The Risks of "Alternative Investments"

Harvard has been very successful with "alternative" investments, as its endowment more than quadrupled in value during the 15 years it was managed by Jack R. Meyer, a former Deputy NYC Comptroller.

But the downside of alternative investments was the Orange County fiasco, when County Treasurer Bob Citron borrowed $13 billion to invest in derivatives, betting that interest rates would go down as the Fed decided to move interest rates the other direction. Orange County declared bankruptcy on December 6, 1994.

The San Diego County Employees Retirement Association lost more than $100 million in a hedge fund in NYC's back yard, Amaranth Advisors.

Orange County is again in the news. New Century Financial was a part of the story on February 27 when the Dow dropped by more than 400 points, although China was mostly blamed then. But in yesterday's Dow-drop of 240 points, New Century Financial is at the heart of the story. Bear Stearns led the decline partly because it had just invested in New Century Financial, the second-largest U.S. subprime lender, now on the brink of bankruptcy.

So where is New Century Financial based? In Irvine, California, right in the middle of Orange County.

And what government-supervised pension fund owns a 3.6 percent stake in New Century Financial? The New York State Teachers Retirement System.