The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . and Are Ready to Do It Again

Overview

By the author of Inventing Money: The Story of Long-Term Capital Management and the Legends Behind it

Imagine somebody who, when confronted with uncertainty, sees not danger but opportunity. This sort of person cannot be chained to predictable, safe outcomes. This sort of person cannot be a traditional banker. For them, any uncertain bet is a chance to become unbelievably happy, and the misery of losing barely merits a moment's consideration. Such people have a very high ...

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The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . an

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Overview

By the author of Inventing Money: The Story of Long-Term Capital Management and the Legends Behind it

Imagine somebody who, when confronted with uncertainty, sees not danger but opportunity. This sort of person cannot be chained to predictable, safe outcomes. This sort of person cannot be a traditional banker. For them, any uncertain bet is a chance to become unbelievably happy, and the misery of losing barely merits a moment's consideration. Such people have a very high tolerance for risk. To be more precise, they crave it. Most of us accept that risk-seeking people have an economic role to play. We need entrepreneurs and inventors. But what we don't need is for that mentality to infect the once boring and cautious job of lending and investing money.

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Editorial Reviews

From the Publisher

“The book has an expert guide in author Nicholas Dunbar, a financial journalist who covered derivatives for the trade press long before they caught the public's attention.” “The book written in a punchy prose that is easy to understand, is a triumphant romp through a decade of financial mismanagement. A must-read.” - The National

The Devil’s Derivatives” presents an intriguing and original analysis of the problems that Wall Street has been spreading to the world.” – Midwest Book Review

“… well written and will grab the interest of financial professionals before the first time they have to turn a page.” “Dunbar's great at taking the long view of things, and you won't find a better explanation, anywhere, of why banks shouldn't mark their assets to market.” - Reuters

“Even Warren Buffett could not have stated the case more simply.” – Absolute Return magazine

“… a well-researched account of the forces and events that led to the implosion of the financial system three years ago.” – The Irish Times

“Nicholas Dunbar follows the first rule of good journalism: talk to everybody. He has interviewed not only the leading players in the derivatives industry, but has also followed many key actors whose stories have never appeared in print—until now. As this book makes clear, the dark side of financial innovation is just getting darker, and it is only a matter of time before we suffer another derivatives fiasco.” — Frank Partnoy, George E. Barrett Professor of Law and Finance, University of San Diego School of Law

“Nicholas Dunbar offers an insider’s perspective into the complex and risky world of derivatives. The Devil’s Derivatives is a compelling book, one that takes clear aim at the risk-takers on Wall Street who contributed to both our economy’s growth and decline. Dunbar is a fine writer who combines a deep knowledge of finance with a great knack for storytelling.” — Edward Chancellor, author, Crunch Time for Credit and Devil Take the Hindmost: A History of Financial Speculation

The Devil’s Derivatives is a bold book written by a hardnosed journalist with a stiff backbone. With guts and nerve, Nick Dunbar investigates the gamblers and speculators who contributed to the latest financial crisis. At last, a book on the subject that shows true grit.” — Jules Kroll, founder of Kroll Inc., and Chairman and cofounder of K2 Global Consulting

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Product Details

  • ISBN-13: 9781422177815
  • Publisher: Harvard Business Review Press
  • Publication date: 7/12/2011
  • Pages: 320
  • Sales rank: 1,166,135
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.20 (d)

Meet the Author


Nicholas Dunbar is one of the most respected financial journalists in the United Kingdom, covering complex derivatives and risk management. He is the author of Inventing Money: The Story of Long-Term Capital Management and a columnist for Reuters. In 2007, he won the State Street award for institutional financial journalism.
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Read an Excerpt

The Devil's Derivatives

The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . an


By Nicholas Dunbar

Harvard Business Review Press

Copyright © 2011 Nicholas Dunbar
All rights reserved.
ISBN: 978-1-4221-7781-5


Excerpt


(Continues...)

Excerpted from The Devil's Derivatives by Nicholas Dunbar. Copyright © 2011 by Nicholas Dunbar. Excerpted by permission of Harvard Business Review Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Foreword ix

Introduction: The Siren Song of the Men Who Love to Win x

Part 1 The Bets That Made Banking Sexy 1

Introduction to derivatives

Long-term actuarial approach versus the market approach to credit

Goldman Sachs sees opportunity in default swaps

The market approach vindicated by Enron's bankruptcy

Part 2 Going to the Mattresses 27

The advent of VAR and OTC derivatives

The collapse of Long-Term Capital Management (LTCM)

A fatal flaw is exposed

The wrong lesson is learned

Part 3 A Free Lunch … with Processed Food 55

A new market for collaterized debt obligations (CDOs)

Risky investments, diversification, and the role of the ratings agencies

Barclays finds investors for its CDOs, only to fall out with them

Part 4 The Broken Heart Syndrome 85

J.R Morgan and Deutsche Bank dominate the European CDO market

Innovation outpaces the ratings agencies

Traders make millions with the help of correlation models

Reasons for concern

Part 5 Regulatory Capture 115

The Fed lessens the restraints on big banks

Regulators are unable to keep pace

Banks abuse the system

Government agencies miss the chance to rein in the abuses

Part 6 Burning Down the Housing Market 143

A boom in the demand for CDOs

Subprime bonds and a new kind of default swap help feed the demand

Housing bubble begins to burst

Dealers bet against their own deals

Part 7 The Eyes of Satan 177

The secret history of shadow banking

Cash gets subverted by subprime

Ratings agencies jump on the structured investment vehicle (SIV) bandwagon

Skittish investors flee the market

Part 8 Massive Collateral Damage 207

A flood of toxic assets undermines confidence in the market-based system

Goldman Sachs takes advantage

Investors bet on the collapse of the banks

Disaster is imminent

Governments prop up the system

Epilogue 239

Appendix 251

Notes 257

Index 269

Acknowledgments 287

About the Author 291

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