Nick Leeson

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Investment: A History by Norton Reamer, Jesse Downing

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

They are still worth highlighting briefly, however, because there have been occasions when such frauds have crippled and even destroyed otherwise well-capitalized financial institutions. While there has been a litany of such episodes, two cases will be explored: Nick Leeson (Barings Bank) and Jérôme Kerviel (Société Générale). The Leeson case will be explored because of its role in the undoing of an old and venerable financial institution, and the Kerviel episode will be discussed because of its sheer size as one of the largest such trading frauds in history. nick leeson and barings bank Nick Leeson was born in 1967 in Watford, England, a working-class town about seventeen miles outside central London. After a short stint as a clerk for a private bank and then Morgan Stanley, he joined Barings Bank in 1989. He made a reasonable impression on his superiors and, in 1992, was sent to Singapore to trade on the Singapore International Monetary Index (SIMEX), serving as the chief derivatives trader there.

,” Forbes, June 12, 2012, http://www.forbes.com/sites/chrisbarth/2012/06/12/warren -buffett-clairvoyant-or-crazy. 86. Kohn, Encyclopedia of American Scandal, 162. 87. Stephen G. Dimmock and William C. Gerken, “Finding Bernie Madoff: Detecting Fraud by Investment Managers” (working paper, 2011). 88. Stephen J. Brown and Onno W. Steenbeek, “Doubling: Nick Leeson’s Trading Strategy,” Pacific-Basin Finance Journal 9, no. 2 (April 2001): 85–86. 89. Ibid., 86. 90. Nick Leeson, “Biography,” NickLeeson.com, accessed January 2015, http://www.nickleeson.com/biography/full_biography_02.html. 362 5. Fraud, Market Manipulation, and Insider Trading 91. Martin Arnold et al., “How Kerviel Exposed Lax Controls at Société Générale,” Financial Times, February 7, 2008, http://www.ft.com /intl/cms/s/0/927fe998-d5b2-11dc-8b56-0000779fd2ac.html. 92.

“Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry.” Journal of Finance 51, no. 1 (March 1996): 85–110. Brown, Richard. Society and Economy in Modern Britain, 1700–1850. New York: Routledge, 1990. Bibliography 385 Brown, Stephen J., William N. Goetzmann, and Stephen A. Ross. “Survival.” Journal of Finance 50, no. 3 (July 1995): 853–873. Brown, Stephen J., and Onno W. Steenbeek. “Doubling: Nick Leeson’s Trading Strategy.” Pacific-Basin Finance Journal 9, no. 2 (April 2001): 83–99. Buffett, Warren. “The Superinvestors of Graham-and-Doddsville.” Hermes (Columbia Business School), Fall 1984, 4–15. Bullock, Hugh. The Story of Investment Companies. New York: Columbia University Press, 1959. Burton, Katherine, and Saijel Kishan. “Raj Rajaratnam Became Billionaire Demanding Edge.” Bloomberg News, October 19, 2009. http://www .bloomberg.com/apps/news?


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

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accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, intangible asset, interest rate derivative, interest rate swap, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

But it did not recommend that the Bank should be deprived of its banking supervisory role. The Bank of England has statutory immunity against negligence claims, but Deloitte, the liquidators of BCCI, brought an £850 million lawsuit against it claiming ‘misfeasance in public office’. In November 2005, the case collapsed and the Bank was thoroughly cleared of any allegations of dishonesty in relation to its supervisory role of BCCI. In 1995, Barings collapsed after its trader Nick Leeson had lost over £800 million through unauthorised trades in derivatives, and this triggered further consideration of the Bank of England’s supervisory role. Under the regulatory regime of the time (discussed in Chapter 22), Barings, as a major investment and trading bank, had to seek authorisation from the Bank of England for its banking activities, from the Securities and Futures Authority for its securities dealing services, and from the Investment Management Regulatory Organisation for its investment management.

