The Balboa Brief: When the Tide Went Out (August 2026)
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When the Tide Went Out
"You can't stop the waves, but you can learn to surf." - Jon Kabat-Zinn
The year is 1994. Bill Clinton is midway through his first term. Theater lines are wrapped around the block for Forrest Gump and The Lion King. Friends premieres its first season, and Dr. Dre collects his first Grammy. Although gas only costs $1.11, it's difficult to drive two miles without hearing Celine Dion’s "The Power of Love" or the latest updates from the epicenter of media fixation: The OJ Simpson case. While Jim Carrey vaults into comedic superstar status after back-to-back-to-back box office hits Ace Ventura, The Mask, and Dumb and Dumber, the baseball strike causes an unceremonious cancellation of the World Series for the first time in nearly a century. During this ordinary American moment, one of the wealthiest counties in the nation, Orange County, files the largest municipal bankruptcy in United States history to date.
There was no war, no depression, no collapse in property values. Orange County was undone by something far more ordinary.
Enter Robert Citron, the county's well-respected treasurer of nearly 25 years. A man who loved praise, wore oversized turquoise Navajo jewelry, $30 polyester suits from budget department stores, pastel slacks, and white patent-leather shoes. He sported a calculator wristwatch, which he used to split lunch tabs to the penny. He was so frugal that he once engaged in a heated argument with county administrators over a $12 discrepancy on his paycheck. His own money sat in extremely conservative savings accounts and CDs, and he never invested his own funds the way he invested the county's. His Santa Ana optometrist joked that the riskiest thing he'd ever seen Bob Citron do was buy a new pair of glasses. A former Merrill Lynch salesman was less charitable: Citron, he said, "knows thirty percent of what he thinks he knows.” It was safe to say that Bob did not look or act the part of a man running one of the largest investment pools in America.
Yet, the money followed him. The pool he ran for Orange County and roughly 240 of its cities, school districts, and water agencies reliably earned about two percentage points more than comparable government pools, year after year. Many school districts were required to keep their funds with him; some agencies went further and borrowed money just so they could deposit more. After 1985 he simply stopped giving his annual investment reports to the Board of Supervisors, because the board found the presentations tedious. One board chairman put it plainly: "I don't know how in the hell he does it, but he makes us all look good."
Here is how he did it. The groundwork was laid back in 1979, when Citron himself lobbied for a new state law allowing treasurers to borrow money against their investments to buy even more investments, a maneuver called leveraging. The bill passed, and it would inevitably be his own undoing. Wall Street happily supplied the other ingredient: Merrill Lynch pitched him the exotic paper to put all that borrowed money into. Citron pledged the pool's bonds as collateral to borrow more, then bought more bonds with the proceeds, turning roughly $7.5 billion of deposits into more than $20 billion of securities. Billions of that went into "inverse floaters," structured notes engineered to pay more as interest rates fell. In plain English, it was a $20 billion bet that rates would stay low, financed with borrowed money. For thirteen years rates mostly cooperated, and the pool did very well.
There were warnings. In the spring of 1994, a Costa Mesa CPA named John Moorlach ran against him for treasurer and told anyone who would listen that the pool was one rate shock away from disaster. After reviewing the portfolio that May, Moorlach said, "I just freaked out." He was mocked as “Chicken Little” and widely dismissed as an alarmist who was chasing political gain. That June, Citron was comfortably re-elected. Now, of course, when interest rates rise, bond prices fall. In an effort to curb future inflation, Fed Chair Alan Greenspan raised interest rates 7 times in 12 months, doubling benchmark rates from 3% to 6%. Citron assured investors in writing that his strategy accounted for what he called the inevitable but unsustainable rise in short- term rates. He kept the position, in what was later known as "The Great Bond Market Massacre."
The collapse came quietly at first. Each rate hike hit the pool twice: the bonds fell in value, and the cost of the borrowed money rose. Lenders demanded more collateral, and the pool's cash drained from roughly $1.5 billion to about $350 million by fall. Then the Irvine Ranch Water District quietly pulled $100 million, others followed, and Orange County found itself in a good old-fashioned bank run. On December 4th, 1994, a group of top county officials knocked on the door of Citron’s Santa Ana home demanding he sign a letter of resignation. Once affable and confident, Bob burst into tears as he complied. Two days later, on December 6th, the Wall Street firm CS First Boston seized and sold $2.6 billion of the pool's collateral, and Orange County filed for Chapter 9 bankruptcy protection. That evening, a somber Bob Citron was seen at the USC Trojan Club dinner. The losses totaled nearly $1.7 billion.
The aftermath was painful and close to home. Pool participants initially recovered about 77 cents on the dollar. The county cut roughly 2,500 positions; school budgets froze; projects were shelved. Citron pleaded guilty to six felony counts of lying to investors and falsifying the county's books, charges that carried up to 14 years in prison and $10 million in fines. He ultimately served his sentence in a county work-release program, processing inmate commissary orders. Merrill Lynch, which had sold the county much of its leverage and its exotic paper, eventually paid $400 million to settle claims. And then the detail that stings in hindsight: analysts later calculated that had the lenders simply held the seized bonds through 1995, the portfolio would have recovered in full, with roughly $300 million to spare. The county was forced to sell at the bottom of a storm it could have survived. John Moorlach, the CPA who had been laughed off, was appointed Citron’s successor to clean up the disaster he predicted.
If that feels like ancient history, it happened again last month. An AI hedge fund called Situational Awareness, up more than 1,000% in under two years, was running roughly $45 billion at about four times leverage when July's selloff hit. Margin calls arrived on July 30th, its portfolio was sold off to Citadel, and within days the market roared back more than 5% to record highs, a surge Downtown Josh Brown has coined “the midsummer melt-up.” The rebound came; the fund was no longer there to enjoy it. Different century, same arithmetic: leverage works until it doesn't, and the forced seller misses the recovery every time.
One last note: even through the largest municipal bankruptcy in American history, holders of Orange County's bonds were ultimately repaid at one hundred percent of par value, and the county itself was back to an investment-grade rating by 1997. In an increasingly unpredictable interest rate environment, this cautionary tale sheds light on why we prefer owning individual bonds outright, with a maturity date circled on the calendar, rather than bond funds, which have no maturity date and no promise to return principal at par. However, there are scenarios where a bond fund makes sense for its diversification and liquidity.
If the story leaves one thought behind, let it be this: know what you own and why you own it, because when markets turn frightening, that conviction is what keeps your hand off the sell button. Good places, like good portfolios, can come back from a bad year. The better plan is never to need the comeback. As always, thank you for reading. And if you were here in 1994 and remember how that winter felt, give me a call. I would truly love to hear your story.
Daniel Tyler Holt
Principal | Holt Investment Partners
Holt Investment Partners LLC is a Registered Investment Adviser. Historical material is drawn from the Orange County Register, the Los Angeles Times, Fortune, Philippe Jorion's Big Bets Gone Bad (1995), Mark Baldassare's When Government Fails (1998), and other publicly available archives and public records, which may differ in minor detail; a full source list is available upon request. Commentary on recent market events is based on publicly available data and published reporting as of August 2026. The Balboa Brief is provided for informational and educational purposes only and does not constitute investment, legal, or tax advice, or a recommendation to buy or sell any security or asset class. Views expressed are as of August 2026 and are subject to change without notice; any forward-looking statements are opinions, not guarantees. All investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. References to specific securities, indices, or third-party firms are for illustrative purposes only. Advisory services are offered only pursuant to a written agreement and only where Holt Investment Partners LLC and its representatives are properly licensed or exempt from licensure.
