Robert Citron
Encyclopedia
Robert Lafee Citron is a Democratic Party
politician
who was the longtime Treasurer-Tax Collector of Orange County, California
, when it declared Chapter 9
bankruptcy
on December 6, 1994. Citron was the only Democrat to hold office in otherwise Conservative/Republican Orange County at the time. The bankruptcy was brought on by Citron's investment strategies, which seemed to be an effort to earn high incomes for the county to pay for increased demand for county services in a time of strong opposition to raising taxes. As usual in finance, high incomes went along with high risk. So this strategy left the county with inadequate capital to allow for any raise in interest rates for its trading positions. A cash crunch occurred when interest rates increased and financiers for the county required increased collateral from the county.
Citron controlled several Orange County funds including the General Fund, the Investment Pool, and the treasury Commingled Pool. He sent out the county's tax bills with catchy slogans, such as "Taxes paid on time never draw fines." He won re-election seven times; in his last election victory, his opponent, John Moorlach
, charged that his handsome gains were the result of risky betting.
As controller of the various Orange County funds, Citron had taken a highly leveraged
position using repurchase agreement
s (repos) and floating rate note
s (FRNs). The loss incurred by the usage of these financial instruments reached the amount of $2 billion and was caused by being too highly leveraged for rising federal interest rates. In other words, if federal interest rates had not risen, the massive trading position would have been a substantially profitable position; if interest rates did rise, the trading position would result in substantial losses. In fact, rates rose.
The Orange County funds, managed by Citron, were worth $8 billion. However, Citron went out to the repo
market and leveraged the County Pools to amounts ranging from 158% to over 292%. To obtain this degree of leverage, he used treasury bonds as collateral. Profits of the fund were excessive for a period of time and Citron resorted to concealing the excess earnings. He pleaded guilty to improperly transferring securities from the Orange County General Fund to the Orange County Treasury Commingled Pool.
The county's finances were not suspect until February 1994. The Federal Reserve Bank
began to raise US interest rates, causing many securities in Orange County's investment pools to fall in value. As a result, dealers were requesting extra margin payments from Orange County. These extra margin payments were funded in part by another bond issue made by Orange County; the size of that bond issue was $600 million. However, this fix proved to be only temporary. In December 1994, Credit Suisse First Boston
(CSFB) realized what was going on and blocked the "rolling over" of $1.25 billion in repos ("rollover" essentially means issuing another repo when the previous one ends, but, at the new prevailing interest rate). At that point Orange County was left with no recourse other than to file for bankruptcy.
Citron pled guilty to six felony counts and three special enhancements. Charges also included filing a false and misleading financial summary to participants purchasing securities in the Orange County Treasury Investment Pool.
While in bankruptcy, every county program budget was cut, about 3,000 public employees were discharged, and all services were reduced. Citron was ordered to serve five years of supervised probation, and to perform 1000 hours of community service. Citron did not serve any time in prison.
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
politician
Politician
A politician, political leader, or political figure is an individual who is involved in influencing public policy and decision making...
who was the longtime Treasurer-Tax Collector of Orange County, California
Orange County, California
Orange County is a county in the U.S. state of California. Its county seat is Santa Ana. As of the 2010 census, its population was 3,010,232, up from 2,846,293 at the 2000 census, making it the third most populous county in California, behind Los Angeles County and San Diego County...
, when it declared Chapter 9
Chapter 9, Title 11, United States Code
Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts...
bankruptcy
Bankruptcy in the United States
Bankruptcy in the United States is governed under the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
on December 6, 1994. Citron was the only Democrat to hold office in otherwise Conservative/Republican Orange County at the time. The bankruptcy was brought on by Citron's investment strategies, which seemed to be an effort to earn high incomes for the county to pay for increased demand for county services in a time of strong opposition to raising taxes. As usual in finance, high incomes went along with high risk. So this strategy left the county with inadequate capital to allow for any raise in interest rates for its trading positions. A cash crunch occurred when interest rates increased and financiers for the county required increased collateral from the county.
Citron controlled several Orange County funds including the General Fund, the Investment Pool, and the treasury Commingled Pool. He sent out the county's tax bills with catchy slogans, such as "Taxes paid on time never draw fines." He won re-election seven times; in his last election victory, his opponent, John Moorlach
John Moorlach
John M. W. Moorlach is a Republican member of the Orange County Board of Supervisors and represents the Second District on the board...
, charged that his handsome gains were the result of risky betting.
As controller of the various Orange County funds, Citron had taken a highly leveraged
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
position using repurchase agreement
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
s (repos) and floating rate note
Floating rate note
Floating rate notes are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months, though counter...
s (FRNs). The loss incurred by the usage of these financial instruments reached the amount of $2 billion and was caused by being too highly leveraged for rising federal interest rates. In other words, if federal interest rates had not risen, the massive trading position would have been a substantially profitable position; if interest rates did rise, the trading position would result in substantial losses. In fact, rates rose.
The Orange County funds, managed by Citron, were worth $8 billion. However, Citron went out to the repo
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
market and leveraged the County Pools to amounts ranging from 158% to over 292%. To obtain this degree of leverage, he used treasury bonds as collateral. Profits of the fund were excessive for a period of time and Citron resorted to concealing the excess earnings. He pleaded guilty to improperly transferring securities from the Orange County General Fund to the Orange County Treasury Commingled Pool.
The county's finances were not suspect until February 1994. The Federal Reserve Bank
Federal Reserve Bank
The twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
began to raise US interest rates, causing many securities in Orange County's investment pools to fall in value. As a result, dealers were requesting extra margin payments from Orange County. These extra margin payments were funded in part by another bond issue made by Orange County; the size of that bond issue was $600 million. However, this fix proved to be only temporary. In December 1994, Credit Suisse First Boston
Credit Suisse First Boston
Credit Suisse First Boston was the former name of the banking firm Credit Suisse.-History:In 1978, Credit Suisse and First Boston Corporation formed a London-based 50-50 investment banking joint venture called the Financière Crédit Suisse-First Boston...
(CSFB) realized what was going on and blocked the "rolling over" of $1.25 billion in repos ("rollover" essentially means issuing another repo when the previous one ends, but, at the new prevailing interest rate). At that point Orange County was left with no recourse other than to file for bankruptcy.
Citron pled guilty to six felony counts and three special enhancements. Charges also included filing a false and misleading financial summary to participants purchasing securities in the Orange County Treasury Investment Pool.
While in bankruptcy, every county program budget was cut, about 3,000 public employees were discharged, and all services were reduced. Citron was ordered to serve five years of supervised probation, and to perform 1000 hours of community service. Citron did not serve any time in prison.
External links
- Plea/Sentencing Agreement at Lectric Law Library
- Losing your tail on the repo market: The story of Robert Citron by Linda Allen, published in The Arbitrageur. Highly technical analysis of how Citron's investments failed.
- The Orange County Bankruptcy: Who’s Next?