Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure in U.S. History

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 USD1.7 billion of Orange County's USD7.4 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 USD35 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 USD1.7 billion.

Table of Contents:
Introduction. Robert Citron and His World. Bond Basics. Repos. Damned Derivatives? Structured Notes. Rocket Scientists--It Gets Technical. The Need for Capital. Going Bankrupt. Citrons Strategy (the Repo Man). Suing Wall Street. The Bondholders. Placing Blame. Fallout in the County. Lessons in Risk. Risk and Derivatives. Do We Need Regulation? Conclusions. Epilogue. Bibliography. Glossary of Financial Terms. Index.

About the Author :
Philippe Jorion, Professor and Corporate Partners Research Scholar at the University of California at Irvine, teaches courses in Futures and Options, International Financial Management, and International Portfolio Management. He has an MBA and a Ph.D. in International Finance from the University of Chicago and has taught at Columbia University, the University of Chicago, Northwestern University, INSEAD, and the University of British Columbia. He has authored more than fifty publications on topics such as global portfolio investments and derivative markets.

Review :
"Jorion cannot be praised enough for his ability to make the complex world of financial instruments understandable...Not a single reader--including those in dire need of a derivatives education--will be lost because of the groundwork he has laid." --RISK MAGAZINE "Jorion...delivers a lucid and surprisingly readable account of Citrons disastrous magic show." --THE ORANGE COUNTY REGISTER "Those interested in learning what really happened in Orange County will find that time invested in Jorion's book is well spent. Recommended for public and academic libraries." --LIBRARY JOURNAL "The book is a must-read for taxpayers all over the country." --MERTON H. MILLER, Professor of Finance, Graduate School of Business, University of Chicago, Nobel Laureate in Economics "Every local government official involved in the financial government of his or her jurisdiction should spend a few hours reading this book. It is an eye opener illustrating once again the effect of too much power concentrated in too few hands and the complacency that occurs based on a successful track record... Philippe Jorion weaves an interesting story of Robert Citron and his world, the growth in power with his successes, the changes in the securities markets, and the effect of leverage... This book serves as a mini-textbook on the strategies and securities used in the investment of the Orange County Investment Pool... The book is well worth the time spent reading it." --GOVERNMENT FINANCE REVIEW "The explanation of the causes of the bankruptcy...are interesting and informative." --THE CPA JOURNAL "Jorion...knows his subject...Every county treasurer should study this work, as should students of finance and economics. The general investor would also be wise to review the contents. But everyone who unfolds these pages should come away with the authors final words firmly embedded in the investing psyche: 'Understand the inherent risks of your investment position and your exposure to these risks, and do not buy any product that you cannot understand or price with reasonable accuracy. The lesson of Orange County should not go unlearned.'" --ACADEMIC LIBRARY BOOK REVIEW "An easy-to-follow primer on the supposedly 'exotic' derivatives market...and an interesting narrative of the factors leading to a financial disaster." --ORANGE COUNTY BUSINESS JOURNAL "Jorion helpfully highlights telltale signs of impending doom that guardians of civic wealth may care to watch for." --FINANCIAL TIMES "Jorion also offers some revealing insights into the life of Robert Citron, the veteran treasurer of Orange County, whose highly risky investment strategy spawned the financial black hole that swallowed the municipality." --FINANCIAL TIMES "Professor Jorion presents a very readable account of the Orange County fiasco, including the people, politics and financial instruments involved. He also includes a non-mathematical discussion of risk--including its measurement and monitoring--which the Orange County treasurer, supervisors, and ideally its voters should have understood." --HARRY M. MARKOWITZ, President, Harry Markowitz Co., Nobel Laureate in Economics "This fascinating account of the Orange County case shows that the episode was not really a Derivatives Disaster, as everyone has been assuming, but a failure of the institutions of municipal government. The book is a must-read for taxpayers all over the country." --MERTON H. MILLER, Professor of Finance, Graduate School of Business, University of Chicago, Nobel Laureate in Economics "Jorion hopes that his book proves useful for 'general' readers, students of finance, and participants in pension funds and investment pools of all kinds (p.6). I would add that state and local officials and policy analysts are also likely to find this book very useful. I recommend this book to a wide range of readers. I never expected that a book about municipal bankruptcy that also serves as a primer to basic finance would ever be such a good read." --Daphne Kenyon in URBAN STUDIES