A Demon of Our Own Design

Preface

Acknowledgments

About the Author

CHAPTER 1 ~ Introduction: The Paradox of Market Risk

CHAPTER 2 ~ The Demons of '87

CHAPTER 3 ~ A New Sheriff in Town

CHAPTER 4 ~ How Salomon Rolled the Dice and Lost

CHAPTER 5 ~ They Bought Salomon, Then They Killed It

CHAPTER 6 ~ Long-Term Capital Management Rides the Leverage Cycle to Hell

CHAPTER 7 ~ Colossus

CHAPTER 8 ~ Complexity, Tight Coupling, and Normal Accidents

CHAPTER 9 ~ The Brave New World of Hedge Funds

CHAPTER 10 ~ Cockroaches and Hedge Funds

CHAPTER 11 ~ Hedge Fund Existential

Conclusion: Built to Crash?

Notes

Index

Richard Bookstaber ran an equity hedge fund at FrontPoint Partners and was the director of risk management at Ziff Brothers Investments and at Moore Capital Management, one of the largest hedge funds in the world. He served as the managing director in charge of firm-wide risk management at Salomon Brothers and was a member of Salomon's powerful Risk Management Committee. Mr. Bookstaber also spent ten years at Morgan Stanley in quantitative research and as a proprietary trader, concluding his tenure there as Morgan Stanley's first market risk manager. He is the author of three books and scores of articles on finance topics ranging from options theory to risk management. Bookstaber received a PhD in economics from MIT. He now works at a hedge fund in Connecticut.

"Mr. Bookstaber wrote one of the best books about the causes of the financial crisis, A Demon of Our Own Design, and did so before the crisis erupted."-- Floyd Norris, New York Times (June 25, 2009)
 
"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