A Demon of Our Own Design : Markets, Hedge Funds, and the Perils of Financial Innovation

BInside markets, innovation, and risk/b 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. iA Demon of Our Own Design/i 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. Read more... Abstract: BInside markets, innovation, and risk/b 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. iA Demon of Our Own Design/i 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 Content: ""Contents"" ""Title"" ""Copyright"" ""Dedication"" ""Preface"" ""Acknowledgments"" ""About the Author"" ""Chapter 1: Introduction: The Paradox of Market Risk"" ""Chapter 2: The Demons of â€TM87"" ""Crunch Time at Morgan Stanley"" ""The Formula"" ""My Life as an Insurance Salesman"" ""Running for the Lifeboat"" ""Read the Fine Print"" ""Risk Arbitrage: The Snowball at the Mountaintop"" ""Ignoring the Cassandras"" ""A Long Weekend"" ""The Avalanche Buries the Buyers"" ""Collateral Damage"" ""Bad Gamma"" ""The Physics of the Meltdown"" ""We can see the Future of Markets, And itâ€TMs Ugly""""Chapter 3: A New Sheriff in Town"" ""Searching for Land Mines with their Feet"" ""The APL Cult"" ""Out of the Loop"" ""Chapter 4: How Salomon Rolled the Dice and Lost"" ""The Roof Caves in on Mortgages"" ""Thirty Million Over Tokyo"" ""Shotgun Marriage"" ""A Lesson in Self-Delusion"" ""Jack Jumps in"" ""The Problem with Stocks"" ""Into the Arms of Travelers"" ""Chapter 5: They Bought Salomon, then They Killed it"" ""The Arbs Lose Face"" ""Good-Bye to Quant Heaven"" ""Circling Vultures"" ""The July Fourth Massacre"" ""Rothschild and Waterloo""""Fooling Just About Nobody"" ""Leverage and the Roots of Crises"" ""How to Prevent a Liquidity Crisis"" ""Chapter 6: Long-Term Capital Management Rides the Leverage Cycle to Hell"" ""Risky Business"" ""The Deceptive Charms of Relative Value"" ""Haghani Steps off the Cliff"" ""The Competition Sticks the Knife in"" ""What were they Thinking?"" ""Mirror, Mirror, on the Fall"" ""Lousy with Leverage"" ""The Japanese take UBS to the Cleaners"" ""Ramy Goldstein takes UBS to the Cleaners"" ""LTCM takes UBS to the Cleaners"" ""Salomon Smith Barney Loses its Nerve""""Chapter 7: Colossus"" ""Sandy Steps in it with Both Feet"" ""Standing Tall"" ""Kindergarten Confidential"" ""The Consequences of Colossus"" ""The Numbers are the Issue"" ""Pacioli Runs the Numbers"" ""Da Vinciâ€TMs Accountant is Still Keeping Our Books"" ""My Departure from Citigroup"" ""Chapter 8: Complexity, Tight Coupling, and Normal Accidents"" ""The Ties that Bind"" ""The Regulation Trap"" ""Accidents Waiting to Happen: Interactive Complexity and Tight Coupling"" ""Tight Coupling and Interactive Complexity: An X-Rated Behavior"" It's Wall Street's Most Painful Paradox. Investors Are More Sophisticated Than Ever, Are Enabled By Unprecedented Technology, And Protected By More Government Oversight And Regulation Than At Any Other Time In History. Yet Wall Street Is Becoming A Riskier And Riskier Place. Crashes And Catastrophic Losses Seem Commonplace. Hedge Funds Wreck On The Financial Shoals With A Disturbingly Familiar Pattern. Worse, Today's Financial Crises Do Not Arise From Economic Instability Or Acts Of Nature, But From The Very Design Of The Financial Markets Themselves. In A Demon Of Our Own Design, Richard Bookstaber Paints A Vivid Picture Of A Financial World That Is Ever Edging Toward Disaster. As A Hedge Fund 'rocket Scientist,' Bookstaber Provides An Insider's Perspective To The Tumultuous Management Decisions Made By Some Of The World's Most Powerful Financial Figures From Warren Buffett To Sandy Weill To John Meriwether,as Well As Recounting His Own Contribution To Market Calamities. He Designed Some Of The Complex Options And Derivatives That, Combined With The Globalization Of The World's Markets And The Ever-increasing Speed Of Transactions, Allow Markets To Slide Out Of Control. And He Explains Why The Best Efforts Of Institutions On The Front Lines To Create Safeguards, Manage Risk, And Regulate The Markets May End Up Contributing To Instability. Bookstaber Argues That Many Of The Financial Innovations And Regulations That Are Supposed To Level The Playing Field Instead Make The Markets More Dangerous For All The Players, Big And Small. Drawing On His Intimate Knowledge Of Such Infamous Disasters As The 1987 Crash And The Demise Of Long-term Capital Management, Bookstaber Identifies The Key Areas That Make Markets Vulnerable: Liquidity That Begets Greater Leverage; Innovation That Creates Greater Complexity; And A Structure That Demands A Nonhuman Level Of Rationality. The Twofold Solution He Suggests—reducing Complexity And Breaking The Tight Coupling Of Transactions—goes Against The Prevailing Winds Of Wall Street, But Will Lead To A More Robust And Survivable Market.

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.

"In A Demon of Our Own Design, Richard Bookstaber paints a vivid picture of a financial world that is ever edging toward disaster. As a hedge fund 'rocket scientist, ' Bookstaber provides an insider's perspective to the tumultuous management decisions made by some of the worlds most powerful financial figures from Warren Buffett to Sandy Weill to John Meriwether, as well as recounting his own contribution to market calamities. He designed some of the complex options and derivatives that, combined with the globalization of the world's markets and the ever-increasing speed of transactions, allow markets to slide out of control. And he explains why the best efforts of institutions on the front lines to create safeguards, manage risk, and regulate the markets may end up contributing to instability. Bookstaber argues that many of the financial innovations and regulations that are supposed to level the playing field instead make the markets more dangerous for all the players, big and small."--Jacket