange County Edition, Los Angeles Times

“A publication must have an incredible amount of evidence before it predicts a financial calamity.  The standard of proof is higher on this subject than any other.  Find me the person who predicted what is now the near-collapse of the Mexican economy.  I think we did a responsible job covering the county investment pool before the bankruptcy.  Our front page story of April 30th stated clearly Citron was borrowing to invest and had recently been forced to come up with $215 million in collateral calls.  And prior to that, even before John Moorlach, we obtained copies of the pool’s 45-page portfolio and faxed copies to ten financial experts across the country.  Their replies were equivocal; some said ‘not too risky,’ others said ‘riskier than average,’ but all were on the fence.  Moorlach himself has given us credit for the things we investigated.  Of course, looking back, you can always say we should have done more.”

Tonnie Katz, Editor and Vice President, The Orange County Register

“Journalism is a matter of making choices.  Clearly, if we knew just an inkling then of what we know now, the choices would have been different.  But despite considerable efforts, we couldn’t validate Moorlach’s claims.  So our attention was directed to stories that at the time seemed more important.”

Jonathan Lansner, Business Editor, The Orange County Register

“Certainly I think the media collectively could have done a better job prior to the fund’s collapse.  But it’s difficult when the county’s entire power structure seemed reluctant to comment on Mr. Citron.  A case in point would be County Auditor Steven Lewis.  He questioned Citron’s practices, but only after the election did he share them with county officials.  And even then he refused to go public with his concerns.  Not that everything we do should be easy, but let’s face it, municipal financing is boring.  It’s dreadful 99% of the time; unfortunately this was the 1% that we should have gotten excited about.  We should have been suspicious of the high returns.   But it’s human nature to think someone has the golden touch.  It’s a great lesson for newsrooms all over the country, we’ve got to be tougher in questioning our human nature.”

Earl Gottschalk, former writer for the Wall Street Journal

“I worked on the Orange County story for two weeks and would have spent longer but the Journal needed it for publication.  After looking at the portfolio, and discussing it at length with Citron and others, it was clear to me that the fund totaled $19.6 billion and was highly leveraged.  The story ran nationally on April 15th and I was surprised that nobody picked it up locally.”

Steve Marble, Managing Editor, The Newport Beach Costa Mesa Daily Pilot

“I think in the long view of things, the media failed to do a fundamental job of investigating John Moorlach’s claims.  But it wasn’t a case of zero attention.  His fundamental concerns were reported and some public officials responded, most notably in Tustin and Orange.  And we gave this county race a fair amount of attention.  But obviously you wish you knew then what you know now.  I’m not sure printing the entire Moorlach to Riley letter would have saved the county by itself.  After all, the arguments in that letter were reported and discussed in public on a fairly consistent basis.  And it didn’t seem to sway the county’s mind.  In fact in our Letters to the Editor, Moorlach was pretty well blasted as an alarmist.