Magazine article Newsweek

A Big Bet Gone Bad

Magazine article Newsweek

A Big Bet Gone Bad

Article excerpt

ORANGE COUNTY, CALIF., PRIDES itself on its outspoke in conservatism. last week, the home of Newport Beach, Disneyland and the opulent Fashion Island mall showed that it isn't so conservative in everything. In an announcement that shocked local taxpayers and briefly shook Wall Street, county officials revealed that a fund holding money from 180 public agencies is showing a stunning $1.5 billion loss. The cause: an aggressive interest-rate bet gone wrong.

The news should not have been so startling; county treasurer Robert Citron is known throughout California for his unusual approach to managing money. While many local treasurers see their job mainly as safeguarding public funds, Citron has aimed to earn enough to ease the tax burden on Orange County's 2.5 million residents. He's done it by taking risks that leave most of his counterparts shaking their heads--and producing investment returns that leave them in the dust. Last year, when a similar state-run investment pool yielded 4.55 percent, the local agencies that parked their spare cash with Citron took away 7.84 percent. Orange County's governments were so happy with that performance that they were slow to ask questions. Only one city, Tustin, pulled its money, although rumors that others wanted out sparked Citron's announcement last week. "The people in charge fully knew what they were doing and fully disclosed to other people what they were doing," says Richard Larkin of Standard Poor's, the bond-rating agency. "This was not something done by one person in secret."

Bond losses: Citron achieved his high-flying record with repurchase agreements, deals in which he temporarily sells bonds to a dealer and reinvests the proceeds to get more bang for each investment buck. Repos are old hat for money managers, but few governments rely on them as heavily as Orange County. …

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