Robert Citron's Risky Business   

Robert Citron used the county's assets – including U.S. Treasury bills and bonds – as collateral to borrow money. He then used that money as collateral to borrow interest rate-sensitive assets he didn't own with the hope of selling them, then buying them back to make a profit. To clarify this concept, known as "selling short," one broker used an analogy: "You own a Corvette. I have a hunch the price of Corvettes is going to drop soon. So I borrow your Corvette. We sign legal documents allowing me to sell the car with a stipulation: You get the car back, no matter what, on an agreed upon future date. You loan me the car. I sell it for $25,000. When the price of Corvettes drops to $10,000, I buy back your car. I then return your car within the agreed upon time limit and pocket $15,000."

That works if you bet correctly on the market for Corvettes. But when the market fools you "the loss potential is limitless," explains the bond broker. "What if the price of Corvettes goes up to $100,000? Then I've bet wrong and you want your car back." The strategy worked great for years, as interest rates fell and stayed low. But when interest rates started to climb, it became clear that Citron had bet wrong. Orange County's lenders realized they weren't going to get back what was owed them. "They looked at the growing debit in the account and demanded back what they had loaned. Orange County was forced to sell," the bond broker explains. "That's why it went bankrupt." l