What significant risk was associated with Orange County, California’s investment strategy in the early 1990s?

The significant risk associated with Orange County, California’s investment strategy in the early 1990s largely stemmed from its investments in structured notes. Structured notes are financial instruments that often combine fixed-income and derivative components, making them complex and sometimes opaque instruments. These notes can carry high levels of risk, particularly when market conditions fluctuate.

During the early 1990s, Orange County's treasurer employed a strategy that heavily included leveraged structured notes. This reliance on structured products left the county vulnerable to interest rate changes, and when rates rose sharply, the value of these investments plummeted, leading to severe financial distress for the county. The complexity and inherent risks of these investments were not adequately understood by all stakeholders, which exacerbated the situation.

In contrast, investing in high-quality government bonds or maintaining high credit ratings would typically pose lower risks as these are generally more stable and less susceptible to significant market volatility. Similarly, overreliance on short-term bonds might limit exposure to interest rate risks but wouldn't encompass the unique complexities and vulnerabilities associated with structured notes. Thus, the choice of structured notes accurately highlights the crucial risk that contributed to the Orange County investment debacle.