An overzealous derivatives salesman could go to an unaware company treasurer and say: ‘Swap your fixed rate for a variable rate loan. Nothing will happen to rates.’ If rates then go from 4 to 12 per cent, the company would have problems. Swaps have not always been used responsibly. In the 1980s, the London Borough of Hammersmith and Fulham lost money when it used interest rate swaps to bet on interest rates, and sold ‘swaptions’, which are options to enter a swap at a fixed rate. Pure fraud happens, as when trader Nick Leeson brought down Barings Bank using various deceits to cover for his derivatives gambling losses, but it is infinitesimal compared with the amount of trading. For more on the Barings collapse, see Chapter 2. 9 Derivatives for retail investors Introduction Retail investors use derivatives for speculating and hedging in the same way as professionals, but have less access to over-the-counter products.

The press will highlight any perceived infringement or corporate failure and this will instil an ‘apparent desire to place the blame on an individual or individuals’, disguising the broader culpability of the organisation, according to risk management research by Dr Lynne Drennan at Glasgow Caledonian University. Drennan has observed the process in the press treatment of Jeff Skilling as chief executive of Enron when the US energy company was hit by scandals in 2001, of Robert Maxwell, chairman and chief executive of Mirror Group Newspapers when his pension theft hit the press, and of Nick Leeson, the trader on the Singapore Monetary Exchange for Barings Bank. A good story is everything. Martin Fridson, a managing director at Merrill Lynch, said in his book Investment Illusions that reporters had a tendency to approach not necessarily the best authorities but those who could provide colourful quotes. _________________________________ FINANCIAL COMMUNICATIONS 187  But if the press is not perfect, it is for private investors the least slanted source of City information, former deputy City editor of the Daily Mail Michael Walters has said.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

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accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Meriwether, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk-adjusted returns, risk/return, Satyajit Das, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

The alchemy of futures, options and swaps was intoxicating. Derivatives suited me. Fortuitously, I seemed to suit derivatives. Traders, Guns & Money is the record of my time in the derivatives industry. It is a collection of tales about the products, the people and the strange goings-on in the business. Ordinary men and women do not trouble themselves about this world. Just occasionally, an event such as Nick Leeson and Barings or LTCM spills over into the news. This infrequent appearance underestimates the importance of the industry and its role in finance. Every one of us is exposed to derivatives. We occasionally trade in derivatives when we invest. Our savings are frequently lodged with banks or fund managers that trade derivatives. Derivatives have the capacity to enhance return on our investments or help manage the risk.

Some take out loans or make investments that have hidden derivative elements; most have handed over their money to banks and investment managers who trade derivatives; derivatives affect what returns they will receive; it affects what their pensions will be. But for most people, derivatives remain an unknown unknown. Once in a while the ripples from this strange sphere make it into the tabloids or into the nightly news. It is always a disaster, a large loss. For example, Nick Leeson on his way to prison after having bankrupted Barings. The name – LTCM – appeared briefly as its demise threatened the financial system. Derivatives in all their mind-boggling variety and combinations are traded each day. The inverse floaters that I traded all those years ago are still around. The risks of derivatives also remain – a known unknown. There are other WMDs – arrears reset swaps, range accrual notes, step-up callables, constant maturity notes, dual currency bonds and credit linked notes.

You can sell a put option and bank the premium; if the price goes up then the option won’t be exercised and you get to keep the premium; if the price goes down, then you leave the country. If you expect the price to be stable, then you sell options, usually both calls and puts – a sold strangle or straddle. You bank the two premiums. If the price doesn’t move a lot then you are fine; if it moves sharply in any direction then you have a problem, it is not easy to straddle a barbed wire fence. Nick Leeson sold a huge straddle on the Japanese stock market just before it fell sharply after the Kobe earthquake – he was strangled. Nick did leave the country. It didn’t help. He was extradited back to Singapore and ended up in jail. If you expect prices to be very volatile, you buy a call and a put – a bought strangle or straddle. You are out of pocket two premiums. If the market moves sharply in any direction then you make out well; if the market stays in a narrow range, then you don’t make out at all.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, capital controls, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, zero-sum game

