Wall Street History: Orange Country Crumbles And Dow Drops

By Andrew Beattie | December 09, 2010 AAA
Wall Street History: Orange Country Crumbles And Dow Drops

This week in financial history marks the birthdays of one of the most important inventors of the industrial/agricultural revolution, an odd purchase for a light bulb company and unthinkable losses for a local government. We'll start in California. (Missed last week's article? Check out Wall Street History: Christmas Cheer Or Irrational Exuberance?)

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Orange County is Burning
On December 6, 1994, Orange County was forced into bankruptcy when it announced that it had lost $1.6 billion in an investment pool. The pool was run by investing whiz, Robert Citron, whose enviable long-term record was based largely on playing interest arbitrage in the bond market. Citron used leverage to make bets that interest rates would stay low, profiting from the difference between long and short-term yields.

Although the fund had $7 billion, leverage allowed Citron to turn that into a $20 billion dollar position. Unfortunately, the Fed began raising rates in February of 1994, and leveraged gains quickly swung to leveraged losses. The county entered bankruptcy and quickly created a recovery plan based on $800 million in new bonds. Although they sold at a discount due to the risks involved, the bonds were enough to keep Orange County from going insolvent.

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A Sad Inventor
On December 8, 1765, Eli Whitney, the inventor of the cotton gin, was born. Gin being short for engine, the device shortened the time it took to separate cotton fibers from the seed using thin wire hooks. It was one of the most important inventions in America's agricultural history. The cotton gin literally cut days from the processing of cotton, but the device was quickly copied by other manufacturers. Whitney exhausted himself in endless patent fights and was unable to profit from the invention. In fact, he never patented any of his other inventions.

Whitney spent his later years working with interchangeable parts - a key component that one-day would lead to industrial mass production. Long attributed to Whitney, the movement towards production of parts to be assembled rather than one whole device at a time is now seen as having come in from abroad. Such are the vagaries of history that we don't even know if he can still claim his most famous invention, the cotton gin. Worse yet, when he is credited, the efficiency of the cotton gin is often pointed two as one of the pillars that helped prop up slavery. After the patent debacle, it is doubtful that Whitney would find this surprising. (If these unpleasant emotions are allowed to influence your decision-making, they may cost you dearly. Check out The Financial Markets: When Fear And Greed Take Over.)

An Opening Day to Remember
On December 9, 1999, VA Linux had its IPO - and it was one for the books. The company was in the hardware business, dealing computers and servers running the Linux operating system. Not only was this a fairly robust niche, but the company was modestly profitable, something nearly unheard of during the dotcom boom.

The shares of VA Linux jumped from $35 to over $235 on the first day of trading, making it a record-breaking IPO. This stunning performance was one of the last hurrahs of the dotcom bubble. Unfortunately for the new "siliconaires," the dotcom crash left them with a share price that was dangerously near penny stock territory in 2001. The company renamed itself SourceForge and rebuilt, posting its first post-IPO profit almost seven years after the fact.

TV Shopping
On December 12, 1985, GE announced a $6.3 billion dollar purchase of RCA. The deal worried analysts because it included NBC and critics couldn't see where television fit into GE's light-bulb pedigree. Expanding the business outside of its traditional boundaries was, of course, CEO Jack Welch's strategy. That said, RCA was actually majority owned by GE prior to 1930. The company was originally a joint venture between several companies, of which GE was the biggest stakeholder. GE gave up its portion of RCA when the Department of Justice launched an antitrust case. The reunion 55 years later was bittersweet as many pieces of RCA - and to be fair, GE itself - were spun off and sold for the sake of efficiency.

That's all for this week. Next week we'll see more of Jack Welch, a landmark publication in personal finance and much more. Until then.

Find out what happened in financial news this week. Read Water Cooler Finance: Steady Stocks, Big G's And Madoff News.

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