Orange CountyEssay Preview: Orange CountyReport this essayOrange CountyIn December of 1994 the financial markets were stunned by a bankruptcy filed by Orange County, California. This was the largest municipal bankruptcy in U.S history, with their portfolio suffering losses of 1.6 billion dollars. The losses were the result of trading activity by the county treasurer Bob Citron. He was not formally educated in finance and was left unsupervised to bring returns to the taxpayers of Orange County. He was able to achieve this goal until 1994 when things took a turn for the worse and OCIPs profitability plunged. Im going to show you; how Citron was able to earn above average returns, the different risks the portfolio faced, and how the lack of supervision came into effect.
- Orange County: A Portrait of the ‘Red-Vinyl’ Economy
- Orange County: A Portrait of the ‘Red-Vinyl’ Economy
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After years of declining value due to a decade of stock market stagnation and a falling stock market that resulted in an economy that had been the envy of the world, Orange County, California’s industrial revolution was finally over. It had taken one last crack at profitability. What remained of Orange County in a weak economy had started to come back to bite the state. The unemployment rate was a low 40%, and businesses and consumers were feeling the pinch. Some workers had to work less hours as a result of a severe recession, some were left with more to lose, and some were not able to pay, leading to the worst economic downturn since the Great Depression. It was a painful time, but it was not over. The Orange County business community came together in support of our plan, and those that supported it joined the struggle to bring a new day to the orange county. The Orange County Report on the Orange County Economy is a comprehensive economic report that will provide some of what might be expected of our financial community in its final decade of financial health.
First, we will turn the eyes of the nation towards the new economy. We will outline a new and exciting strategy by combining all of our financial resources in one place. We will establish a regional financial community which can accommodate the expansion of business and consumer services. We will also begin offering financial incentives for students and businesses, helping to further accelerate the growth of the economy and enhancing the opportunities for future employment. We will offer investment scholarships and business loans through the Orange County International Investment Fund, providing assistance to many new students and business owners. We will support the production of government bonds through the Orange County Investment Fund and the Orange County Public Fund. We’ll also provide free public education through our local community and school partners, making Orange County an open, public place where children grow and learn. In order to keep up with this exciting and innovative future, we will build local communities. We will encourage and foster entrepreneurial growth. We will encourage and encourage innovation and technology by building state-of-the-art, public schools that are among the nation’s most dynamic, high-tech hubs.
Third, we are going to seek to improve the quality and quality of our services throughout this period. We will support and promote innovative thinking in the community. We will establish an annual budget for public health and educational programs, and we will ensure our state’s colleges and universities meet their full responsibilities relating to quality of education. Those two things alone will make the economic situation much better. We will also encourage all of our members to invest in innovative ways of making real, clean energy to provide better, more efficient, sustainable, and environmentally friendly electricity – a plan that will support all of us both locally and nationally for well-being and economic well-being.
The Coalition of States will work to ensure the health, prosperity, and well-being of everyone in Arkansas. If we are successful, we are going to build on this success and grow the economy for Arkansas.
[blockquote]
Arkansas has made some of the best investments in recent times in the energy sector in terms of generating electricity. While it has been one of the most productive industries in the nation, those that did so took their time. The state has already invested millions of dollars in facilities to supply power to the state’s businesses. However, due to increased technology, as well as competition, this capital investment is now only one to two years behind. Our goal is to start by the end of next quarter of this year producing some of our own.
In short, we believe Arkansas to be a leader in the next wave of the energy supply. With high current rates and the cost-effective capacity of many of our existing grid stations, we believe Arkansas has a rich infrastructure and there is a need for high-quality, high-quality energy production plants. We are making it possible—without expensive government subsidies—for Arkansas to produce the sort of energy needed to meet all of our needs. Without this, we could not be in the position to manage the country’s energy needs and be ready by the time we graduate from college.
Thank you,
Arkansas President Mike Beebe,
Dear Governor Bumgarner,
You know how many times we’ve had stories about how you’ve bought things in a way that hasn’t worked? How many times our state has experienced a government-funded cut in subsidies and then made a choice that did nothing in the short-term or in all but created massive financial hardship within the state? The fact that we have to start from scratch from this all-time low in energy is troubling to you and to us.
For the last two years, we’ve been building new coal plants and more capacity plants. We’ve spent money on new gas pumps and more natural gas wells, and this week we’ve been building a power plant and a pipeline that will eventually be 100% renewable by 2030.
We will continue to build on this momentum, and also as part of ongoing efforts to expand all government funding for public health and education institutions. We will continue to invest in innovative new ideas like the new Power Generator that can help solve our challenges, expand state power stations and provide more energy to all the small towns and small businesses in our community.
We also love to spend time working with our neighbors, working
Fourth, we will continue our drive to protect our citizens. This will include the creation of a national climate policy of mandatory emissions reductions, protecting our air, water and land
.
After years of declining value due to a decade of stock market stagnation and a falling stock market that resulted in an economy that had been the envy of the world, Orange County, California’s industrial revolution was finally over. It had taken one last crack at profitability. What remained of Orange County in a weak economy had started to come back to bite the state. The unemployment rate was a low 40%, and businesses and consumers were feeling the pinch. Some workers had to work less hours as a result of a severe recession, some were left with more to lose, and some were not able to pay, leading to the worst economic downturn since the Great Depression. It was a painful time, but it was not over. The Orange County business community came together in support of our plan, and those that supported it joined the struggle to bring a new day to the orange county. The Orange County Report on the Orange County Economy is a comprehensive economic report that will provide some of what might be expected of our financial community in its final decade of financial health.
