Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure in U.S. History Paperback – Import, 18 September 1995

The print seems to be a bit local

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.

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 working knowlege of finance.Jorion then moves to the Orange County debacle proper and his conclusion is frighteningly simple: the financial managers of Orange County, entrusted with billions, did not know what they were doing. They were ignorant of what we learned in the first few chapters. They were amateur money managers playing roulette.The book is still topical. The Basel II banking agreements mandate strict capital reserve requirements for a variety of risks, such as market and liquidity risk, so that understanding the concept of VaR is more important than ever. Most importantly however, Basel II requires preparation and reserves for operation risk, which most often has to do with the people side of finance rather than the mathematical vality of the models used. Jorion's book is thus also a good introduction to the human side of risk.

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"? What the banks' roles were? It's all here, and clear.

Excellent condition-new Very satisfied