Robert Citron and Orange County smoke screen.

Until last year Robert Citron was the successful treasurer of Orange County, Calif. Then under the irresistible influence of exotic financial derivatives, he apparently lost $1.7 billion. Appearances are deceiving. In reality, Citron actually may have made money for Orange County. The real villain here is not financial derivatives, but Orange County itself.

A billion here Citron's results have escaped attention for a simple reason. Investment advisors (or county treasurers) should not be judged by results from just one year. Examining Citron's performance over the last 18 years reveals the following: During the first 17 years, Citron made an average return of 10%. Then in 1994 Citron lost $1.7 billion. But factoring in the entire period, Citron made 8.5% compounded annually.

How good is an 8.5% return? The value of any return must be measured against an appropriate benchmark. In this case the benchmark is the return earned by the California State Treasurer. Many California counties and municipalities invest with the California treasurer, and Citron's critics say he should have put Orange County's money there. But Citron outperformed the California treasurer for 17 years by an average of 1.5% annually.

Orange County spent the excess profits on the dangerous assumption that its excess returns would continue indefinitely. That's why Orange County is laying off workers, canceling programs and drastically cutting back on spending. Now that the bubble has burst, Orange County does not want to raise taxes to cover unfunded costs from the previous years.

While it appears that Orange County is strapped for cash because of Citron's investments, in truth, the county made money but has been living beyond its risk-free revenues for 18 years and now does not want to pay for the party.

A billion there The second billion-dollar benefit Citron provided Orange County is bankruptcy. This may seem like a strange benefit, but Chapter 9 of the Bankruptcy Code (for cities and counties) allows Orange County to stiff its creditors to the tune of $1.5 billion, with little cost to itself. This is because Chapter 9 does not allow creditors to seize assets such as schools or parks or courthouses or even force governments to raise taxes. In effect, people who lend money to governments are relying on the good faith of those governments to repay their debts.