MOORLACH UPDATE — Global Derivative Debacles — February 1, 2011

Let me start off by wishing my youngest, Daniel, a very Happy 21st Birthday!  It’s hard to believe the time has gone so quickly.  Mom and I are proud to have three healthy, wonderful adult children.  Daniel, it was an honor to raise you and your brother and sister.  Mom and I are blessed.

In Daniel’s honor, today I’m featuring the Christmas gift that my youngest son gave me.  It is a paperback copy of Global Derivative Debacles:  From Theory to Malpractice, by Laurent L. Jacque.  It was published by World Scientific Publishing Co. Pte. Ltd., Copyright 2010.  Laurent L. Jacque is the Walter B. Wriston Professor of International Finance & Banking at The Fletcher School of Law and Diplomacy (Tufts University) and Director of its International Business Studies Program.  From 2004 to 2007, he was Fletcher’s Academic Dean and as such responsible for the design and the establishment of the new Master of International Business degree and the Center for Emerging Market Enterprises.   Since 1990, he has also held a joint appointment at the HEC School of Management (France) as a Professor of Economics, Finance, and International Business.  From 1976 to 1987, he was on the faculty of the Wharton School University of Pennsylvania before teaching at the Carlson School of Management, University of Minnesota (1987-93).  He is the author of two books, Management and Control of Foreign Exchange Risk (Kluwer Academic Publishers, 1996) and Management of Foreign Exchange Risk: Theory and Praxis (Lexington Books, 1978).

If you’re looking for a quick 23-page read on the OC 1994 implosion, then this one will provide the basics and the technical.  It also includes a set of lessons learned.

Chapter 14 is titled “Orange County” and starts on page 221.  It begins with one of my favorite William Shakespeare quotes from Hamlet, “Neither a borrower, nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.”  I’m first mentioned on page 223 and the narrative has a very similar look to my last book review on Risk Takers (see MOORLACH UPDATE — Risk Takers — December 28, 2011), which is mentioned in the bibliography.  The section is titled “From Hero to Villain,” and has a few items that should be addressed.  The head of the trading desk at Goldman Sachs refused to do business with Citron.  Consequently, a few years following the County’s bankruptcy filing, Goldman was successfully sued by OCTA, the largest participant in the Orange County Investment Pool (OCIP), for not informing them of Goldman’s reluctance to do business with Citron.  This shows that no good deed goes unpunished.  In fact, former Goldman Sachs underwriter Ed Burdett and I had a good laugh over this the last week of 2011, as he called me after he read the Risk Takers UPDATE.  The missing sentence begins where the narrative should state that I was a Certified Financial Planner and may have alluded to my campaign platform.  The OC Register has not endorsed candidates for decades and did not in this race.  However, the bias in the campaign reporting by the OC Register would give an independent reviewer the sense that a leaning toward the incumbent was blatantly obvious.  Here is the second of two paragraphs, blemishes and all (including an entire missing line between pages):

Citron’s achievements earned him national fame and recognition which inflated his ego to the point that Citron could not tolerate criticisms:  for example, in 1993, to Goldman Sachs which had dared to criticize some of his decisions, Citron wrote back “that Goldman does not understand the type of investment strategies that we are using.  I would suggest that you not seek doing business with Orange County.”  The most serious assault however came from John Moorlach – a newspaper columnist and a cable TV host of the Costa Mesa Conservative Report – who challenged Citron in the June 1994 election.  Moorlach – a Certified Public Accountant and a  Certified – – – – – exposure to rising interest rates proved to be very prescient.  Moorlach repeatedly pointed to the declining value of OCIP’s asset portfolio which Citron refuted by arguing that these losses were “paper” losses which would not materialize as actual cash-flow losses as long as assets would be held to maturity.  Moorlach’s campaign attacks on Citron’s highly leveraged and speculative investment strategy was grounded in sound financial theory and was echoed widely by the business press including the Wall Street Journal and Derivatives Weekly which called it “a scandal waiting to happen.”  Citron was in denial and resented the campaign as a personal attack:  both republicans and democrats came to his rescue and the Los Angeles Times as well as the Orange County Register endorsed him:  Citron was re-elected by a wide margin.  Still, the electoral battle and intense scrutiny took a toll on Citron who according to his deputy Matthew Raabe “turned into a very fragile man.  He was an imposing and dominating figure all throughout the County for many, many, many years and by November 1994 he was this frail old man . . . .”


