Orange County financial disaster

There was one very unique attributes about the financial crisis that struck Orange County. The county had almost 200 local government entities including the county government, thirty one cities, the regional transportation agency, the local school district, local water agencies, sanitation districts and many local special districts. Almost every local government in Orange County had money on deposit in the county pool.

Risk Management encompasses risk reduction through safety, quality control and hazard education, alternative risk financing, including self insurance and captive insurance and the purchase of traditional insurance products as available. Derivative dealers use derivatives to hedge or customize market risk exposures. Derivative instruments are sometimes called risk management products. The new risk management evolved during the 1990s focuses on reporting, oversight and segregation of duties within organizations.

Risk management has nowadays been termed as financial risk management. Financial risk management includes monitoring of risk taking activities, upholding relevant policies and procedures and distributing risk related reports. Risk management is implemented in an organization by a risk oversight committee usually comprising senior managers. Risk management is about rocking the boat, asking questions and challenging the establishment.

The Orange County financial disaster highlights the fatal flaw in the assessment of the derivatives as mere wealth transfers of little social significance. Orange 6 Regulation of derivatives cannot be reduced to simple numerical calculation of measurable costs and benefits. The real case for regulation rests on preserving public confidence in the honesty and integrity of the marketplace. The belief that derivates disasters are preventable is an essential case for regulation. Economics gives us tool to measure the perceived loss in the integrity of the market.

If the public had lost confidence in the derivatives market then the volume of business would have dried up. Volume of business is high and industry is booming. Some parts of the derivatives market like collateralized mortgage obligations or CMOs and inverse floaters and other exotic structured notes have seen severe decline in volumes. The reaction of several economists has been that derivatives can be used for good reasons if the primary aims were hedging and if inordinate risks were kept under lock and key.

Orange County had $860 million in subprimes or 37. 4 percent and out of it lost $460 million which amounts to 53. 5 percent of its subprime exposure. The capital markets were upset with the Orange county bankruptcy because municipalities are not allowed to speculate. But there were also some positives associated with this bankruptcy. Paying off more of the debt ahead of schedule sent a positive signal to the bonds market. Rescue operations in the past helped to provide a frame of reference.