Download A Demon of Our Own Design: Markets, Hedge Funds, and the by Richard Bookstaber PDF

By Richard Bookstaber

Inside markets, innovation, and risk
Why do markets preserve crashing and why are monetary crises more than ever earlier than? because the chance supervisor to a couple of the best organisations on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of a few of the world’s greatest hedge cash, from Moore Capital to Ziff Brothers and FrontPoint companions, Rick Bookstaber has obvious the ghost contained in the desktop and vividly indicates us a global that's even riskier than we predict. The very issues performed to make markets more secure, have, actually, created an international that's way more harmful. From the 1987 crash to Citigroup final the Salomon Arb unit, from spectacular losses at UBS to the death of long term Capital administration, Bookstaber provides readers a entrance row seat to the administration judgements made via one of the most strong monetary figures on this planet that resulted in disaster, and describes the effect of his personal actions on markets and industry 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 marketplace hazard and what it has wrought. within the means of exhibiting what now we have performed, Bookstaber shines a gentle on what the long run holds for a global the place capital and tool have moved from Wall highway associations to elite and hugely leveraged hedge cash.

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Additional info for A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

Sample text

We got into the act at Morgan Stanley in 1993 when Bob Feduniak established the risk management division. Feduniak was one of the “Class of ’84” managing directors. He had been recruited from J. Aron, which became a part of Goldman Sachs, by Lewis Bernard in 1982 to start the commodity trading group. He was thoughtful, even scholarly, with a BS from Stanford and an MS from Berkeley. And he was a great poker player, having placed in the top 20 in the World Series of Poker. Feduniak asked me to join his new effort and appointed me as Morgan Stanley’s first market risk manager.

The market hardly differentiated between domestic and foreign, small cap or large. It was like plasma physics: As matter becomes hotter it becomes less differentiated. The forces that bond atoms together in the form of molecules are overwhelmed, so that rather than having a myriad of different substances, we have the elemental building blocks of the atoms. Turn up the heat even more and the atoms themselves are melded into plasma, positively charged ions and negatively charged free electrons: matter in its most uniform and nondifferentiated state, no longer hydrogen atoms and oxygen atoms, just a seething white-hot blur of matter.

Usually if things do not go well for the firm, both the bonds and the equity drop in price, so a short position in the equity counteracts that effect. And if interest rates rise, the bonds will drop in value, so a short position in Treasuries helps to offset that. The composite hedge was great in theory again but the hedge did not work well because bonds, especially high-yield bonds, started to trade like equities, going down points at a time. The short stock positions tempered this, but only slightly, because they were established for a normal market environment when the equity component of the bonds is small.

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