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

by Philippe Jorion

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.

Genres: Nonfiction

176 pages, Paperback

First published September 18, 1995

About the author

Philippe Jorion is Professor of Finance at The Paul Merage School of Business at the University of California at Irvine.

Reviews

[Paul · Rating 5 out of 5]

I am a big fan of popular finance books - think Lowenstein, Taleb, Lewis, etc. This book doesn't have the storytelling polish that those books do. Plus it is rapidly approaching 20 years old (published originally in 1995) and it does feel dated at times.

That all being said, the events around the bankruptcy of the Orange County Investment Pool are a critical piece of modern financial history. The part that derivatives played in this debacle is deftly handled and at a sufficient level of technical detail that I assigned this book as required reading for graduate students in my financial derivatives class. If that seems daunting (or you don't want too much technical detail), the technical parts can be skipped and you still have a very good story - one that could have told us a lot about what was coming less than 15 years later. The failure of oversight by managers, auditors and regulators is already in full view here. The hubris on the part of money managers is shocking - and their reaction after they get in over their heads is all too commonplace.

I gave the book 5 stars based on the importance of the story, the balanced reporting of the issues, the technical coverage of how things went wrong, and how it ultimately is a good story well-told. I think it should be required reading for anyone who is trying to understand how financial derivatives work and how their use can go wrong.

[Aminul Haque · Rating 3 out of 5]

The book is an interesting read on what was then the largest debacle in the financial markets. Events in the financial market that happened between mid-to-late 2000s pales everything that happened before, but the Orange County bankruptcy may have heralded what was to come.

The book has an interesting structure going back and forth between the events and the concepts of the financial instruments that were used (misused). Given that the book was written less than a year after the Orange County bankruptcy, it lacks the in-depth analysis and the dissection of the events. However, it goes further than newspaper articles of the time to explain the debacle.

[Clare · Rating 1 out of 5]

This book is aimed at people who don't know anything about finance. I was mightily disappointed.