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The Aftermath

The effect of the bankruptcy filing was profound. The funds of 185 school districts, cities, and other agencies were frozen during the bankruptcy process. The agencies that invested in the fund received only 77% of their principle back. Projects ranging from new schools to a new stadium for the Los Angeles Rams football team were cancelled or scaled back.[12] Many teachers were laid off. The Rams moved to St. Louis and won a Super Bowl. Orange County employees became anxious about their pensions. By the end of 1995, over 1,500 employees lost their jobs due to budget cuts. Some public services were scaled back or eliminated.

In July 1994, Orange County and some other municipalities had issued $600 million in municipal bonds. Most of the proceeds from this bond issue were invested in Citron's portfolio. Citron used leverage, which magnified the returns and increased the risk. It is interesting to note that Orange County further leveraged its position by borrowing money (the municipal bond issue) to invest in the portfolio. Therefore, Orange County was even more leveraged than most media accounts suggest. The investors who purchased the $600 million in municipal bonds in July did not fare too well. Two months after the bankruptcy filing, the municipal bonds were trading at an 18% loss, and it is unclear how the county will be able to pay off the bonds when they mature.


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