RICHARD BOOKSTABER – A DEMON OF OUR OWN DESIGN

Financial crises are greater than ever before, why do markets keep crashing? 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 The things done to make markets safer have created a dangerous world. From the 1987 crash to Citigroup closing the Salomon Arb unit, 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. The innovation of the last 30 years has wreaked havoc on the markets and cost trillions of dollars. Our own design is a demon. The story of man’s attempt to manage market risk is told. 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.

TABLE OF CONTENTS

Preface ix

Acknowledgments xvi.

About the author.

Chapter 1 introduces the paradoxes of market risk.

Chapter 2 is about the demons of 1987.

Chapter 3 is about a new sheriff.

There is a chapter on how Salomon rolled the dice and lost 51.

They Killed it 77 after they bought Salomon.

The chapter deals with long-term capital management.

Chapter 7 is called Colossus 125.

Chapter 8 is about complexity, tight Coupling and normal accidents.

Chapter 9 deals with the new world of hedge funds.

Chapter 10 deals with cockroaches and hedge funds.

Chapter 11 is about Hedge Fund Existential 243.

It was built to crash.

Notes 261

Index 273

AUTHOR INFORMATION

Richard Bookstaber. He runs an equity hedge fund. At Ziff Brothers Investments, he was the director of risk management, and at Moore Capital Management, he was the director of risk management. He was a member of the Risk Management Committee at Salomon Brothers and was the managing director in charge of firm-wide risk management. Mr. Bookstaber spent ten years at Morgan Stanley in quantitative research and as a proprietary trader before becoming Morgan Stanley’s first market risk manager. He is the author of three books and scores of articles on finance topics. Bookstaber received a PhD in economics from MIT.

REVIEWS

The book shows us some complex strategies that very smart people followed to seemingly reduce risk, but that led to huge losses. Newsweek. )

One of Wall Street’s rocket scientists is Mr. Bookstaber, who was lured from academia to help create both complex financial instruments and new computer models for making investing decisions. The turmoil in the financial markets today comes less from changes in the economy than it did 50 years ago, and more from some of the financial instruments that were designed, according to the book. The New York Times. )

The boom in financial derivatives and Byzantine products was sparked by sparks like Mr Bookstaber. The problem is that this wizardry has made markets more prone to crises. It has done this by increasing complexity and by forging tighter links between various markets and securities. The Economist. )

A liberal sparkling of juicy stories from the trading floor is what he understands. The Economist. )

Part memoir, part market forensics, the book gives an inside view. The news is from Bloomberg. )

Richard Bookstaber thinks financial derivatives, Wall Street innovation and hedge funds will lead to a financial meltdown. Mr. Bookstaber has spent his career designing derivatives, working on Wall Street and running a hedge fund. The Wall Street Journal. )

Every so often a book comes out of the pile with something original to say, or an original way of saying it. Richard Bookstaber was in. Markets, Hedge Funds, and the Perils of Financial Innovation is a demon of our own design. It 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 book about it. He calls mathematics, physics, and even meteorology to his aid. The Financial Times. )

The book covers a lot about risk management that is relevant to capital markets today. The Financial Times. On Saturday 25th August.

There is a guide to markets, hedge funds and the perils of financial innovation. There were a lot of those in 2007. The Sunday paper. Sunday 25th November 2007)

I can’t recommend this book very highly. The combination of derivatives, leverage and hedge funds can affect the markets.

It’s in short. Our own design is a demon. It 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. If you want to understand the demonic risks we are taking, read this book. Forbes.com.

Richard Bookstaber is a demon of our own design.

A Demon of Our Own Design is a book by Richard Bookstaber.