In my humble opinion, the writer fails to make the connection to financial risk and then goes on to make a quick turn to Jiu Jitsu.
As Bookstaber has gathered tremendous experience on Wall Street, I was hoping for anecdotes and detail in his narrative.
Unfortunately, he remains on the surface, To give one example to the point I am making: it is at different times requested in the book to reduce financial risk by making financial instruments simpler.
But, not a single time does the author make a concrete suggestion as to what kind of financial instruments he is thinking about.
For example go through a list of asset types and say which instruments are simple enough and which aren't.
This is missing, so the reader is left with her own imagination as to what the author means by simpler financial tools.
Lacking clarity is a recurring theme of the book, One star but worth every penny if you're interested in car crash Wallstreet trash, Having myself worked in the industry for overyears, I am occasionally temped to read the financial equivalent of a Mills Boon novel, and I really enjoyed reading Michael Lewis's Big Short and Zuckerman's The Greatest Trade Ever, but "demon's of our own design", is not in that league.
Maybe Bookstaber and me got off on the wrong foot, when he started blaming Mark to Market for the credit crisis.
The 'I was in the room when' anecdotes are hilarious, Bookstaber seems to have been involved in every disaster in the lastyears, mostly in positions where his chief responsibility was to avoid disaster.
He is the Wall Street equivalent of Blackadder, Richard describes a situation at Citi, where a particular transaction is discussed in a risk committee, A transaction that had already lost the firm approxmln, As chief risk manager, Bookstaber suggests to increase the position "I have a cunning plan" springs to mind and then describes with surprise that "Charlie Scharf, Salomon Smith Barney's Chief Financial Officer, looked at me like I had three heads".
Bookstaber to this day, clearly doesn't understand the role he was supposed to fill, This is 'jaw on the floor' reading for anyone who has ever wondered what the risk manager at LTCM was thinking.
When towards the end of the book, the much referred to cockroach anecdote finally comes, it illustrates Bookstabers shortcomings as a writer.
The cockroach has survived through "many unforeseeable changes jungles turning to desserts, flatlands giving way to urban habitat", How Wait for it "it's defence mechanism is limited to moving away from slight puffs of air, puffs that might signal an approaching predator.
". Right, the puff of air that was the last ice age, Overal, the book is a hotchpotch of anecdotes from his career, and gives limited insight in actual risk management.
Enjoy, but please don't think we're all like bookstaber, The insights provided in this book are remarkable for forecasting the first big meltdown of the market pre, The insights of an obvious insider are also revealing, This is a very good book well worth adding to a traders library as a reminder of the facts that markets are cyclical and the newest technologies or trading strategies never provide full protection from a total market collapse.
Ultimately mathematics and computing power fail once the psychology of the market takes over, The author is well known for his writings on option strategies and this book is refreshing in providing insights into the qualitative aspects of any market strategy.
I bought this book because, as a financial planner, I was becoming increasingly concerned about the burgeoning market for highly complex, geared and interlinked financial products.
Back in, my concerns were focused on the inexorable rise and rise of SCARPs, and I was therefore initially a little disappointed that Bookstaber has relatively little to say on the subject.
His area of expertise is hedge funds, which at that time one did not appear to come across nearly as frequently.
Of course, with all the horrendous financial upheaval fromthrough to, this book begins to take on a strongly prophetic tinge.
The "just because we can do it, is wise TO do it" question has become highly relevant, albeit somewhat sidelined by the big financial product providers who have returned to the fray with ever complex instruments, in the pursuit of that perennial holy grail higher returns for lower risk.
This is an excellent, and very readable book, It clearly satisfies the needs of the techie, but I suspect that Bookstaber makes himself relatively accessible to a wider range of readers, by using memorable chapter headings: "Long term capital management rides the leverage cycle to hell" is one that stands out.
This book has value to the financial planner because it makes you think very carefully about what you are prepared to put in your client toolbox.
And the fact that the author's experience is primarily in the context of Hedge Funds is now less of a problem to me than it was given the inexorable rise of the new 'smoke and mirrors' financial instruments Absolute Return funds.
Like a previous reviewer, my one serious reservation about the book is that, whilst Bookstaber does admirably highlight the real dangers in the marketplace, he appears to have little to give us in the way of positive advice.
If this book had been titled "Memoirs of a Risk Manager" it would only have sold a copy to the author's mum.