January 30


The Bond Buyer’s Richard Richtmyer and Angela Shah provided “S&P’s New Policy Draws Fire From A Variety of Players.”  S&P decided that issuing ratings on insured bonds (a no brainer easy AAA) without being compensated was no longer a good business policy.  You can see that I was not amused.

                On Monday, the rating agency said issuers of insured bonds that do not apply for a Standard & Poor’s rating will not automatically be assigned a AAA designation.  Rather, insured transactions in which the issuer does not request a rating will be assigned a designation of “NR,” meaning “not rated.”

                For some, Standard & Poor’s move is a blatant attempt to increase sales.

“That’s blackmail,” said John Moorlach, the treasurer of Orange County, an issuer which has filed suit against Standard & Poor’s for allegedly failing to inform the market of the formerly bankrupt county’s financial difficulties.  “I have strong opinions on how immoral that is. . . . There is definite coercion in it.” 


The County of Los Angeles was interviewing candidates for Chief Administrative Officer and Tom Mauk was interviewed for the position the previous Thursday.  On Tuesday, the news outlets provided the results.  Susannah Rosenblatt and Jack Leonard of the LA Times had it in “County fills No. 1 vacancy – Supervisors choose Thomas Mauk, Orange County’s chief executive, to run the largest county government in the U.S.”  This started a whirlwind of activity, which is provided in the articles below.  Here’s the start of the LA Times piece:

Orange County’s chief administrator immediately accepted an offer Monday to run Los Angeles County’s government, although Orange County supervisors planned a last-ditch effort to keep him.

A unanimous Los Angeles County Board of Supervisors offered the job to Thomas G. Mauk. He replaces retiring Chief Administrative Officer David Janssen.

The supervisors made the offer Monday after interviewing Mauk Thursday, officials said. He will be paid $270,000 a year.

Mauk is scheduled to start March 12, although Orange County supervisors said they still hoped to persuade him to stay. Mauk met individually with Orange County’s supervisors Monday and apparently agreed to hear a counteroffer from them at a closed session this morning. Orange County officials may offer him a sweetened deal. He had been hired at an annual salary of $215,000 in 2004.

"The fat lady hasn’t sung yet," said Orange County Supervisor John Moorlach, adding that a search for a new chief administrator would be costly. "There may be a glimmer of hope we may be able to keep him here."

The tug of war for Mauk underscores the difficulty large counties face in finding and retaining qualified managers. After Los Angeles County supervisors conducted a six-month search for Janssen’s replacement, they offered the post to Sandra Vargas, a county administrator from the Minneapolis area, earlier this month. She turned the job down. Two others among the five finalists dropped out.

Janssen described Mauk as open, ethical and direct. Supervisors had praised similar qualities in Janssen.

Mauk, a 35-year veteran of local government in Southern California, "has a great respect for the political process," Janssen said. "He’s not going to become the sixth supervisor."

Hired by Orange County in 2004, Mauk, 63, of Whittier, oversees more than 15,000 employees. Los Angeles County has about 100,000 workers.

Mauk also has held management posts with the cities of Whittier, La Habra and Norco, and a finance job with the city of Los Angeles.

Los Angeles County’s chief administrative officer is responsible for a $21-billion budget that provides law enforcement, criminal justice, healthcare and other services to the nation’s most populous county.

The title of Norberto Santana, Jr.’s piece in the OC Register was “County CEO could stay – Supervisors plan to make Mauk an offer to keep him in O.C.”  Here’s the start of his piece:

They took the Angels’ name.

But Orange County supervisors say it might be tougher for Los Angeles to grab the county’s CEO.

Los Angeles County officials on Monday morning issued a press release stating they had hired Tom Mauk away from Orange County.

"The Board of Supervisors voted this morning to offer the job of Chief Administrative Officer of Los Angeles County to Thomas G. Mauk. Mr. Mauk has accepted the position and will assume his duties on March 12," read the release from Los Angeles County Supervisor Zev Yaroslavsky.

That drew a coy response from one Orange County official.

"You might have the fish on the hook, but until he’s in the boat, I would be kind of quiet about it," said Orange County Supervisor John Moorlach.

Despite confirming the offer to lead the nation’s most populous county this weekend, on Monday Mauk would not comment.

Orange County supervisors have called an emergency closed meeting for today to issue Mauk a counteroffer.

January 31


Troy Anderson of the Los Angeles Daily News broke the story:  “Second CAO candidate rejects job offer.”  Here are the opening sentences:

In another embarrassing blow to Los Angeles County, a second candidate to be offered the chief administrative post turned it down Tuesday just a day after it was announced he had accepted it.

