Author: Satyajit Das

ISBN: 0273704745

“Shareholders want higher profits; directors and chief executives want the bank’s stock to go up; if it is from trading profits, so be it. Traders are given every incentive to take risk and generate short-term profits. Finely calibrated bonus schemes encourage the ‘upfronting’ and overstatement of earnings. The absurdities of the compensation scheme lie at the heart of this perverse system. When things go wrong, there is always the ‘rogue’ trader. The implication is that nothing could have been done. It exonerates the management from any malfeasance (p.151).”

So does Satyajit Das, a veteran of the world of finance the complex mysteries of derivatives, summarise the toxic relationship at the heart of the business. The traders, the hero-villains of the piece, dream up ever more complicated schemes to exchange future liabilities with the hope of gain for one side or another, it does not matter which as long as the fees keep rolling in – and to supplement income, they can bet on the capital under their responsibility on their own account. Massively overpaid and under-regulated and supervised, the traders rollercoaster their way to success or failure – except that the market is rigged and they cannot fail (although they can be exiled to ‘pursue personal interest’):

“Traders risk the bank’s capital: they literally bet the bank, at least up to their limits. If they win then they get a share of the winnings. If they lose, then the bank picks up the loss. Traders might lose their jobs but the money at risk is not their own, it’s all OPM – other people’s money. What if the losses threaten the bank’s survival? Most banks are now ‘too big to fail’ and they can count on government support. Regulators are wary about ‘systemic risk,’ and no regulator with an eye to their place in history wants the banking system to be flushed down the toilet on their watch. Traders can always play the systemic risk trump card. It is the ultimate in capitalism – the privatization of gains, the socialization of losses (p.151).”

Das provides anecdotes from his rich personal knowledge and experience of finance to explain how this situation has arisen and details the disasters that many have suffered as a result along the way. Disney, Orange County and the London Borough of Hammersmith and Fulham were among those who came croppers as the result of adverse market movements in situations in which they had been sold as being risk-free. Traders provide an early gain for prospective clients and then hook them into the world of fear and greed: it is greed for easy and massive gains that brings new investors into the world of derivatives and then fear that keeps them locked into it when the apparent gains disappear and the losses start to loom. More complex transactions are entered into to try to hide the losses or, at least, make them go away for a while. This leads to currency swaps, call and put options, double currency swaps, credit swaps, double reverse currency swaps and even more arcane instruments of financial mass deception and destruction. As long as more punters can be locked into the system, there will be fees to be made by someone somewhere and, since failure is no longer an option, the feverish search for new risks to juggle and exchange continues. Das occasionally but rarely touches upon the human costs of all of this: the jobs lost, the debts incurred, the threats of prison sentences and, for the traders, the broken marriages and unloved children. However, the focus of the book is squarely on the how and why of derivatives trading and whether it is ever possible to make money through this kind of gambling on the future – the secret seems to be to wait until an investment shows a profit and then cash out and bank it; when a position shows a loss, hold on to it in the hope that it will change some time. There is good sense in waiting, if it can be done, since the people who help drive market movements in one direction will also help to drive it back in the opposite direction because money can be made in both cases.

Das reveals little of himself in these pages: he moves from position to position and is a ‘conscientious objector’ when it comes to the money and champagne-fuelled excesses of the traders. This seems to be a deliberate decision and, given the skill with which this excellent book has been written, it would be wise to give him the benefit of the doubt. Certainly this is a book which anyone thinking of investing in any financial market should read and it takes its place alongside the small bookshelf of indispensable business books.

The above review was contributed by: John Walsh PhD:  Professor at Shinawatra International University CLICK TO VIEW  John Walsh's Reviews