Happily, it has a snappier title, so there'll be no excuse for market supervisors to ignore its lessons, Don't be put off by the technicalities in the early chapters if your eyes glaze over at "inflexion points of the long / short bond option" or whatever just keep going.
You will be rewarded. We generally think of risk managers as "Don't do that, Maud" types, In fact the reverse is true, Far from preventing the firm from betting the farm, the risk managers job is to help to bet the farm, but only on a sure thing.
Hence the development of risk strategies which allow firms to profit from market imperfections, Bookstaber gives a history of these strategies, enlivened often by amusing anecdotes and a dry wit, Some of them statistical arbitrage, for example appear to have been invented almost by accident, All of them lose their edge over time and become just another part of the market with very low returns for the risk.
Most users of these risk strategies provide liquidity to the market, which Bookstaber shows is necessary and less convincingly under rewarded.
By this analysis the financial markets were almost programmed to blow up, Recessions and depressions come always from the financial markets to the real economy, not the other way round as Galbraith alleged.
Now that the crisis is upon us, what does Bookstaber recommend If he had a good plan I'd elect him world president right away, but this is unsurprisingly the weakest part of the book.
But he's good on what won't help, More regulations Useless, because they'll only control the obvious, Ban short trading / hedge funds Likewise, Better risk management Of limited use, because some risk is unpredictable and so unmeasurable, He recommends eschewing the exotic derivatives, No doubt they are already untradeable and so worthless but if someone wants to buy one you can be sure that Wall St will find a way to sell it.
Less leverage Well, we've already got that with a vengeance, without any new legislation, I repeat: this is a terrific book, buy it, The author should be congratulated for not mentioning Faust or Prometheus once inpages,
"A risk management maven who's been on Wall Street for decadesBookstaber's book shows us some complex strategies that very smart people followed to seemingly reduce risk but that led to huge losses.
" Newsweek
"Mr. Bookstaber is one of Wall Street's 'rocket scientists' mathematicians lured from academia to help create both complex financial instruments and new computer models for making investing decisions.
In the book, he makes a simple point: The turmoil in the financial markets today comes less from changes in the economy economic growth, for example, is half as volatile as it wasyears ago and from some of the financial instruments derivatives that were designed to control risk.
" The New York Times
"Bright sparks like Mr Bookstaber ushered in a revolution that fuelled the boom in financial derivatives and Byzantine 'structured products.
' The problem, he argues, is that this wizardry has made markets crisis prone, not less so, It has done this in two ways: by increasing complexity, and by forging tighter links between various markets and securities, making them dangerously interdependent.
" The Economist
"He understands the inner workings of financial marketsA liberal sparkling of juicy stories from the trading floor" The Economist
"smart bookPart memoir, part market forensics, the book gives an insider's view" Bloomberg News
"Like many pessimistic observers, Richard Bookstaber thinks financial derivatives, Wall Street innovation and hedge funds will lead to a financial meltdown.
What sets Mr. Bookstaber apart is that he has spent his career designing derivatives, working on Wall Street and running a hedge fund.
" The Wall Street Journal
"Every so often a book pops out of the pile with something original to say, or an original way of saying it.
Richard Bookstaber, in A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, accomplishes both of these rare feats.
" Fortune
"a must read amidst the current market chaos" BusinessWeek, com
"Bookstaber is a former academic who went on to head risk management for Morgan Stanley and now runs a large hedge fund.
He knows the subject and has written a lucid and readable book, To his aid he calls mathematics from Bertrand Russell to Godel's theorem physics particularly Heisenberg's uncertainty principle and even meteorology.
" Financial Times
"The book covers a lot about risk management that is relevant to capital markets conditions today and the liquidity crisis.
" Financial Times, Saturdayth August
"an insider's guide to markets, hedge funds and the perils of financial innovation.
We saw plenty of those in, " The Sunday Telegraph, Sundayth November
"I cannot recommend this book too highly, It is a clear exposition of what the combination of derivatives, leverage and hedge funds can do to the markets.
In short, A Demon of our Own Design is a guide to the dangerous financial markets we have created for ourselves by the clever innovations of structured finance, derivatives, credit default swaps and other newfangled products that are a mystery to the ordinary investor and even plenty of the sophisticates in the investment business.
To understand the demonic risks we're taking, read this book, " Forbes. com