A Demon of Our Own Design: Markets, Hedge Funds, and the Risks of Financial Innovation
Praise for A Demon of Our Own Design\ "This book is powerful stuff. When the hero of the story is a cockroach, you are assured of a controversial, illuminating, and fascinating discovery of where the financial risks really lurk and how to avoid them. Bookstaber knows whereof he speaks: I have read every word of his sophisticated essays on why market crises are inevitable, why investors are their own worst enemies, and how regulators should keep out of their way."\ —Peter L. Bernstein, author...
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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. The Economist 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.
Acknowledgments. About the Author. CHAPTER 1: Introduction: The Paradox of Market Risk. CHAPTER 2: The Demons of ’87. CHAPTER 3: A New Sheriff in Town. CHAPTER 4: How Salomon Rolled the Dice and Lost. CHAPTER 5: They Bought Salomon, Then They Killed It. CHAPTER 6: Long-Term Capital Management Rides the Leverage Cycle to Hell. CHAPTER 7: Colossus. CHAPTER 8: Complexity, Tight Coupling, and Normal Accidents. CHAPTER 9: The Brave New World of Hedge Funds. CHAPTER 10: Cockroaches and Hedge Funds. CHAPTER 11: Hedge Fund Existential. Conclusion: Built to Crash? Notes. Index.
\ The EconomistBright 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.\ \ \ \ \ The Wall Street JournalLike 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.\ \ \ NewsweekA 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.\ \ \ \ \ The New York TimesMr. Bookstaber is one of Wall Street's 'rocket scientists' . . . In the book, he makes a simple point: The turmoil in the financial markets today comes less from changes in the economy ... and more from some of the financial instruments (derivatives) that were designed to control risk.\ \
