In a year marked by dramatic changes, these 10 events dominated the world of business and economics in 1994:

1. Interest Rates Take Off

With the U.S. economy gathering steam, the Federal Reserve Board stepped on the brakes--six times, in fact. The central bank raised short-term interest rates to slow the economy and curb inflation.

As usual, fallout from the Fed’s actions was widespread.


Bond prices plunged in the face of the rising rates, and the simultaneous jump in yields--the Treasury’s 30-year bond climbed above 8% for the first time in 2 1/2 years--also gave the stock market fits, leaving many stock averages in the red for the year.

The rate hikes also caused huge losses for municipalities and industrial companies that speculated with “derivatives"--essentially, risky bets on the future course of lending costs, exchange rates and commodities prices.

Rates on home mortgages, auto loans and other consumer debt naturally rose as well, but so did savings rates--if more slowly. Bank certificates of deposit and money market funds suddenly appealed to many investors wary of the jittery stock market.

2. Orange County Goes Bust


The Fed’s rate hikes claimed their biggest victim in Orange County. Longtime Treasurer Robert L. Citron had used heavy borrowings, exotic financial instruments and other risky strategies to bet heavily on a drop in rates. But with rates rising instead, the affluent county shocked the world by declaring that its investment fund had lost $1.5 billion--a figure later raised to more than $2 billion--and then filing for bankruptcy, marking the largest municipal failure on record. Citron resigned.

Orange County’s debacle sent ripples across the nation. About 180 municipalities that had invested in Orange County’s pool found their cash frozen, placing them in fiscal jeopardy. Wall Street firms that had held billions of dollars of the county’s securities as collateral--in order to loan the county even more money--sold it in just days. The municipal bond market teetered, and there were widespread calls to reform local finance practices.

3. Southland Shakes

The 6.7 earthquake Jan. 17 rocked the state economy, but businesses showed surprising resilience--including transportation firms that quickly adapted to repair freeway damage near the quake’s epicenter in the San Fernando Valley. The temblor gave California’s construction industry a shot in the arm, which in turn helped the economy maintain its slow climb out of recession.


But there was no denying the earthquake’s financial devastation. Total insured damage is expected to reach $10 billion to $12 billion. The disaster seriously depleted the capital of Woodland Hills-based insurer 20th Century Industries, which was forced to sell a major stake to American International Group Inc. for badly needed cash. Dozens of stores in the Valley were destroyed, and the Northridge Fashion Center has yet to be completely rebuilt.

4. California Mends

Finally. The state economy emerged, albeit slowly, from one of its most severe and stubborn recessions in recent memory. California’s jobless rate dropped to its lowest level in nearly three years, and UCLA predicted a gain of 111,000 net new jobs in 1994. Consumer confidence improved, and manufacturers began spending again for new plants and equipment. The housing market stabilized, in rough terms, after prolonged declines in prices and sales.

Problems remained, however. Layoffs and plant closings in the state’s battered aerospace industry rolled on, in lock step with defense spending cuts. McDonnell Douglas chose to build its newest jetliner in Texas--the employment potential is 5,000 jobs--rather than in Long Beach, saying California business costs were too high. The rise in interest rates threatened to derail the rebound in home sales; housing and commercial construction remained weak.


5. The Merger Returns

The deals were back--with a vengeance. Huge corporate takeovers, friendly and hostile, occurred in the aerospace, health care, telecommunications and railroad industries. But unlike the go-go 1980s, when many a buyout was aimed at busting up the target company to enhance the predator’s return, most of these deals were designed as strategic marriages.

Case in point: Lockheed Corp.'s $10-billion “merger of equals” with aerospace rival Martin Marietta Corp., expected to close this year. Ditto Rockwell International Corp.'s $1.6-billion purchase of Reliance Electric Co., whose motors Rockwell covets to enhance its industrial automation line.

Railroads also sought partners to gain efficiency and better compete against the nation’s truckers. The biggest target: Santa Fe Pacific, a major West Coast railroad, which got $3-billion offers from Union Pacific and Burlington Northern.


6. Trade Barriers Ease

After eight years of negotiations and debate, a sweeping new version of the General Agreement on Tariffs and Trade received U.S. approval. The pact is aimed at bolstering world trade by slashing tariffs and subsidies, but opponents continued to worry that GATT would cost some U.S. manufacturing workers their jobs.

Initial results of the North American Free Trade Agreement--the 1993 pact that relaxed trade barriers between the United States, Mexico and Canada--appeared positive for U.S. business. Midwestern farmers sold more corn to Mexico, and heavy-equipment and trucking companies both scored big sales gains and expect more to come.

Americans bought more Mexican products, offsetting a surge in U.S. exports to Mexico and sharply cutting the U.S. trade surplus with the nation. Nonetheless, analysts caution that the final verdict on NAFTA is still years away.


7. Utility Deregulation Looms

State regulators decided to open the electric power market to competition in hopes of lowering Californians’ power rates, which are now roughly 50% higher than the U.S. average. But there’s a snag: The seemingly simple matter of letting Californians choose from whom they buy their power is proving difficult.

The utilities, consumers and environmentalists have presented different proposals, all of which are being hashed out in public hearings before the state Public Utilities Commission. The PUC’s own plan, which began the debate in April, in effect would permit customers to choose their power providers much as they now pick long-distance telephone companies.

The final plan--which companies can offer electricity to which consumers, along with such details as whether low-income assistance and environmental programs can survive a free market--still needs to be worked out.


8. Hollywood Does the Shuffle

A “Dream Team,” some nightmares and a blockbuster merger changed the face of Hollywood. Director Steven Spielberg, former Disney studio head Jeffrey Katzenberg and music mogul David Geffen joined forces to create their own entertainment company. Katzenberg’s departure from Disney was just one of many hurdles for that firm, which also lost its No. 2 executive, Frank G. Wells, in a helicopter crash. Viacom Inc. joined the ranks of entertainment giants by acquiring Paramount Communications Inc. and then Blockbuster Entertainment Corp.

But past Hollywood mergers came to haunt the Japanese. Sony Corp., admitting failure in its purchase of Columbia Pictures for $5 billion five years ago, took a $2.7-billion write-off on the movie studio, now named Sony Pictures. Matsushita Electric Industrial Co.'s ownership of MCA Inc. also looked rocky after management squabbles erupted between Matsushita and MCA, home of Universal Studios.

9. Nasdaq Comes Under Fire


The Nasdaq stock market, which operates electronically through dealers at brokerage firms, came under multiple investigations by the Justice Department, the Securities and Exchange Commission and other regulators. The focus is on whether dealers have colluded to set prices, quoting customers abnormally large “spreads” between the stocks’ “bid” and “asked” prices.

A series of stories by The Times examined allegedly unfair practices in Nasdaq trading that work to the disadvantage of small investors. Nasdaq defended its trading but also proposed new rules that would give small investors more of a chance to trade at prices better than those quoted by the dealers. The market’s parent, the National Assn. of Securities Dealers, formed a committee to review Nasdaq operations.

10. Health Care Reform

Or the lack of it. The Clinton Administration’s massive and complex attempt at reform fizzled, but industry providers kept buying and selling assets, anticipating that some type of change will be forthcoming.


Mergers swept the health care and biotechnology industries. Columbia/HCA Healthcare Corp. agreed to buy HealthTrust Inc. for $3.5 billion, and National Medical Enterprises struck a deal to buy rival hospital chain American Medical Holdings for $3.3 billion. On a smaller scale in the biotechnology industry, Amgen Inc. in Thousand Oaks agreed to buy Synergen Inc. for $240 million.