After peeling back the layers of what caused the global market crash of 2008, award-winning U.K. financial journalist Nicholas Dunbar uncovers brash, alpha-male traders at the heart of the crisis. His latest tome - The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street ... And Are Ready to Do It Again - recounts how traders ignored the warning signs and drove the global financial system to the brink.
Dunbar's missive begins in 2003, in the VIP section of a London nightclub where a group of financiers are celebrating bonus season with beautiful women, $50 whiskey sours and $650 bottles of Belvedere vodka.
Among the partiers were the head of a derivatives marketing operation who once forgot which of his Italian supercars was impounded and the head of credit structuring at a large firm who Dunbar claims was notorious for having his corporate credit cards stolen by prostitutes.
Aside from such colorful tidbits, Dunbar's new book points out how for years prior to the crash, banks were run by people who were driven more by a hatred of losing money than by a desire for immense profits. But in the late 1990s and early 2000s, he writes, the folks who ran the industry were transformed into a thrill-seeking, "love-to-win" tribe that would not be deterred by the risk of losing large sums of money.
This newfound confidence was not driven by a sense of bravado, he explains, but instead by faith in the latest innovations in risk modeling that essentially made their new investing strategies seem foolproof.
"No one doubted that finance was becoming more scientific and safer, while old fashioned prudence and caution belonged in a museum," Dunbar notes in the book. "The scientific gloss of the models assured you that the world outside, with its fear and inefficiencies, could be exploited to make you rich and virtuous at the same time."
The Road to Disaster
The creation of this new culture on Wall Street was the first step on the road to global disaster, according to "The Devil's Derivatives." The second was the industry's seduction of traditional bankers and consumers. Along the way, Dunbar writes, the credit rating agencies were corrupted and regulators grew neglectful.
Dunbar also takes individual firms to task in the book. He writes that Goldman Sachs brought AIG to its knees by purposefully making a trade with a London hedge fund that enabled Goldman to enforce collateral agreements with the stricken insurance giant. The move not only sealed AIG's fate, it threatened the entire global financial system, he argues.
The book also fingers Deutsche Bank for allowing a saleswoman to sell a collateralized debt obligation to a Catholic religious order in Rome despite the fact that neither she nor the client understood what it was. "If you have large financial institutions with sophisticated traders and huge sales forces - folks that are incentivized to find buyers for complex instruments," Dunbar tells AT, "then you're going to wind up in situations where inappropriate activity takes place." As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio