When Supervisors Go AWOL . . . : It can, as in Orange County, create a national disgrace

The Securities and Exchange Commission no doubt has contributed to the heartburn of Orange County’s political leadership by announcing it is investigating possible influence peddling in the colossal bankruptcy scandal. The inquiry was described as casting a wide net rather than indicating violations (i.e, it might be little more than a fishing expedition at this point); however, it intensified the attention already directed at the Board of Supervisors as AWOL overseers of Orange County’s finances.

The week’s most damaging revelation was that while then-Treasurer Robert L. Citron apparently was driving Orange County’s huge investment pool into the tank between June and September, supervisors signed off on more than $1.3 billion in borrowing requests, seemingly without questioning them. County staff greased the fast track for board approval by failing to raise any flags.

All of this contributed mightily to converting what began merely as a risky strategy into one bound resolutely for disaster. On Dec. 6 the county declared bankruptcy, four days after disclosing that its investment pool had suffered a loss of at least $1.5 billion, a figure subsequently put at $2.02 billion.

Even early in 1994, the wisdom of the county’s investment approach was a matter of controversy, and closer to the end, as interest rates continued their relentless march upward, there were more and more reasons to be watching the fund and asking questions. The supervisors’ knee-jerk approval of vast sums--which turned out to be for dangerous investments--stretched on through the third quarter. By that time, the Federal Reserve had raised interest rates for the fifth time since February, sealing Citron’s fate.

How was this public gambling table run? Citron repeatedly turned to the supervisors as his banker. Requests for more money to fuel the mounting debacle were signed off on routinely. No questions were asked about what the borrowing was for. No questions were asked about interest payments or the terms of the borrowing or where the economy was headed. No questions were asked about the county’s financial standing.

By October, the supervisors accepted, again without discussion, Citron’s annual report, which underplayed “paper losses” and continued to worship at the shrine of reverse repurchase agreements, the investing mechanism that proved so problematic as interest rates climbed.

In view of alarm raised during the election campaign about potential dangers, the supervisors can’t say they weren’t warned. They didn’t fulfill a fiduciary responsibility, and the result is a national disgrace.