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

A DEMON OF OUR OWN DESIGN......Page 5
CONTENTS......Page 9
ACKNOWLEDGMENTS......Page 11
ABOUT THE AUTHOR......Page 13
CHAPTER 1: INTRODUCTION: THE PARADOX OF MARKET RISK......Page 15
CHAPTER 2: THE DEMONS OF ’87......Page 21
CRUNCH TIME AT MORGAN STANLEY......Page 22
THE FORMULA......Page 23
MY LIFE AS AN INSURANCE SALESMAN......Page 24
RUNNING FOR THE LIFEBOAT......Page 26
READ THE FINE PRINT......Page 28
RISK ARBITRAGE: THE SNOWBALL AT THE MOUNTAINTOP......Page 29
IGNORING THE CASSANDRAS......Page 30
A LONG WEEKEND......Page 32
THE AVALANCHE BURIES THE BUYERS......Page 34
COLLATERAL DAMAGE......Page 37
BAD GAMMA......Page 38
THE PHYSICS OF THE MELTDOWN......Page 39
WE CAN SEE THE FUTURE OF MARKETS, AND IT’S UGLY......Page 44
CHAPTER 3: A NEW SHERIFF IN TOWN......Page 47
SEARCHING FOR LAND MINES WITH THEIR FEET......Page 51
THE APL CULT......Page 57
OUT OF THE LOOP......Page 60
CHAPTER 4: HOW SALOMON ROLLED THE DICE AND LOST......Page 65
THE ROOF CAVES IN ON MORTGAGES......Page 68
THIRTY MILLION OVER TOKYO......Page 70
SHOTGUN MARRIAGE......Page 76
A LESSON IN SELF-DELUSION......Page 78
JACK JUMPS IN......Page 83
THE PROBLEM WITH STOCKS......Page 85
INTO THE ARMS OF TRAVELERS......Page 89
CHAPTER 5: THEY BOUGHT SALOMON, THEN THEY KILLED IT......Page 91
THE ARBS LOSE FACE......Page 94
GOOD-BYE TO QUANT HEAVEN......Page 96
CIRCLING VULTURES......Page 98
THE JULY FOURTH MASSACRE......Page 100
ROTHSCHILD AND WATERLOO......Page 103
FOOLING JUST ABOUT NOBODY......Page 104
LEVERAGE AND THE ROOTS OF CRISES......Page 107
HOW TO PREVENT A LIQUIDITY CRISIS......Page 108
CHAPTER 6: LONG-TERM CAPITAL MANAGEMENT RIDES THE LEVERAGE CYCLE TO HELL......Page 111
RISKY BUSINESS......Page 112
THE DECEPTIVE CHARMS OF RELATIVE VALUE......Page 115
HAGHANI STEPS OFF THE CLIFF......Page 116
THE COMPETITION STICKS THE KNIFE IN......Page 118
WHAT WERE THEY THINKING?......Page 120
MIRROR, MIRROR, ON THE FALL......Page 122
LOUSY WITH LEVERAGE......Page 125
THE JAPANESE TAKE UBS TO THE CLEANERS......Page 127
RAMY GOLDSTEIN TAKES UBS TO THE CLEANERS......Page 130
LTCM TAKES UBS TO THE CLEANERS......Page 132
SALOMON SMITH BARNEY LOSES ITS NERVE......Page 134
CHAPTER 7: COLOSSUS......Page 139
SANDY STEPS IN IT WITH BOTH FEET......Page 141
STANDING TALL......Page 143
KINDERGARTEN CONFIDENTIAL......Page 145
THE CONSEQUENCES OF COLOSSUS......Page 146
THE NUMBERS ARE THE ISSUE......Page 148
PACIOLI RUNS THE NUMBERS......Page 150
DA VINCI’S ACCOUNTANT IS STILL KEEPING OUR BOOKS......Page 151
MY DEPARTURE FROM CITIGROUP......Page 153
CHAPTER 8: COMPLEXITY, TIGHT COUPLING, AND NORMAL ACCIDENTS......Page 157
THE TIES THAT BIND......Page 158
THE REGULATION TRAP......Page 160
ACCIDENTS WAITING TO HAPPEN: INTERACTIVE COMPLEXITY AND TIGHT COUPLING......Page 168
TIGHT COUPLING AND INTERACTIVE COMPLEXITY: AN X-RATED BEHAVIOR......Page 171
NORMAL ACCIDENTS AND ORGANIZATIONS......Page 173
YOU CAN’T PLAY IT SAFE......Page 175
CHAPTER 9: THE BRAVE NEW WORLD OF HEDGE FUNDS......Page 179
FUN WITH DATA......Page 180
BUBBLE BATHS......Page 182
WHY TULIP MANIA WASN’T CRAZY......Page 188
FUTURES SHOCK, 1635......Page 189
“THIS CRAP IS GOING TO BE WORTH ZERO”......Page 191
PAIRING OFF: THE EMERGENCE OF STATISTICAL ARBITRAGE......Page 196
TARTAGLIA......Page 203
LONG-TERM CAPITAL MANAGEMENT’S SCANDALOUS BIRTH......Page 209
THE MARCH OF THE LONG/SHORT HEDGE FUNDS......Page 214
CHAPTER 10: COCKROACHES AND HEDGE FUNDS......Page 221
IMPERFECTIONS IN THE PERFECT PARADIGM......Page 224
IT’S THE LIQUIDITY, STUPID......Page 226
LIQUIDITY IN THREE EASY LESSONS......Page 227
TOO MUCH INFORMATION......Page 234
PRIMAL RISK AND THE LIMITS OF KNOWLEDGE......Page 244
COCKROACHES AND THE BENEFITS OF COARSE BEHAVIOR......Page 246
FATE FINISHES THE FURU......Page 247
PRIMAL RISK AND THE CASE FOR COARSE HUMANS......Page 249
OUR NOT-SO-EFFICIENT REALITY......Page 251
THE DANGER TO THE SYSTEM IS THE SYSTEM......Page 255
CHAPTER 11: HEDGE FUND EXISTENTIAL......Page 257
CAN WE REGULATE HEDGE FUNDS?......Page 261
THE HALF-LIFE OF HEDGE FUNDS......Page 264
WILL HEDGE FUNDS TAKE OVER THE INVESTMENT WORLD?......Page 266
DO YOU BELIEVE?......Page 267
CONCLUSION: BUILT TO CRASH?......Page 269
NOTES......Page 275
INDEX......Page 285