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

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Wiley, Apr 6, 2007 - Business & Economics - 276 pages
14 Reviews

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.

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

User Review  - Christopher Russell - Goodreads

Hard to understand. I think I got to page 100, then stopped. I got the jist however: banking system and culture are wholly removed from the effects of their actions. They are not attempting to ... Read full review

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

User Review  - Randy Carlson - Goodreads

Great book but you will have a hell of a time with this one if you have not taken a class in Advanced Finance with the Mathematics to go with it. Not that you will see a lot of equations, but the subtext is extremely technical. Inside Baseball to the max.... Read full review

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About the author (2007)

Richard Bookstaber runs an equity hedge fund in Greenwich, Connecticut. He 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 Ph.D. in economics from MIT.

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