In 1994, the affluent enclave of Orange County, Calif., was forced into Chapter 9 bankruptcy thanks to a series of bad bets made by Treasurer Robert Citron, who bet a borrowed $14 billion on interest-sensitive derivatives contracts in an effort to keep up his track record of remarkably high returns.
When federal interest rates increased, though, the plan collapsed, and bond dealers, as Businessweek put it, began “panicking” — prompting a massive selloff of Orange County bonds. As one Wall Street executive described the calamity: “People are scared to death.” Welcome to the O.C.
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