How can a municipal investment pool, which is supposed to be safe, lose billions of dollars? What are derivatives and how did they contribute to this tragedy?
In December 1994, Orange County became the largest municipality in U.S. history to become bankrupt. By borrowing heavily and placing the wrong bets, Orange County Treasurer Robert Citron lost $1.7 billion of Orange County’s $7.4 billion investment portfolio.
Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County is the first detailed description of the Orange County bankruptcy. Author Philippe Jorion, the only professor in Orange County who teaches and researches derivatives, is uniquely placed to understand the technical details of the portfolio and climate in the Orange County municipal government that encouraged the decisions that led to the bankruptcy.
Big Bets Gone Bad provides an introduction to the U.S. bond market and details Federal Reserve Chairman Greenspan’s efforts to tighten credit. Its description of the $35 trillion derivatives market makes the losses of Barings Bank, Kashima Oil, West Virginia, and Metallgesellschaft more understandable. Big Bets Gone Bad explains what everyone should know about tax monies and public investments. Because nobody likes to lose $1.7 billion.

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November 15th, 2017

Posted In: Income Strategies

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2 Comments

  • Vincent Poirier says:

    Risk Management, emphasis on management This book has a clear subject and goals, sticks to it, and gives a very nice tutorial in the basics of its topics. All this is accomplished in a quick read. I appreciate the good clean editing. Those who don’t know a lot about these topics or the history, but want an entry point, are well served here. I like its calm tone, yet unsparing in describing mistakes, and those who made them. Are you curious how a huge county portfolio might be packed with highly leveraged “inverse floaters”…

  • Gregory McMahan says:

    Profiteering without Prudence or Oversight Jorion gives a good text book account of the Orange County debacle, concluding that this was a gross but purely human error, and not a failure of the financial system or the derivatives market.The first part of the book introduces the problem quickly then proceeds to give the reader a crash course in risk management theory, explaining among other things the concept of Value-at-Risk (VaR). Many types of derivatives are described and their proper use explained. We are given a manager’s…

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