California's Orange County filed for bankruptcy protection last Tuesday and defaulted on a $110 million issue of taxable pension obligation bonds on Thursday. The municipal bond market's recent rally aborted, and Securities and Exchange Commission chairman Arthur Levitt said the events were "significant" and "may cause grief and loss to many people." The municipal bond market faces its gravest test in more than a decade.

When Orange County's problems are finally settled - and like New York City in 1975 or the Washington Public Power Supply System in 1983, they will take years to unfold and solve - governmental money funds will be controlled more tightly and more rationally. They will be marked to market, and leverage will be firmly restricted.

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