Orange County
Orange County is a county in California, United States, that is known for its significant role in the history of financial risk management. In the early 1990s, the county experienced a major financial crisis that resulted in bankruptcy, and this crisis was caused by a risky investment strategy that went wrong.
The county’s treasurer at the time, Robert Citron, had invested heavily in highly leveraged securities that were backed by mortgage bonds. This strategy was aimed at taking advantage of the higher interest rates on these securities, which were supposed to generate significant returns for the county’s investment pool.
However, when interest rates unexpectedly fell, the value of these securities plummeted, and the county’s investment pool suffered huge losses. The losses were so significant that they exceeded the county’s available funds, and as a result, Orange County declared bankruptcy in 1994.
The Orange County bankruptcy was a wake-up call for many financial institutions and investors who had been engaging in similar risky investment strategies. It highlighted the need for proper risk management and the importance of diversifying investments to avoid catastrophic losses.
Today, the lessons learned from the Orange County bankruptcy continue to inform financial risk management practices. Financial professionals are trained to carefully assess and manage risks associated with their investments, and to develop diversified investment strategies that can withstand unforeseen market conditions.
Recovery
The trip back from bankruptcy was hard and marked by false starts and breakdowns. The county’s credit rating fell to “junk” status. The Wall Street firms continued to sell off the billions of dollars in securities that they held as collateral. Called in to manage the county pool, former state treasurer Thomas Hayes sold off the risky securities, establishing the pool loss at $1.64 billion. He also set up a mechanism to allow the local governments to withdraw some of their funds from the pool on an emergency basis. The Board of Supervisors appointed the county sheriff and two other county officials to a crisis team to keep the county government working. They also appointed a local financial executive, William Popejoy, to the newly created position of chief executive officer for the county in early February. Popejoy initiated severe staff and budget cuts necessary to balance the budget and removed county officials tainted by the fiscal collapse.
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