They preach caution, but practice risk. Under pressure to increase revenues without raising taxes or cutting services, local treasurers try to make up the difference with aggressive investment earnings. Too many Main Street investors dive into the pool with Wall Street sharks. They're in over their heads. You all know about the billion-dollar mess in Orange County.
Derivatives are a common thread to public funds losses across the country in the last two years.
Sifting through the wreckage turned up familiar traces. Over here, a futures security. Over there, a pile of interest rate swaps. Derivatives are the financial equivalent of explosives on a construction site. Used properly, they do the job like nothing else can.