Since then a number of high-profile and highly damaging incidents have also raised ethical concerns over finance. These include the liquidation of the Bank of Credit and Commerce International (BCCI) amid allegations of fraud; the bankruptcies of Enron and WorldCom, which were associated with “creative accounting” – the deliberate manipulation of accounts to obscure the true financial position of these firms – and also with fraud; the activities of rogue trader Nick Leeson, which brought about the collapse of Barings Bank, the UK’s oldest merchant bank; Robert Maxwell’s alleged misappropriation of the Mirror Newspaper Group’s pension fund; the German FlowTex scandal, where non-existent machinery had been sold; and the Credit Lyonnais crisis in the early 1990s, following a disastrous expansion strategy and a failure of risk controls. Although there has been media and political criticism of aspects of the behaviour of hedge funds and private equity funds, there does not seem to 12 Business Ethics and the Financial Crisis 13 be any systematic evidence that the staggering growth of these sectors over the past two decades has presaged a decline in ethical standards in business.

Writing about the emergence of “casino capitalism” in the 1980s, Susan Strange, a professor at the London School of Economics, commented that when luck takes over from skill and hard work, “Respect for ethical values . . . suffers a dangerous decline.”3 A concern – from the outside at least – is that the speculative nature of the trading that is a core part of investment banking can indeed erode values. While the suggestion that traders engage in reckless gambling is a gross distortion of the skill of those working within a (speculative) market, it nevertheless highlights the importance of ethics within investment banking, and the importance of encouraging virtuous behaviour. 44 Ethics in Investment Banking In the 1990s, the activities of Nick Leeson highlighted the significance of personal character in investment banking. More recently, the case of Jérôme Kerviel provides a stark reminder of the dangers of reckless behaviour. Kerviel placed bets within the markets worth more than the entire capital of his firm, the French bank Société Générale, for which he received a five-year prison sentence and was fined ¤4.9 billion – the amount lost by Société Générale in January 2008 because of his rogue trading.

. • Trading with informal authorisation, which is not properly recorded, would not necessarily be unethical, but could be damaging to the trader if the trades go wrong. The issue of trading without a formal record of authorisation (the basis of Mr Kerviel’s defence, which was not accepted by the judge) can be one primarily of internal processes within an investment bank. If there is a deliberate attempt to subvert internal processes, then the actions would be unethical. There have been a number of high-profile cases involving rogue traders. One of these, Nick Leeson, in fact did bring about the demise of his employer, the relatively small (compared, for example, with the bulge bracket) but highly prestigious Barings Bank. Although the ethical position would be complex regarding whether a trader was committing a specifically unethical act by trading without a formal record of authorisation if they had nonetheless been informally authorised to trade, the same would not be the case for the managers who gave the “informal” authorisation.


pages: 302 words: 82,233

Beautiful security by Andy Oram, John Viega

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Albert Einstein, Amazon Web Services, business intelligence, business process, call centre, cloud computing, corporate governance, credit crunch, crowdsourcing, defense in depth, Donald Davies, en.wikipedia.org, fault tolerance, Firefox, loose coupling, Marc Andreessen, market design, Monroe Doctrine, new economy, Nicholas Carr, Nick Leeson, Norbert Wiener, optical character recognition, packet switching, peer-to-peer, performance metric, pirate software, Robert Bork, Search for Extraterrestrial Intelligence, security theater, SETI@home, Silicon Valley, Skype, software as a service, statistical model, Steven Levy, The Wisdom of Crowds, Upton Sinclair, web application, web of trust, x509 certificate, zero day, Zimmermann PGP

The breach was actually a succession of breaches perpetrated by one individual, Nick Leeson, over a period of four years that resulted in the collapse of Barings Bank and its ultimate sale to the ING Group for one pound sterling in 1995. The players Barings Bank was Britain’s oldest merchant bank, founded in 1762. It had a long and distinguished history, helping to finance the Louisiana Purchase, the Napoleonic Wars, the Canadian Pacific Railway, and the Erie Canal. The British government used Barings to liquidate 38 CHAPTER THREE assets in the United States and elsewhere to finance the war effort during World War II. Princess Diana was the great-granddaughter of one of the Barings family. Barings was Queen Elizabeth’s personal bank. Born in 1967 as a working class son of a plasterer, Nick Leeson’s life is a tale of rags to riches to rags, and possibly back to somewhat lesser riches.

