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Orange Country, California – Robert Citron’s Leveraged Bond Investments, 1994
Risk Management is an important and critical function at any institution, especially when the invested funds at stake are public. In 1994, Robert Citron was in charge of investing Orange County, CA money raised by public departments for public works. His strategy favored high yields over safe investments, so he invested in leveraged portfolios linked to interest rates. Investment strategies included “inverse floaters” and “collateralized mortgage obligations” among others aimed to increase the bet on the yield curve. Was the portfolio management reporting for Orange County adequate? Were the strategies involved in investing public funds appropriate? What could be done differently? Did Merrill Lynch act prudently as Orange County investment advisor?