MOORLACH UPDATE — 25th Anniversary Story — December 7, 2019

Orange County Goes “Broke” in 1994 

The Sunday OC Register story covers the Orange County bankruptcy history in a stimulating fashion.  It’s by Teri Sforza, an incredible reporter who has been with the OC Register over the past quarter-century.   

I have only one clarification to provide.  I never personally contacted the rating agencies.  I only had the joys of trying to figure out why they were not competent enough to fully understand what their client was doing.  In the aftermath, Standard & Poor’s was one of the parties the County and I sued for damages. 

25th Anniversary Look Backs 

As mentioned in the OC Register piece, the evening of December 6, 1994, would be the time that Orange County’s Board of Supervisors would officially file for Chapter 9 bankruptcy protection. 

It received media attention the next day, see MOORLACH UPDATE — LOOK BACKS — December 7, 2009 december 7, 2009 john moorlach

The anger level of the residents of Orange County rose with each passing day.  And the letters to the editor sections of the newspapers provided a partial glimpse.  One letter in the OC Register by Eric Christensen of Irvine would be titled “Don’t blame me, I voted for Moorlach.” It concluded with the question, “Where can I get my ‘Don’t Blame Me, I Voted For Moorlach!’ bumper sticker?”

This started a fun phenomenon, the bumper sticker started appearing around the county! 

One letter that was submitted to the Orange County Register, but was not printed, summed up the feelings of many and also addressed the greed factor (also see

Dear Editor, 

John Moorlach warned this county during his campaign for Orange County Treasurer-Tax Collector about the problem with this County’s financial portfolio.  Orange County officials, drunk on the high return of their investments, were blinded to the financial risk. Economics 101 tells you the simple fact, high risk = high return.  To paraphrase the Register’s ad campaign from earlier this year; your paper just “Didn’t get it.” When Tustin pulled funds from the pool you slanted it as a political move. When in fact it was a move of fiscal prudence.

Last week on my way to work (I am a teacher, raise what raise?) I saw a Register truck being towed.  On its side read the slogan, “We’re on Orange County’s side.” Nothing could be further from the truth.  If you had been on Orange County’s side as you claim, you would have taken a picture of the emperor “Citron” in his new clothes and put it on the front page 8 months ago.  Then an informed public would have voted him out. In this past Sunday’s editorial section you seem to point fingers at everyone but yourself. When it is your fault for not printing the facts and telling the truth during the campaign.  Yes Mr. Knap, the sky was and did fall.

In the words of Harry Bailey to his uncle in the film “It’s a Wonderful Life;” “Where’s the money?  Do you realize what this means? It means bankruptcy and scandal and prison. That’s what it means.”

Orange County taxpayers are now being held hostage in debtors prison thanks to the greed of our public officials and the lack of journalistic responsibility from our Orange County paper.

Edward H. J. Moorlach


By December 8th, the articles kept peeling the onion and we even saw an apology of sorts from Fred Martin, see MOORLACH UPDATE — LOOK BACKS — December 8, 2009

For the previous Look Back, see MOORLACH UPDATE — 25th Anniversary Commemoration — December 6, 2019.


If you are a homeowner, December 10th is the due date for the first installment on your property taxes.  If you fail to remit your payment in time, you will be assessed with a 10 percent penalty.

Here’s how Orange County went broke

How could a rich place like us go bankrupt? Hubris and greed didn’t help.

By tsforza

Former Orange county treasurer Robert L. Citron glances back at his wife, Terry Citron, moments after Superior Court Judge J. Stephen Czuleger sentenced Citron to a year in county jail and a $100,000 fine in 1996. (PHOTO BY MARK RIGHTMIRE, Orange County Register/SCNG)

The scene, 25 years ago this month, could have been lifted from a mob movie:

Ten top power-brokers in Orange County government headed to an exclusive Italian restaurant for a secret Saturday dinner. Strung out from a string of all-nighters — they’d been working to keep the county’s $20 billion investment pool from imploding — the meal was to be a pressure-reliever, a breather, a reward.

Despite the headlines just two days earlier — “O.C. fund down $1.5 billion” — it seemed, on Dec. 3, 1994, that things might work out. During marathon calls with Wall Street brokers and local city bureaucrats they’d delivered a smooth new mantra — “It’s just a paper loss. Everything’s under control… Don’t panic!”

And the message, they thought, was landing.

The brokers said, sure, they’d continue lines of credit to Orange County. The nervous city workers — who faced an instant 20% haircut on their investments (and likely unemployment) if they pulled out — had little choice.

