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

  • ID: 2326389
  • Book
  • April 2007
  • 288 Pages
  • John Wiley and Sons Ltd
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

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Preface ix

Acknowledgments xvii

About the Author xix

CHAPTER 1 ∼ Introduction: The Paradox of Market Risk 1

CHAPTER 2 ∼ The Demons of ’87 7

CHAPTER 3 ∼ A New Sheriff in Town 33

CHAPTER 4 ∼ How Salomon Rolled the Dice and Lost 51

CHAPTER 5 ∼ They Bought Salomon, Then They Killed It 77

CHAPTER 6 ∼ Long–Term Capital Management Rides the Leverage Cycle to Hell 97

CHAPTER 7 ∼ Colossus 125

CHAPTER 8 ∼ Complexity, Tight Coupling, and Normal Accidents 143

CHAPTER 9 ∼ The Brave New World of Hedge Funds 165

CHAPTER 10 ∼ Cockroaches and Hedge Funds 207

CHAPTER 11 ∼ Hedge Fund Existential 243

Conclusion: Built to Crash? 255

Notes 261

Index 273

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Richard Bookstaber
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