The Devil's Derivatives

by Dunbar, Nicholas

• ISBN13: 9781422177815
• ISBN10: 1422177815
• Format: Hardcover
• Copyright: 2011-07-12
• Publisher: Harvard Business School Pr

Summary

The Devil's Derivativescharts the untold story of modern financial innovation how investment banks invented new financial products, how investors across the world were wooed into buying them, how regulators were seduced by the political rewards of easy credit, and how speculators made a killing from the near-meltdown of the financial system. Author Nicholas Dunbar demystifies the revolution that briefly gave finance the same intellectual respectability as theoretical physics. He explains how bankers created a secret trillion-dollar machine that delivered cheap mortgages to the masses and riches beyond dreams to the financial innovators. Fundamental to this saga is how "the people who hated to lose" were persuaded to accept risk by "the people who loved to win." Why did people come to trust and respect arcane financial tools? Who were the bankers competing to assemble the basic components into increasingly intricate machines? How did this process achieve its own unstoppable momentum, ending in collapse, bailouts, and a public outcry against the stars of finance? Provocative and intriguing, The Devil's Derivativessheds much-needed light on the forces that fueled the most brutal economic downturn since the Great Depression.

Table of Contents

Foreword	p. ix
Introduction: The Siren Song of the Men Who Love to Win	p. x
The Bets That Made Banking Sexy	p. 1
Introduction to derivatives
Long-term actuarial approach versus the market approach to credit
Goldman Sachs sees opportunity in default swaps
The market approach vindicated by Enron's bankruptcy
Going to the Mattresses	p. 27
The advent of VAR and OTC derivatives
The collapse of Long-Term Capital Management (LTCM)
A fatal flaw is exposed
The wrong lesson is learned
A Free Lunch … with Processed Food	p. 55
A new market for collaterized debt obligations (CDOs)
Risky investments, diversification, and the role of the ratings agencies
Barclays finds investors for its CDOs, only to fall out with them
The Broken Heart Syndrome	p. 85
J.R Morgan and Deutsche Bank dominate the European CDO market
Innovation outpaces the ratings agencies
Traders make millions with the help of correlation models
Reasons for concern
Regulatory Capture	p. 115
The Fed lessens the restraints on big banks
Regulators are unable to keep pace
Banks abuse the system
Government agencies miss the chance to rein in the abuses
Burning Down the Housing Market	p. 143
A boom in the demand for CDOs
Subprime bonds and a new kind of default swap help feed the demand
Housing bubble begins to burst
Dealers bet against their own deals
The Eyes of Satan	p. 177
The secret history of shadow banking
Cash gets subverted by subprime
Ratings agencies jump on the structured investment vehicle (SIV) bandwagon
Skittish investors flee the market
Massive Collateral Damage	p. 207
A flood of toxic assets undermines confidence in the market-based system
Goldman Sachs takes advantage
Investors bet on the collapse of the banks
Disaster is imminent
Governments prop up the system
Epilogue	p. 239
Appendix	p. 251
Notes	p. 257
Index	p. 269
Acknowledgments	p. 287
About the Author	p. 291
Table of Contents provided by Ingram. All Rights Reserved.