The Board of Supervisors had said Monday that Orange County Executive Officer Thomas G. Mauk had accepted Los Angeles’ $270,000-a-year job.

But Tuesday, the Orange County Board of Supervisors met with Mauk in closed session and said they had convinced him to stay with an 8 percent raise he declined to take last June and another 4 percent raise effective Jan. 1.

"This is pretty embarrassing for the county to have a second person actually turn them down," said Bob Stern, president of the Center for Governmental Studies.

"It seems almost like these people are using the county to enhance their other positions. This shows how difficult a job this is if people are expressing interest and then not accepting the position once it’s offered."

Orange County Board of Supervisors Vice Chair John Moorlach said the supervisors met with Mauk on Tuesday and made him the counteroffer.

"I guess the fact that Los Angeles County asked him could serve just as well as a capstone for his illustrious career as opposed to actually doing it," Moorlach said.

February 1


Christian Berthelsen of the LA Times provided a reflection on the CEO tug-of-war in “O.C.’s pitch ‘resonated’ with chief exec – Thomas G. Mauk was leaving for L.A. County’s post when his employers marshaled winning facts.” 

Monday morning, 10 minutes after Los Angeles County announced it had selected Orange County Chief Executive Thomas G. Mauk as its top manager, word was circulating among Orange County supervisors that he still had his doubts.

Believing they still had a shot to keep him at the job he had held for two years, the supervisors engaged in an all-out push to persuade him to stay. At one point, Mauk even had copies of his resignation letter hand-delivered to their offices. Undeterred, the supervisors continued their campaign to keep him, and a few hours later he had changed his mind.

They argued that Los Angeles County’s labyrinthine management structure, in which the top administrator holds far less authority than Mauk does in Orange County, would be much less satisfying, a point he took to heart. The supervisors each emphasized how much they admired his work and how much they wished he would stay. With Mauk nearing retirement at age 63, the supervisors convinced him that at this stage in his career a balanced life outweighed the enormous responsibilities — and attendant headaches — the new job would bring.

In the end, Orange County was able to keep Mauk without offering him as much as the $270,000-per-year salary he was promised in Los Angeles. Instead, he will receive a raise from $215,000 to $241,000 a year, plus one-time retroactive salary and merit adjustments of about $9,000, and a contract extension to 2010.

"We didn’t have to match L.A.," said Supervisor John Moorlach.

What follows is an account from people directly involved in this week’s dramatic turnabout.

About 9:30 Monday morning, Los Angeles County supervisors announced they had selected Mauk as their next chief administrative officer. The hire was a relief there, ending a six-month search after their previous choice had turned them down.

Running the nation’s most populous county would be a crowning achievement for almost any career public administrator. Its annual budget of $21 billion and nearly 100,000 employees would place it among the largest corporations in America. But the parameters of the job and issues facing that county, including a shortage of healthcare funds and severe crowding in its jails, make it a minefield as well.

In a meeting just after the Los Angeles announcement, Orange County board Chairman Chris Norby told Moorlach that Mauk "hadn’t made up his mind." About half an hour later, Mauk’s hand-delivered resignation letter showed up in supervisors’ offices on the fifth floor of the Hall of Administration.

Rather than accepting it, Norby and Moorlach raced down a back stairwell that leads directly to Mauk’s office and asked him to reconsider. Mauk refused to budge, and even helped the two men develop a short list of candidates to replace him.

But by 1 p.m., a third supervisor, Bill Campbell, had talked Mauk into giving it a second thought, relying on the arguments about L.A. County’s management structure and his retirement on the horizon.

"Those resonated with him," Campbell said in an interview Wednesday.

Mauk agreed to listen to a counter-offer from the Orange County supervisors in a closed session the next morning.

Mauk was hired by Orange County in 2004 at a salary of $215,000. He declined a raise last year because he was in the middle of a union contract negotiation and thought it would be poor form. By 3:30 p.m. Monday, Mauk told Moorlach that if supervisors offered to give him that raise, that would keep him there, Moorlach said.

Supervisors went one better. Besides the 8% raise retroactive to July, they agreed to give him 4% more, retroactive to Jan. 1.

Tuesday afternoon, Mauk told Los Angeles County that he was withdrawing his acceptance, in what he acknowledged was a difficult telephone call to make.

"Los Angeles County deserved better than what I gave them," Mauk said in an interview Wednesday.

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