First, we will turn the eyes of the nation towards the new economy. We will outline a new and exciting strategy by combining all of our financial resources in one place. We will establish a regional financial community which can accommodate the expansion of business and consumer services. We will also begin offering financial incentives for students and businesses, helping to further accelerate the growth of the economy and enhancing the opportunities for future employment. We will offer investment scholarships and business loans through the Orange County International Investment Fund, providing assistance to many new students and business owners. We will support the production of government bonds through the Orange County Investment Fund and the Orange County Public Fund. We’ll also provide free public education through our local community and school partners, making Orange County an open, public place where children grow and learn. In order to keep up with this exciting and innovative future, we will build local communities. We will encourage and foster entrepreneurial growth. We will encourage and encourage innovation and technology by building state-of-the-art, public schools that are among the nation’s most dynamic, high-tech hubs.
Third, we are going to seek to improve the quality and quality of our services throughout this period. We will support and promote innovative thinking in the community. We will establish an annual budget for public health and educational programs, and we will ensure our state’s colleges and universities meet their full responsibilities relating to quality of education. Those two things alone will make the economic situation much better. We will also encourage all of our members to invest in innovative ways of making real, clean energy to provide better, more efficient, sustainable, and environmentally friendly electricity – a plan that will support all of us both locally and nationally for well-being and economic well-being.
The Coalition of States will work to ensure the health, prosperity, and well-being of everyone in Arkansas. If we are successful, we are going to build on this success and grow the economy for Arkansas.
[blockquote]
Arkansas has made some of the best investments in recent times in the energy sector in terms of generating electricity. While it has been one of the most productive industries in the nation, those that did so took their time. The state has already invested millions of dollars in facilities to supply power to the state’s businesses. However, due to increased technology, as well as competition, this capital investment is now only one to two years behind. Our goal is to start by the end of next quarter of this year producing some of our own.
In short, we believe Arkansas to be a leader in the next wave of the energy supply. With high current rates and the cost-effective capacity of many of our existing grid stations, we believe Arkansas has a rich infrastructure and there is a need for high-quality, high-quality energy production plants. We are making it possible—without expensive government subsidies—for Arkansas to produce the sort of energy needed to meet all of our needs. Without this, we could not be in the position to manage the country’s energy needs and be ready by the time we graduate from college.
Thank you,
Arkansas President Mike Beebe,
Dear Governor Bumgarner,
You know how many times we’ve had stories about how you’ve bought things in a way that hasn’t worked? How many times our state has experienced a government-funded cut in subsidies and then made a choice that did nothing in the short-term or in all but created massive financial hardship within the state? The fact that we have to start from scratch from this all-time low in energy is troubling to you and to us.
For the last two years, we’ve been building new coal plants and more capacity plants. We’ve spent money on new gas pumps and more natural gas wells, and this week we’ve been building a power plant and a pipeline that will eventually be 100% renewable by 2030.
We will continue to build on this momentum, and also as part of ongoing efforts to expand all government funding for public health and education institutions. We will continue to invest in innovative new ideas like the new Power Generator that can help solve our challenges, expand state power stations and provide more energy to all the small towns and small businesses in our community.
We also love to spend time working with our neighbors, working
Fourth, we will continue our drive to protect our citizens. This will include the creation of a national climate policy of mandatory emissions reductions, protecting our air, water and land
Citron was able to earn above average returns for Orange County when the interest rates were falling, and deliver the investors a return 2% higher than the state of Californias fund. Citrons investment strategy was concentrated on betting big that interest rates would fall or stay low. At the time interest rates were doing exactly this, which allowed the portfolio to make enormous profits. He leveraged the $7.5 billion of investor equity into a $20.5 billion portfolio, to capitalize on these returns. He did this through reverse repurchase agreements; where he pledged his securities as collateral and reinvested the cash in new securities, mostly 5-year notes issued by government-sponsored agencies. His main purpose was to increase current income by capitalizing on the fact that medium-term maturities had higher yields than short-term investments. In 1992, for instance, short-term yields were about 3.7%, while a 5-year yield was around 6%. He increased the duration of the investments to pick up an extra yield, of course with more time comes at greater market risk. By having the portfolio so leveraged this magnified the effect of movements in interest rates. The strategy worked fine as long as interest rates went down. In February 1994, the Federal Reserve Bank started a series of six consecutive interest rate increases, which led to the $1.6 billion loss. This is because bonds have an inverse relationship with interest rates. When the rates go up bond prices go down if they have to be sold prior to maturity. He also started to use a doubling strategy once the portfolios profitability started plunged which caused him to lose greater amounts than he already lost.
The second reason the portfolio suffered catastrophic losses, was citron and the board of directors didnt realize the loss potential or what the overall risk of the portfolio was. Citron took into effect the credit risk, but didnt factor in the market or liquidity risk. Market risk captures the change in an assets value if it is sold prior to maturity. So if they wanted their funds back early they would have to sell them for what the market would bear, and we know that bonds have an inverse relationship
Interest Rates And County Treasurer Bob Citron. (October 7, 2021). Retrieved from https://www.freeessays.education/interest-rates-and-county-treasurer-bob-citron-essay/