Question

Search case study “Orange County Bankruptcy”

a. What was the Orange County Governance Structure?

b. What was the Orange County Investment Pool and balance sheet (1994)?

c. What was Citrons Strategy?

d. How the Fed action affects the interest rate in 1994?

e. Describe the crisis following the Fed action.

f. Describe the outcomes?

Answer 1

a) Talking about the governance structure of the orange county, there was too much autonomy given to Citron who could make investment decision without much of a check.Even though there was an oversight committee comprised of the board of supervisors, but unfortunately they lacked the financial sophistication to do so.

b) Investments were reverse repurchase agreements, Government papers, derivatives, recovery bonds etc.

Derivatives were $2.8 billion, Debt were $18 Billion = 20 Billion total Investments were there.

c) The strategy was to invest in medium term bonds as they give more interest rates compared to short term bonds. They borrowed from investors for short term but lent it for long term which was not a good strategy because it puts liquidity challenges.

d) The fed started raising interest rates in 1994 which made the people ask for their money which in turn created a liquidity problem because the investments were stuck in bonds.

Please note : We need to answer only 4 sub parts as per the policy