Product Description

Inside markets, innovation, and risk

Why do markets keep crashing and why are financial crises greater than ever before? As the risk manager to some of the leading firms on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of some of the world’s largest hedge funds, from Moore Capital to Ziff Brothers and FrontPoint Partners, Rick Bookstaber has seen the ghost inside the machine and vividly shows us a world that is even riskier than we think. The very things done to make markets safer, have, in fact, created a world that is far more dangerous. From the 1987 crash to Citigroup closing the Salomon Arb unit, from staggering losses at UBS to the demise of Long–Term Capital Management, Bookstaber gives readers a front row seat to the management decisions made by some of the most powerful financial figures in the world that led to catastrophe, and describes the impact of his own activities on markets and market crashes. Much of the innovation of the last 30 years has wreaked havoc on the markets and cost trillions of dollars. A Demon of Our Own Design tells the story of man’s attempt to manage market risk and what it has wrought. In the process of showing what we have done, Bookstaber shines a light on what the future holds for a world where capital and power have moved from Wall Street institutions to elite and highly leveraged hedge funds.

Product Details

• Amazon Sales Rank: #82447 in Books
• Published on: 2008-11-28
• Original language: English
• Number of items: 1
• Binding: Paperback
• 304 pages

Review
“Mr. Bookstaber wrote one of the best books about the causes of the financial crisis, A Demon of Our Own Design, and did so before the crisis erupted.”–– Floyd Norris, New York Times (June 25, 2009)

"A risk–management maven who′s been on Wall Street for decades…Bookstaber′s book shows us some complex strategies that very smart people followed to seemingly reduce risk—but that led to huge losses." (Newsweek)

"Mr. Bookstaber is one of Wall Street′s ′rocket scientists′––mathematicians lured from academia to help create both complex financial instruments and new computer models for making investing decisions. In the book, he makes a simple point: The turmoil in the financial markets today comes less from changes in the economy––economic growth, for example, is half as volatile as it was 50 years ago––and more from some of the financial instruments (derivatives) that were designed to control risk." (The New York Times)

"Bright sparks like Mr Bookstaber ushered in a revolution that fuelled the boom in financial derivatives and Byzantine ′structured products.′ The problem, he argues, is that this wizardry has made markets more crisis–prone, not less so. It has done this in two ways: by increasing complexity, and by forging tighter links between various markets and securities, making them dangerously interdependent." (The Economist)

"He understands the inner workings of financial markets...A liberal sparkling of juicy stories from the trading floor..." (The Economist)

"…smart book…Part memoir, part market forensics, the book gives an insider′s view…" (Bloomberg News)

"Like many pessimistic observers, Richard Bookstaber thinks financial derivatives, Wall Street innovation and hedge funds will lead to a financial meltdown. What sets Mr. Bookstaber apart is that he has spent his career designing derivatives, working on Wall Street and running a hedge fund." (The Wall Street Journal)

"Every so often [a book] pops out of the pile with something original to say, or an original way of saying it. Richard Bookstaber, in A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, accomplishes both of these rare feats." (Fortune)

"a must–read amidst the current market chaos" (BusinessWeek.com)

"Bookstaber is a former academic who went on to head risk management for Morgan Stanley and now runs a large hedge fund. He knows the subject and has written a lucid and readable book. To his aid he calls mathematics (from Bertrand Russell to Godel′s theorem); physics (particularly Heisenberg′s uncertainty principle); and even –– meteorology." (Financial Times)

"The book covers a lot about risk management that is relevant to capital markets conditions today and the liquidity crisis." (Financial Times, Saturday 25th August)

"...an insider′s guide to markets, hedge funds and the perils of financial innovation.  We saw plenty of those in 2007."  (The Sunday Telegraph, Sunday 25th November 2007)

"I cannot recommend this book too highly. It is a clear exposition of what the combination of derivatives, leverage and hedge funds can do to the markets.

