It's Wall Street's most painful paradox. Investors are moresophisticated than ever, are enabled by unprecedented technology,and protected by more government oversight and regulation than atany other time in history. Yet Wall Street is becoming a riskierand riskier place. Crashes and catastrophic losses seemcommonplace. Hedge funds wreck on the financial shoals with adisturbingly familiar pattern. Worse, today's financial crises donot arise from economic instability or acts of nature, but from thevery design of the financial markets themselves.
In A Demon of Our Own Design, Richard Bookstaber paints a vividpicture of a financial world that is ever edging toward disaster.As a hedge fund 'rocket scientist,' Bookstaber provides aninsider's perspective to the tumultuous management decisions madeby some of the world's most powerful financial figures from WarrenBuffett to Sandy Weill to John Meriwether,as well as recounting hisown contribution to market calamities. He designed some of thecomplex options and derivatives that, combined with theglobalization of the world's markets and the ever-increasing speedof transactions, allow markets to slide out of control. And heexplains why the best efforts of institutions on the front lines tocreate safeguards, manage risk, and regulate the markets may end upcontributing to instability. Bookstaber argues that many of thefinancial innovations and regulations that are supposed to levelthe playing field instead make the markets more dangerous for allthe players, big and small.
Drawing on his intimate knowledge of such infamous disasters asthe 1987 Crash and the demise of Long-Term Capital Management,Bookstaber identifies the key areas that make markets vulnerable:liquidity that begets greater leverage; innovation that createsgreater complexity; and a structure that demands a nonhuman levelof rationality. The twofold solution he suggests—reducingcomplexity and breaking the tight coupling oftransactions—goes against the prevailing winds of Wall Street,but will lead to a more robust and survivable market.