By Richard Bookstaber
Inside markets, innovation, and risk
Why do markets hold crashing and why are monetary crises more than ever prior to? because the possibility supervisor to a few of the best enterprises on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of a few of the world’s greatest hedge money, from Moore Capital to Ziff Brothers and FrontPoint companions, Rick Bookstaber has noticeable the ghost contained in the computing device and vividly indicates us a global that's even riskier than we expect. The very issues performed to make markets more secure, have, in reality, created an international that's way more risky. From the 1987 crash to Citigroup remaining the Salomon Arb unit, from marvelous losses at UBS to the loss of life of long term Capital administration, Bookstaber offers readers a entrance row seat to the administration judgements made by way of probably the most strong monetary figures on the planet that resulted in disaster, and describes the effect of his personal actions on markets and marketplace crashes. a lot of the innovation of the final 30 years has wreaked havoc at the markets and value trillions of bucks. A Demon of Our personal Design tells the tale of man’s try to deal with industry possibility and what it has wrought. within the means of exhibiting what we have now performed, Bookstaber shines a gentle on what the longer term holds for a global the place capital and tool have moved from Wall road associations to elite and hugely leveraged hedge money.
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Additional info for A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
Morgan Stanley owed $700 million in futures margin that had not arrived at the exchange. There was concern among the firm’s major creditors and the Fed that Morgan Stanley might be in default. A call confirmed that the funds had been sent, but they had somehow been lost en route. qxd 2/13/07 A DEMON 1:44 PM OF Page 28 OUR OWN DESIGN side to be dealt with the next day. Included in the stack was a transfer for $700 million on behalf of Morgan Stanley. Heroes emerge from panicky times, and on this occasion, John Mack, the head of Morgan Stanley’s fixed income division, was one of them.
Leeson failed to notice the £20,000 error until that Friday night, and it slipped his mind to correct it when he returned to work on Monday. By the time he finally got around to addressing the error, it had grown to a £60,000 loss. He decided to deal with the error by making a false entry to negate the trade and then entered the loss as an error account until his trading could recoup the loss. qxd 7/13/07 2:42 PM Page 39 A NEW SHERIFF IN TOWN Over the course of the next two and a half years, his attempts to recoup this once small loss led to one bad trade after another, culminating in a disastrous position.
Clever structures for splitting up mortgage instruments pushed Salomon and First Boston into the forefront, creating early-retirement opportunities for mortgage traders after a few frenetic years. Other investment firms quickly followed suit, opening up their trading desks to the new, exotic instruments while, like an airplane trying to build its navigation system in midflight, they grabbed up mathematicians and leased Cray supercomputers to try to figure out what they were doing. Each new market reaped a few years of huge profitability before competitive forces drove the spreads down and a new market rose up to become the envy of every freshly minted MBA trainee.
A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber