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

Philippe Jorion (Author)

Book Description

ISBN-10: 0123903602 | ISBN-13: 978-0123903600 | Publication Date: September 18, 1995

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.

Editorial Reviews

From Publishers Weekly

Jorion (finance, Univ. of California-Irvine) had a ringside seat at the great Orange County, California, financial debacle of 1994. He gives readers information about the major players and a thorough analysis of the esoteric financial instruments that provided the vehicle by which the treasurer, Robert Citron, bankrupted the county after losing $1.5 billion. Readers unfamiliar with financial jargon may find the chapters detailing the high-flying world of repos and derivatives heavy going, but 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.
Andrea C. Dragon, Coll. of St. Elizabeth, Convent Station, N.J.
Copyright 1995 Reed Business Information, Inc.

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

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Product Details

• Paperback: 176 pages
• Publisher: Emerald Group Publishing (September 18, 1995)
• Language: English
• ISBN-10: 0123903602
• ISBN-13: 978-0123903600
• Product Dimensions: 8.5 x 5.5 x 0.6 inches
• Shipping Weight: 9.6 ounces (View shipping rates and policies)
• Average Customer Review: 4.6 out of 5 stars  See all reviews (5 customer reviews)
• Amazon Best Sellers Rank: #863,055 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

13 of 15 people found the following review helpful:

5.0 out of 5 stars Profiteering without Prudence or Oversight, May 30, 1999

By 

Gregory McMahan (Tottori, Japan) - See all my reviews
(VINE VOICE)   

Amazon Verified Purchase

This review is from: Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure in U.S. History (Paperback)

Jorion should be commended for his insightful, first-class treatment of this history making event. Big Bets... is a fast, fluid read that is devoid of technical terms and is written in an active, conversational and explanatory voice that the typical layman can readily understand. In this book, which reads more like gripping fiction, we are treated to an excellent character sketch of the key culprit in the Orange county financial fiasco, Robert L. Citron, his rise to power, the environment he worked in, the exotic financial tools he carelessly wielded, an unforgettable cast of financial hucksters and ill-advised power wielding greedy misfits, and the ultimate downfall of the Orange county financial safety net and its after-effects.

From this book, we learn that Robert L. Citron was head of a large portfolio, had no oversight, and an inflated ego. His superiors and fellow investment participants (such as the county school district) knew full well what he was doing, but allowed him to continue unsupervised because of his past stellar performance- much of which was due to pure luck and favorable market conditions. We also learn that Citron, much like Nicholas Leeson, the orchestrator of the fall of Barings, was a financial neophyte. While on the one hand believing that he was fully invested in bonds, Citron had taken a heavily leveraged position in very exotic derivative securities, proving to Jorion's point that he really did not have a clue as to what he was doing.

We also learn that Citron (nor the people above him and his investment participants), who had no real background in finance, did not know the difference between market price and face value, nor did he know the difference between an option on an asset and the outright ownership of an asset. Based on one very bad bet on the movement of interest rates, Citron fully invested Orange County's finances in derivative securities that he did not understand at all, and compounded the problem by leveraging his position (basically using a little money to borrow a lot of money) to the extreme.

After reading this book, those of us who believe that our investments, from the retirement funds managed for us by fund advisors and our places of work to our bank accounts and our kids' education funds, are safe should have our heads examined. People such as Citron were not financial gurus, that is certain, but as the more recent derivative led failures at hedge fund Long Term Capital Management (which included the two Nobel laureates who literally wrote the book on derivative pricing on its stellar team of rocket scientists) and Bank of America demonstrate, no one is truly safe.

6 of 7 people found the following review helpful:

4.0 out of 5 stars Interesting and informative read, July 28, 2000

By 

omarbukka (Chicago, IL USA) - See all my reviews

This review is from: Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure in U.S. History (Paperback)

Readable account of the Orange County financial blow-up. Particularly interesting is the description of Robert Citron, the hapless college dropout who controlled billions of dollars of public money. Also fascinating are the prescient comments of the obscure accountant who ran against unbeatable Citron in the election prior to the disaster. Jorion manages to educate the reader, in a very painless way, about the institutions of the bond market (such as repos).

On the minus side, the book is not particularly well documented (in terms of, for example, the graphs and the sources of the data) and some chapters seem suspiciously like lecture notes, hastily adapted to a book format. Still, an enjoyable trip to the dark side of financial market.

4 of 5 people found the following review helpful:

5.0 out of 5 stars Excellent explanation., December 11, 2002

By 

Luc REYNAERT (Beernem, Belgium) - See all my reviews
(REAL NAME)   

This review is from: Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure in U.S. History (Paperback)

This book tells the story of a 1.4 billion$ financial loss by the Orange County municipality.
The author explains very clearly what happened.
The municipality, through its treasurer, speculated that interest rates would stay the same or fall. Into the bargain, he leveraged his position with a factor 3. The means for the speculation were repos on bonds.

When the interest rates went through the roof (from 5,25% to 8% = + 52%), the value of the collateral (the bonds) for his position fell (with a factor 3). He got a margin call, but couldn't pay it. The biggest part of the investment (held by FBCS) was liquidated with a phenomenal loss. Only Merrill Lynch didn't cover their position.

The author gives excellent explanations on some very specialized investments like reverse floaters and other high tech financial operations of which the value can only calculated by partial integrals.

Food for investment bankers.