In short, A Demon of our Own Design is a guide to the dangerous financial markets we have created for ourselves by the clever innovations of structured finance, derivatives, credit default swaps and other newfangled products that are a mystery to the ordinary investor and even plenty of the sophisticates in the investment business. To understand the demonic risks we′re taking, read this book."––Forbes.com

Review
“Richard Bookstaber’s fine book on modern financial innovation”. Financial Times Wednesday 17 June 2008

Financial Times, Saturday 25th August
"The book covers a lot about risk management that is relevant to capital markets conditions today and the liquidity crisis."

Customer Reviews

A good insight into financial markets
Quite an interesting book with numerous anecdotes and a lot of historical information in there. It provides an interesting insight into the late 80's and the 90's financial markets from the perspective of someone who was obviously high up in the organisation and would have seen what was going on.

The book does seem to focus very much on the author's time at Morgan Stanley and Salomon/Citi though, with only a small amount of information on his time at Moore or Ziff Brothers which I would have liked to have seen more information on.

Definitely worth reading but don't expect it to be another FIASCO or Liars Poker with lots of stories about greedy traders and salespeople.

Thought-provoking reflection on Wall Street risk today
This book is part memoir, part reflection on risk, part tell-all, part recapitulation of recent financial crises and part polemic. If you fret that all these parts might blur author Richard Bookstaber's objectives and message, you are right, but, if you have the patience, keep reading. Enjoy the somewhat diffuse anecdotes and observations in the first few chapters until you reach the author's straightforward presentation of his case that the U.S. financial system is at risk from complexity and tight coupling. The book would have benefited from a slightly fresher take on the financial crises of the last three decades. However, given the author's years as a risk manager on Wall Street (Morgan Stanley, Salomon Brothers, Citigroup) and as a hedge fund expert (Moore Capital, Ziff Brothers, FrontPoint), his personal experience during fiscal crises and his close view of dramatic turns in the market, getAbstract finds that his diagnosis of systemic problems conveys several important stories and that his analysis deserves your attention.

fascinating and timely
If this book had been titled "Memoirs of a Risk Manager" it would only have sold a copy to the author's mum. Happily, it has a snappier title, so there'll be no excuse for market supervisors to ignore its lessons. Don't be put off by the technicalities in the early chapters; if your eyes glaze over at "inflexion points of the long / short bond option" (or whatever) just keep going. You will be rewarded.

We generally think of risk managers as "Don't do that, Maud" types. In fact the reverse is true. Far from preventing the firm from betting the farm, the risk managers job is to help to bet the farm, but only on a sure thing. Hence the development of risk strategies which allow firms to profit from market imperfections.

Bookstaber gives a history of these strategies, enlivened often by amusing anecdotes and a dry wit. Some of them (statistical arbitrage, for example) appear to have been invented almost by accident. All of them lose their edge over time and become just another part of the market with very low returns for the risk. Most users of these risk strategies provide liquidity to the market, which Bookstaber shows is necessary and (less convincingly) under-rewarded.

By this analysis the financial markets were almost programmed to blow up. Recessions and depressions come always from the financial markets to the real economy, not the other way round as Galbraith alleged.

Now that the crisis is upon us, what does Bookstaber recommend? If he had a good plan I'd elect him world president right away, but this is unsurprisingly the weakest part of the book. But he's good on what won't help. More regulations? Useless, because they'll only control the obvious. Ban short trading / hedge funds? Likewise. Better risk management? Of limited use, because some risk is unpredictable and so unmeasurable. He recommends eschewing the more exotic derivatives. No doubt they are already untradeable (and so worthless) but if someone wants to buy one you can be sure that Wall St will find a way to sell it. Less leverage? Well, we've already got that with a vengeance, without any new legislation.

I repeat: this is a terrific book, buy it. The author should be congratulated for not mentioning Faust or Prometheus once in 260 pages.