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Title: Big Bets Gone Bad : Derivatives and Bankruptcy in Orange County. The Largest Municipal Failure in U.S. History ISBN: 0-12-390360-2 Publisher: Academic Press Pub. Date: 18 September, 1995 Format: Paperback Volumes: 1 List Price(USD): $36.95 |
Average Customer Rating: 4.5 (4 reviews)
Rating: 4
Summary: Risk Management, emphasis on management
Comment: Jorion gives a good text book account of the Orange County debacle, concluding that this was a gross but purely human error, and not a failure of the financial system or the derivatives market.
The first part of the book introduces the problem quickly then proceeds to give the reader a crash course in risk management theory, explaining among other things the concept of Value-at-Risk (VaR). Many types of derivatives are described and their proper use explained. We are given a manager's working knowlege of finance.
Jorion then moves to the Orange County debacle proper and his conclusion is frighteningly simple: the financial managers of Orange County, entrusted with billions, did not know what they were doing. They were ignorant of what we learned in the first few chapters. They were amateur money managers playing roulette.
The book is still topical. The Basel II banking agreements mandate strict capital reserve requirements for a variety of risks, such as market and liquidity risk, so that understanding the concept of VaR is more important than ever. Most importantly however, Basel II requires preparation and reserves for operation risk, which most often has to do with the people side of finance rather than the mathematical vality of the models used. Jorion's book is thus also a good introduction to the human side of risk.
Rating: 5
Summary: Excellent explanation.
Comment: This book tells the story of a 1.4 billion$ 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.
Rating: 4
Summary: Interesting and informative read
Comment: 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.
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Title: The Fundamentals of Municipal Bonds, 5th Edition by The Bond Market Association, Judy Wesalo Temel ISBN: 0471393657 Publisher: Wiley Pub. Date: 05 January, 2001 List Price(USD): $70.00 |
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Title: When Government Fails: The Orange County Bankruptcy by Mark Baldassare ISBN: 0520214862 Publisher: University of California Press Pub. Date: 01 June, 1998 List Price(USD): $22.50 |
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Title: Bond Markets : Analysis and Strategies (5th Edition) by Frank J. Fabozzi ISBN: 0130497827 Publisher: Pearson Education Pub. Date: 31 October, 2003 List Price(USD): $121.00 |
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Title: Options, Futures, and Other Derivatives (5th Edition) by John C. Hull ISBN: 0130090565 Publisher: Pearson Education Pub. Date: 03 July, 2002 List Price(USD): $146.00 |
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Title: Ethics in Finance (Foundations of Business Ethics) by John R. Boatright ISBN: 0631214275 Publisher: Blackwell Publishers Pub. Date: 01 June, 1999 List Price(USD): $24.95 |
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