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

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

 

Synopses & Reviews

Publisher Comments:

It's Wall Street's most painful paradox. Investors are more sophisticated than ever, are enabled by unprecedented technology, and protected by more government oversight and regulation than at any other time in history. Yet Wall Street is becoming a riskier and riskier place. Crashes and catastrophic losses seem commonplace. Hedge funds wreck on the financial shoals with a disturbingly familiar pattern. Worse, today's financial crises do not arise from economic instability or acts of nature, but from the very design of the financial markets themselves.

In A Demon of Our Own Design, Richard Bookstaber paints a vivid picture of a financial world that is ever edging toward disaster. As a hedge fund 'rocket scientist,' Bookstaber provides an insider's perspective to the tumultuous management decisions made by some of the world's most powerful financial figures from Warren Buffett to Sandy Weill to John Meriwether,as well as recounting his own contribution to market calamities. He designed some of the complex options and derivatives that, combined with the globalization of the world's markets and the ever-increasing speed of transactions, allow markets to slide out of control. And he explains why the best efforts of institutions on the front lines to create safeguards, manage risk, and regulate the markets may end up contributing to instability. Bookstaber argues that many of the financial innovations and regulations that are supposed to level the playing field instead make the markets more dangerous for all the players, big and small.

Drawing on his intimate knowledge of such infamous disasters as the 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 creates greater complexity; and a structure that demands a nonhuman level of rationality. The twofold solution he suggests—reducing complexity and breaking the tight coupling of transactions—goes against the prevailing winds of Wall Street, but will lead to a more robust and survivable market.

Synopsis:

Praise for A Demon of Our Own Design

"This book is powerful stuff. When the hero of the story is a cockroach, you are assured of a controversial, illuminating, and fascinating discovery of where the financial risks really lurk and how to avoid them. Bookstaber knows whereof he speaks: I have read every word of his sophisticated essays on why market crises are inevitable, why investors are their own worst enemies, and how regulators should keep out of their way."

—Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk

"Are you ready for the real deal? An insider, everysider view of the Wall Street calamities that have kept investing tantalizingly hot and frighteningly volatile since the crash of '87. For an in-depth, curtains-open, and coolly written exposition of Wall Street, Bookstaber is my man."

—Mark Rubinstein, Professor of Finance, UC Berkeley

"Exactly WHY do markets misbehave? Rick Bookstaber draws on his extensive knowledge of today's complex financial markets to set forth many of the reasons endogenous risk is so large AND so ominous. He understands one of the most sobering aspects of this risk: its sources are far too complex to be meaningfully assessed. This gives lie to current regulatory bromides that 'everything will be OK provided that we better assess and manage risk,' for the risks that matter most are non-assessable!"

—H. "Woody" Brock, President, Strategic Economic Decisions, Inc.

"Rick Bookstaber was at the nexus of many of the financial crises of the past twenty-five years. His recollections and smart analyses of markets, meltdowns, and the people who caused them make for a genuine thriller."

—Emanuel Derman, author of My Life as a Quant

Synopsis:

Inside markets, innovation, and risk

Why do markets keep crashing and why are financial crises greater than ever before? 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 and vividly shows us a world that is even riskier than we think. The very things done to make markets safer, have, in fact, created a world that is far more dangerous. From the 1987 crash to Citigroup closing the Salomon Arb unit, from staggering losses at UBS to the demise of Long-Term Capital Management, 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, and describes the impact of his own activities on markets and market crashes. Much of the innovation of the last 30 years has wreaked havoc on the markets and cost trillions of dollars. A Demon of Our Own Design tells the story of man’s attempt to manage market risk and what it has wrought. 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.

About the Author

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.

Table of Contents

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.

Product Details

ISBN:
9780471227274
Author:
Bookstaber, Richard
Publisher:
John Wiley & Sons
Subject:
Finance
Subject:
Risk management
Subject:
Investments & Securities - Futures
Subject:
Hedge funds
Subject:
Investments & Securities
Subject:
market risk
Subject:
market technology
Subject:
Financial crises
Subject:
market crashes
Subject:
managing market risk
Subject:
leveraged hedge funds
Subject:
credit crisis
Subject:
out of control markets
Subject:
Options
Subject:
Derivatives
Subject:
safeguards
Subject:
manage risk
Subject:
regulate the markets
Subject:
financial innovations
Subject:
Regulations
Subject:
the stock market crash of 1987 Crash
Subject:
the demise of LTCM
Subject:
Liquidity
Subject:
Leverage
Subject:
Transparency
Subject:
Financial Markets
Subject:
global financial markets
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
Business-Accounting and Finance
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Subject:
market innovation, market risk, market technology, financial crises, market crashes, managing market risk, hedge funds, leveraged hedge funds, credit crisis, out of control markets, options, derivatives, safeguards, manage risk, regulate the markets, fina
Copyright:
Publication Date:
April 2007
Binding:
HARDCOVER
Grade Level:
General/trade
Language:
English
Pages:
288
Dimensions:
9.20x6.14x1.07 in. 1.04 lbs.

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A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation Used Hardcover
0 stars - 0 reviews
$6.50 In Stock
Product details 288 pages John Wiley & Sons - English 9780471227274 Reviews:
"Synopsis" by , Praise for A Demon of Our Own Design

"This book is powerful stuff. When the hero of the story is a cockroach, you are assured of a controversial, illuminating, and fascinating discovery of where the financial risks really lurk and how to avoid them. Bookstaber knows whereof he speaks: I have read every word of his sophisticated essays on why market crises are inevitable, why investors are their own worst enemies, and how regulators should keep out of their way."

—Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk

"Are you ready for the real deal? An insider, everysider view of the Wall Street calamities that have kept investing tantalizingly hot and frighteningly volatile since the crash of '87. For an in-depth, curtains-open, and coolly written exposition of Wall Street, Bookstaber is my man."

—Mark Rubinstein, Professor of Finance, UC Berkeley

"Exactly WHY do markets misbehave? Rick Bookstaber draws on his extensive knowledge of today's complex financial markets to set forth many of the reasons endogenous risk is so large AND so ominous. He understands one of the most sobering aspects of this risk: its sources are far too complex to be meaningfully assessed. This gives lie to current regulatory bromides that 'everything will be OK provided that we better assess and manage risk,' for the risks that matter most are non-assessable!"

—H. "Woody" Brock, President, Strategic Economic Decisions, Inc.

"Rick Bookstaber was at the nexus of many of the financial crises of the past twenty-five years. His recollections and smart analyses of markets, meltdowns, and the people who caused them make for a genuine thriller."

—Emanuel Derman, author of My Life as a Quant

"Synopsis" by , Inside markets, innovation, and risk

Why do markets keep crashing and why are financial crises greater than ever before? 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 and vividly shows us a world that is even riskier than we think. The very things done to make markets safer, have, in fact, created a world that is far more dangerous. From the 1987 crash to Citigroup closing the Salomon Arb unit, from staggering losses at UBS to the demise of Long-Term Capital Management, 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, and describes the impact of his own activities on markets and market crashes. Much of the innovation of the last 30 years has wreaked havoc on the markets and cost trillions of dollars. A Demon of Our Own Design tells the story of man’s attempt to manage market risk and what it has wrought. 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.

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