Monday, March 30, 2009

What the Orange County CA bankruptcy of 1994 can teach us

Susie Madrak sez (h/t):

Demonstrating the consistent amnesia of our media overlords, I’ve seen nary a mention of the Orange County CA 1994 bankruptcy that resulted from a hefty investment in derivatives. (You know, like CDOs?) I remember reading a magazine piece (either Harpers or the Atlantic) at the time that illustrated just what time bombs derivative investment could be. It made such an impression on me that a few years later, as a reporter, I lectured some township commissioners who just sat through a presentation by a broker that promised much bigger returns on derivative investments.

“This is what made Orange County go bankrupt,” I said. “I mean, you do what you’re gonna do, but you should know that I will cover the whole issue of high-risk investments in depth if you do.”

They were actually surprised. You know, people tend to accept “expert” advice uncritically, and these were citizens with no particular expertise in finance. They told me they’d look into it, and for whatever reason, they decided not to consider the broker’s proposal - which was good.

For me, red flags go up whenever I hear about derivatives, and that’s why I was so concerned about the repeal of Glass-Steagall.
She then goes on to post the details of the story. For me, it was a stroll down memory lane, as I lived in the county at the time. It makes for an interesting read. The bottom line is that if something seems too good to be true, it probably is.

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