A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber Summary and Reviews
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Book Reviews of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
Book Review: Informative
Summary: 5 Stars
This book attempts to describe the mechanics of the previous financial meltdowns. Very advanced even for those with a finance background but takes time to elaborate on specifics. Good read for applying previous applications to future problems when they do occur.Book Review: Insight into the Past 2 Decades of Financial History
Summary: 4 Stars
Today's financial derivatives, designed to control risk, have only succeeded in intensifying it.
The author, Richard Bookstaber, a Wall Street quant, makes a simple point. Although economic growth is more stable today than it has in the past 50 years, the markets have grown more volatile. A MIT-educated mathematician was lured out of academia to create complex financial instruments and computer models designed to limit risk. In his own words, he failed.
Yet that does not lessen his insight. The author paints as poignant a picture of the 1987 Crash and Long Term Capital Management (LTCM) failure as I have read. In the latter case, he argues convincingly that LTCM demise began not with the Russian default, but with Sandy Weill's decision to shutter the newly acquired U. S. fixed income arb desk of Solomon Brothers,
As great as his historical analysis is, Bookstaber's book appears to lose focus when stipulating solutions. The author admits it took him more than a decade to complete this book. That comes as no surprise. Complex situations defy Euclidean precision.
His prescription of reduced complexity and coupling with less leverage seems, somehow, unlikely. Neo-classical economics with its efficient markets assumption does not jibe with today's instantaneous distribution of copious amounts of information. Until human beings adapt, volatility promises to increase.
Book Review: Lightweight, a conversational biography, good
Summary: 3 Stars
This is not a heavy theoretical work, contrary to some of the reviews here. This book is more of an autobiography along the lines of Barton Bigg's "Hedgehoging" (also pretty good) or something by Andy Kessler or Michael Lewis (excellent writers) but not as funny or good. But it gets interesting if you read it carefully: basically the author makes the somewhat implausible and incredible claim that the financial institutions that come up with exotic finanical products don't really understand these products themselves, or, equally incredibly, that they market simplistic versions of these products (that can fit on an Excel spreadsheet--however the author was talking about the late 1980s, so perhaps it's possible), or, more credibly, that even when these exotic financial products are used successfully, their profit potential only lasts a few years since they become widely imitated. The author closes with some interesting but speculative parallels between biology and financial markets, arguing that more looseness and 'slop' be allowed in a financial system, because if it is too "tightly coupled" and precise, too many things can go wrong. The analogy between the success of a cockroach, which filters information and is actually pretty simplistic, and a robust financial system is interesting. Interesting tidbits of history are thrown in, for example how primogeneture from the medieval ages prevented liquidity and thereby wealth creation (Peruvian economist Hernando De Soto would agree).
Also some good scuttlebutt is disclosed about various famous Wall Street personalities, and the clash of cultures between Citibank and Salomon Brothers, as well as the characters like Paul Mozer and John Merriwether [who seems to take disaster with him whereever he goes, as he ended up leaving Salomon for the ill-fated LTCM] that got Salomon into trouble in bond trading. For example, I did not realize that Salomon chief John Gutfreund lost a good part of his fortune as a result of the bond trading scandal.
Contrary to the subtitle, except at the very end of the book hedge funds are not really discussed much; this is more of a quant/ financial engineering book.
Insofar as writing style goes, it is easy to read first person passive voice.
All in all a good book you can finish in a few days, and it captures your interest.Book Review: Most cogent explanation for today's financial crises
Summary: 5 Stars
This is one of the few books that explains the reasons for much of today's financial crises (as it relates to the banks, anyways), in a way that transcends sanctimony and overgeneralizations. Bookstaber has seen how the incentives to take risks permeate in an organization, and why that's generally acceptable. He is one of the few that highlights the importance of the tight interconnectedness of financial counterparties that spreads financial infection.Book Review: Nails it on the head
Summary: 5 Stars
This book nails it for the sort of market problems that ended up being behind the sub prime crisis, and sets the stage to understand the problems at Citigroup to boot. It points the finger at all the complexity in the market that is coming from derivatives and structured products, and the "tight coupling" that is arising from leverage.
I read a borrowed copy and ended up liking it enough that I decided to buy copies for two of my friends who are in finance. I am not in the investment world, but I found it interesting and easy to read, and sometimes even funny. And it looks like it has made its mark -- I see positive reviews from the New York Times, Wall Street Journal, the Economist and a number of other business publications.