So that Saturday afternoon, as the county’s fiscal bureaucrats headed to Prego in Irvine, the sun seemed about to break through the clouds.

The deluge? They didn’t see it yet.

Tax man

Orange County’s treasurer in 1994, Robert L. Citron, was an eccentric man. He had a strong affinity for Navajo jewelry. His closet held 300 ties he rarely wore. He composed 14-page odes to Chrysler automobiles. And, while he hadn’t graduated from the school, his love of USC football was such that his own car horn played the Trojan fight song.

In all of this, some people saw genius.

But the degree wasn’t the only thing missing from Citron’s resume. As a younger man he’d labored at a series of non-high-finance jobs; as a loan manager and car salesman. He landed in the county’s tax collection office in 1960, when county government was a less complex world. He rose to the level of department supervisor and, in 1970, ran for the elected job, handily winning the title of “tax man.”

A twist came three years later, when the county decided to save money by merging the offices of tax collector and treasurer. It seemed a natural fit: The tax collector took in hundreds of millions of dollars on behalf of the county, cities, schools and special districts; the treasurer’s office invested, accounted for and distributed that same money.

It didn’t matter that Citron had no background in accounting or investing. Or that he had never owned a single share of stock.

Perhaps predictably, in the first year that the jobs were combined, Citron stumbled. He bought securities from the highest bidder rather than the lowest one, his former assistant treasurer, Ray Wells, later testified.

Citron’s inexperience meant he came to depend on advice, especially from Wells, who had invested the county’s cash for years. But Citron sought other advisers, too. Merrill Lynch, a financial behemoth aiming to sell him securities, became a source of key information. As conflicted as that relationship appeared, Citron came to think of Merrill as the county’s financial adviser.

In the wake of Proposition 13, passed in 1978, and a dramatic drop in property tax revenue, the pressure to deliver more money for cash-hungry local governments grew intense. So when Merrill salesmen began pitching Citron exotic investments – derivatives, reverse repurchase agreements, high-risk/high-reward securities (financial products that later would send the nation’s economy to the edge of a depression), Citron bought.

It worked. For years, Citron’s investments earned more than twice as much as those made by California’s state treasurer. Betting that interest rates would drop — always — Citron delivered hundreds of millions of extra dollars to the county and local governments. Others sung his praises.

“I don’t know how in the hell he does it,” said Thomas Riley, then chairman of the Board of Supervisors. “But he makes us all look good.”

Others also wanted in. City governments around the state pulled cash from their local treasuries to jump into Orange County’s investment pool, eager to share in Citron’s magic.

And, quite literally, that’s what Citron thought he had. To predict — perhaps even sway — financial markets, Orange County’s treasurer-tax collector consulted psychics, astrologers and a $4.50 star chart.

After Wells retired, young Matt Raabe became Assistant Treasurer, Citron’s right-hand man. Soon, Raabe’s boss informed him that there were two financial worlds — the “regular market,” and the “Citron market.”

“He believed he had tremendous influence,” Raabe would later say in an interview with the Orange County Register.

Citron lobbied for a new state law to allow county treasurers to borrow money against current investments so they could buy even more investments. That allowed him to earn interest on borrowed money — but only so long as the cost to borrow money was less than the money that could be earned.

Technically, the move is known as “leveraging.” Less technically, it’s called “gambling.” But, either way, the bill passed. Soon, Citron had leveraged some $7 billion public dollars into a $20 billion investment fund.

Eventually, that simple fact would prompt local governments around the country to tighten up how they account for their investments.

But before that there was chaos.


Earning huge returns on investments is good politics. And for decades Treasurer Citron sailed to easy reelection, even as the lone Democrat in a sea of Republicans.

But in 1994, a young upstart named John Moorlach was giving Citron the fight of his political life.

Moorlach, a certified public accountant from Costa Mesa, understood that Citron was betting on interest rates remaining low. He also understood that the county’s investments would shrink dangerously if interest rates went up.

And rates were going up. In February, the federal fund rate — a number that sets how much governments and others pay out to investors — was 3.25%. By May, it was 4.25%. That dramatically deflated Citron’s investment pool. Wall Street soon demanded $300 million in additional collateral to secure loans they’d made to Orange County.

Heavily-leveraged private funds had reported major — and very public — losses. Candidate Moorlach told New York rating agencies and anyone who would listen that Citron risked similar losses, but with taxpayer money.

“Regardless of who is elected on June 7, Orange County has a bleak future for its fiscal assets,” Moorlach said in a letter to officials. “The supervisors need to know that their goose is no longer laying golden eggs.”

