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A TIMELY WARNING UNHEEDED,
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This review is from: Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Paperback)Published in 2003, 'Infectious Greed', by Frank Partnoy, a professor at the University of San Diego School of Law' paints a disturbing picture, drawing on actual cases, of how an individual rogue trader can take down an entire firm, and how the derivative instruments may be destabilising the market.
Beginning with the development of 'casino mentality' derivatives at Bankers Trust and elsewhere, Partnoy guides us through the crazy, convoluted, and greed driven world of high-stake speculation, using spurious computer modelling engineered by so-called mathematical geniuses as tools of justification for the excessively leveraged high risk 'betting'. The most malign aspect was the banks themselves making huge fees out of exposing their own clients to mega losses by selling the client unnecessarily complicated 'mumbo-jumbo' derivative trades, when it was abundantly clear that the client had not the first clue as to the risks it was taking on board.
Whilst the clients had little or no understanding of the risks being assumed, it came to pass that neither at the end of the day did the senior management of the financial institutions themselves, as the rogue traders in pursuit of massive bonuses bamboozled their bosses and, in the main fled with their $millions when the 'muck hit the fan', and the bank's shareholders were left to pick up the tab.
One might have imagined that the dire warnings laid down in the book about the lack of regulation for the derivative industry, the banks feeble internal risk, accountancy and audit controls, and the all to obvious systemic risk, would have rung alarm bells just about everywhere from Capitol Hill downwards. But it didn't and the result was the catastrophic credit crunch 2007-2008 that very nearly destroyed the global monetary system.
Mr Partnoy has an incredible ability to relate very complicated financial situations and transactions with great lucidity so as to retain the interest of the reader. An excellent and illuminating book - pity all the caveats went unheeded.