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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Which statement best describes a key risk management failure at Orange County that differs from the S&L crisis?

Orange County's failure was a speculative, leveraged bet on falling or stable rates using reverse repos and structured notes, with weak oversight and no meaningful market-value risk limits, inside a pool investors believed was safe. The S&L crisis was instead a structural mismatch and regulatory problem.

  1. AOrange County's losses came mainly from fraud by borrowers on mortgage loans
  2. BOrange County used leverage and structured notes to bet on rates, with weak oversight and no use of mark-to-market or VaR-type limits on a pool that investors treated as safeCorrect
  3. COrange County had no exposure to interest rate changes
  4. DOrange County's losses arose because it was required to hold only long-term bonds by law

Explanation

The county treasurer pursued a speculative, leveraged rate bet inside a pool seen as conservative, with poor governance and reporting of market value risk. The S&L crisis was driven by structural regulatory and mismatch issues. The other options misstate the facts.

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