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A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation Hardcover – 17 Apr 2007


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Product details

  • Hardcover: 288 pages
  • Publisher: John Wiley & Sons; 1 edition (17 April 2007)
  • Language: English
  • ISBN-10: 0471227277
  • ISBN-13: 978-0471227274
  • Product Dimensions: 16 x 2.7 x 23.6 cm
  • Average Customer Review: 3.9 out of 5 stars  See all reviews (7 customer reviews)
  • Amazon Bestsellers Rank: 631,048 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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Review

"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

"He understands the inner workings of financial markets...A liberal sparkling of juicy stories from the trading floor... ( The Economist, April 21st 2007) “…smart book…Part memoir, part market forensics, the book gives an insider′s view…” ( Bloomberg News, 30th April 2007) "...shines a light on what the future holds for a world where capital and power have moved from Wall Street". ( Actuary , June 2007) "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) “Richard Bookstaber’s fine book on modern financial innovation”. Financial Times Wednesday 17 June 2008 "...a unique perspective" (PEF, Volume 7/3, November 2008)

Book Description

Bookstaber's fine book on modern financial innovation".

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Most Helpful Customer Reviews

5 of 6 people found the following review helpful By James-philip Harries on 15 Jan 2009
Format: Paperback Verified Purchase
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?
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1 of 1 people found the following review helpful By Dutch on 24 Nov 2012
Format: Paperback Verified Purchase
One star but worth every penny if you're interested in car-crash Wallstreet trash.

Having myself worked in the industry for over 15 years, I am occasionally temped to read the financial equivalent of a Mills & Boon novel, and I really enjoyed reading Michael Lewis's Big Short and Zuckerman's The Greatest Trade Ever, but "demon's of our own design", is not in that league. Maybe Bookstaber and me got off on the wrong foot, when he started blaming Mark-to-Market for the credit crisis.

The 'I was in the room when...' anecdotes are hilarious. Bookstaber seems to have been involved in every disaster in the last 25 years, mostly in positions where his chief responsibility was to avoid disaster. He is the Wall Street equivalent of Blackadder. Richard describes a situation at Citi, where a particular transaction is discussed in a risk committee. A transaction that had already lost the firm approx $100mln. As chief risk manager, Bookstaber suggests to increase the position ("I have a cunning plan" springs to mind) and then describes with surprise that "Charlie Scharf, Salomon Smith Barney's Chief Financial Officer, looked at me like I had three heads". Bookstaber to this day, clearly doesn't understand the role he was supposed to fill. This is 'jaw on the floor' reading for anyone who has ever wondered what the risk manager at LTCM was thinking.

When towards the end of the book, the much referred to cockroach anecdote finally comes, it illustrates Bookstabers shortcomings as a writer. The cockroach has survived through "many unforeseeable changes - jungles turning to desserts, flatlands giving way to urban habitat...". How? Wait for it "it's defence mechanism is limited to moving away from slight puffs of air, puffs that might signal an approaching predator." .
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7 of 9 people found the following review helpful By S. Moran on 29 Dec 2007
Format: Hardcover
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.
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By demola on 31 July 2012
Format: Paperback
Rick Bookstaber used to be a trader and a risk manager which means he knows not just where but how the bodies are buried. His is a fascinating account not just of the people and firms involved in three decades of financial innovation and destruction, but of the strategies that have brought the Furies to our doors. Help yourself.
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