The Orange County Bankruptcy

Financial Market Decisions

Prof. Dr. Michael Feucht

June 2012

The Orange County Bankruptcy

Final Project

Francesc Xavier Serna Pascual, Luis Giménez Benito and Cinthya L. Valero Rodríguez

Index

Introduction 3

The Orange County Bankruptcy 4

Why does it matter? 4

The O.C.I.P. 6

Robert Citron and Matthew Raabe 7

Involvement of Merrill Lynch 9

Main roles involved were: 9

Conclusions made by Merrill Lynch 13

Misuse of providing the correct information 16

Orange County’s Debt Issuance 18

Disclosure Statements: concerning The O.C. borrowings 20

The Involvement of Merrill Lynch in borrowings of The O.C.I.P. 23

Timetable of the Financial Disaster 28

Conclusions 29

Bibliography 31

Introduction

Since 1972, the treasurer of Orange County (California), Robert Citron, managed the funds of the county and several local authorities more through a pool of investment. Until 1994, the yields obtained were very favourable. Some sources evaluated the investment in the hundreds of millions of dollars made per year, which attracted new institutional investors and a whole new bunch of investors. These returns were especially attractive in the early 90's by the current political environment: there was a tax reduction, which put the finances of local government institutions in difficulties.

In 1994 the Treasurer of Orange County, Mr.Citron, had available funds amounting to $7,500 million that had to be capitalized. At that time, the pool's investments were concentrated in fixed income securities in the medium term clearly betting that their value would either stay the same or even increase, which was a clear commitment that interest rates would not raise. To maximize profits, it was invested in leveraged structures, so that the notional amount on which the returns were calculated exceeded 20 Billion dollars. The instruments in which they invested were:

1. Reverse repos: These operations allowed using titles as collateral purchasing new...