For sounding that alarm, Moorlach wasn’t simply attacked — he was vilified. He was the little boy who cried wolf; Chicken Little. Worse, sowing doubt in the stability of the investment pool was irresponsible political claptrap. His claims reduced investor confidence in the county’s stability and, because of that, he cost taxpayers money.

In June, Moorlach lost at the polls. In August, interest rates rose again, but Moorlach’s message still wasn’t heard. A headline in September read: “O.C.’S SKY DIDN’T FALL,” and the story noted that Orange County had cash-on-hand of $1.2 billion. Officials with the nation’s two largest bond-rating firms agreed that Citron had enough liquidity in his portfolio to cover any short-term drop in market value.

But in November the fed raised rates again.

In the span of 10 months, rates skyrocketed from 3.25% to 5.5%. The market value of the bonds Citron had borrowed against plunged, forcing him to either invest more cash as collateral or sell the leveraged securities at a loss.

To avoid taking such a loss, Citron put up $650 million in additional cash. The county’s cash on hand shrank to $350 million.

And local governments — which held more than $7 billion in the pool — started to want their money back. It was a dangerous request. Defections would force the county to sell securities at bad time, turning paper losses into real losses.

Citron countered with a message of calm. He’d hold securities until they matured. All would be well.

“The portfolio is not failing, has not failed, and will not fail,” Citron told The Orange County Register. “We have a liquidity problem which will be solved and no one will lose any principal — if the participants keep their funds in.”


That’s not quite what happened.

On that Saturday, Dec. 3, 1994, as Raabe and the county’s longtime private bond counsel were about to leave the treasurer’s office in Santa Ana for the dinner in Irvine, the phone rang.

It was Capital Market Risk Advisors of New York, the company hired to price the investment portfolio. Wall Street was losing faith, they were told. Brokers were planning to sell the county’s collateral on Monday, the next business day. If that happened, losses could exceed $3 billion.

Raabe and the attorney arrived at the restaurant in a state of shock. None of the elected county supervisors was invited to this dinner. Neither was Citron.

“We never expected it was going to come to this,” Raabe said back then. “We’re talking paper losses and we could survive. (Then), all of a sudden, we are facing a billion-and-a-half-dollar tragedy.”

They made new plans. They drafted a resignation letter for Citron and delivered it to him the next day at his home. As they convinced Citron to sign, he wept.

“He was an imposing and dominating figure all throughout the county for many, many years,” Raabe later said. “And by November, he was this frail old man.”

Raabe and others raced back to the Hall of Administration to tell the supervisors — and to prepare to liquidate the county’s investment portfolio. Their idea was to sell off overnight, in the international market. That meant they’d be done before U.S. markets opened, before “people could take up positions against us,” Raabe said. “It could have worked.”

But it didn’t. After frantically working all night, the sell-off plan collapsed. On Monday, Dec. 5, at 8 a.m. in New York, an interest payment of several million dollars was soon due to a lender on Wall Street. An even larger payment — of more than $1 billion — was due to another Wall Street lender on Tuesday.

Panicked county officials begged the U.S. Securities and Exchange Commission and the Treasury Department to intervene and freeze the investment pool. Rebuffed, they appealed to O.C.’s Congressional delegation in Washington. And to the state attorney general. And to California’s governor.

But there would be no bail-out for Orange County.

Supervisors retreated into closed session on Tuesday, Dec. 6. The deadline for paying $1.2 billion to First Boston and Co. came and went and the company swiftly sold O.C.’s collateral. In an instant, the county lost $120 million.

At 5:30 p.m., supervisors emerged from closed session and Chairman Riley delivered a message:

“As one of the dozen major investors in the treasurer’s investment pool, the Orange County Board of Supervisors late this afternoon authorized the filing of petitions under Chapter 9 of the Bankruptcy Code.”

It was the largest municipal bankruptcy in history. The idea was to protect what was left of the county’s assets, buy some breathing room, and stop a frantic sell-off of county collateral by stiffed Wall Street firms.

But that didn’t work, either.

Orange County bonds fell to junk status. Wall Street insisted that an investment pool couldn’t be protected by Chapter 9 bankruptcy.

“SELLING FRENZY,” said the headline on Friday, Dec. 9. “O.C. defaults on bond as lenders sell collateral.”

Seven Wall Street firms had seized and sold more than $8 billion of county investments — the precise thing that bankruptcy was meant to stave off.

In the end, the pool lost $1.64 billion.

Over the next quarter century, the county’s finances — and the way governments are financed nationally — would change. Orange County would be the poster child for inept fiscal management.

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