Question

Please search case study “Orange County Bankruptcy” in Google. First, do some self-learning, and then write an essay to give me some directions on:

1. What was Citrons Strategy? (1 mark) 2. How the Fed action affects the interest rate in 1994? (1 mark) 3. Describe the crisis following the Fed action. (1 mark) 4. Describe the outcomes. (1 mark) 5. Finally what are the lessons to learn? (1 mark)

Answer 1

1. Citrons strategy was that by he borrowed money at low short term rates and invested at higher long term rates that would eventually gave him profit. He was at a position that if the interest rates rose, he would lose money. He also was involved in other derivatives that had a adverse effect when interest rates rose.

2. Fed action had an abrupt increase in the interest rates and consecutively that led the county to lose money and at last led county to backrupcy.

3. In 1994 , Fed made first six consectutive interest rate hikes ( abrupt increase) , the county had to produce $515 million in order to cover its situation. Further rise brought the cash reserves to just $350 million. Analysing the situation of county's troubles in raising of cash , the investors took the back leaving county's backrupt by losing $1.64 billion.

4.Outcomes:

1.) Mr.Citron pleaded guilty for the financial fraud. He was misled by a psychic and an astrologer. He was in jail for about an years

2.) Merril Lynch ,who was broker of Mr. Citron was held guilty and was sued by orange county paying it $400 million.This helped in th recovery of orange county.

5. The lesson i learnt by analysing this case study are:

1.) We should also look over the laws before practically implying the strategies whether they are legal or not.

2.) We should never ever believe anybody (like Mr, Citron over Merril) without analysing the act impact and its legality. We should queston its legality ourselves.

3.) We should never jump in the pool ,directly if we do not have proper guidance or proper knowledge about swimming. ( It means we need to to first gain knowledge about any thing and then move on to its practical usage)