The seller of a call option is making a commitment to sell a certain number of shares of stock for a strike price at a time in the future. As with put options, the parameters N, S, and T all apply and are the same for one contract between the buyer and seller of a call. The price of the option (Qcall ) is what the buyer pays to the seller. A short straddle is a trading strategy in which a trader—say, Nick Leeson—sells matching put and call options. Note that a long straddle is a strategy in which the trader buys matching put and call options. For both of these trading strategies, one can build a model that projects trading profits (Y ) as a function of N, S, T, and the current stock price per share (X ). Since Nick was authorized to follow a short straddle strategy, let’s look at short straddles in detail.

Metrics bypass the dilemma by forcing managers to share information 48 CHAPTER THREE with their bosses, who can then evaluate their performance in isolation or as compared with their peers. It’s ironic that these same bosses often refuse to share information outside of their department or outside of their company because they fear being evaluated against their peers as members of the same market ecosystem. Certainly, Nick Leeson’s account and its contribution to metrics such as those described would have merited at least a yellow rating for access management controls in the BSS business unit or in the Far East location. The presence of a persistent yellow rating, with no improvement, would hopefully have precipitated an executive decision to commission some type of investigation, if for no other reason than to be able to annotate the yellow with statements that the accounts had been reviewed and no problems were discovered.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

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Albert Einstein, asset allocation, Atul Gawande, backtesting, beat the dealer, Bernie Madoff, Black Swan, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, volatility arbitrage, William of Occam, zero-sum game

For every loser there’s a winner, but you can’t always be specific about who the winner is.”3 When the big trading events happen, many people know the losses are going somewhere, but after time passes, they stop thinking about it. Reflecting on the unknown is not pleasant, as author Alexander Ineichen notes: “Fear is still in the bones of some pension fund trustees— after Mr. Leeson brought down Barings Bank. The failure of Barings Bank is probably the most often cited derivatives disaster. While the futures market had been the instrument used by Nick Leeson to play the zero-sum game [and] someone made a lot of money being short the Nikkei futures Mr. Leeson was buying.”4 It often seems that trends create events more than events create trends. The event itself is usually a reflection of everyone “getting it” as Ed [Seykota] calls it, “an aha.”’ By this time, the trend followers usually have well-established positions. Jason Russell6 Someone did indeed make a lot of money trading short to Leeson’s long, as I discuss later in the chapter.

The performance histories of trend followers during the 2008 market crash, 2000–2002 stock market bubble, the 1998 LongTerm Capital Management (LTCM) crisis, the Asian contagion, the Barings Bank bust in 1995, and the German firm Metallgesellschaft’s collapse in 1993, answer that all important question: “Who won?” “Have you heard any rumors?” Killian, perplexed, said no. “I think we’re bust.” “Is this a crank call?” Killian asked. “There’s a really ugly story coming out that perhaps Nick Leeson has taken the company down.”9 126 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets Event #1: 2008 Stock Market Bubble and Crash One reason for this paucity of early information is suggested by the following part of the term trend following. The implication is one of passivity, of reaction, rather than of bold, assertive action—and human nature shows a distinct preference for the latter.

Event #5: Barings Bank The first few months of 1995 must go down as one of the most eventful periods in the history of speculative trading. The market events of that time period, by themselves, could be the subject of a Chapter 4 • Big Events, Crashes, and Panics graduate course in finance at Harvard Business School. Only a few years later, despite the significance of what happened, the events have been forgotten. A rogue trader, Nick Leeson, overextended Barings Bank in the Nikkei 225, the Japanese equivalent to the American Dow, by speculating that the Nikkei 225 would move higher. It tanked, and Barings, the Queen’s bank, one of the oldest, most well established banks in England, collapsed, losing $2.2 billion. Who won the Barings Bank sweepstakes? That question was never asked by anyone—not The Wall Street Journal nor Investor’s Business Daily.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

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Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

James Reason, a psychologist who has spent a lifetime studying human error in aviation, medicine, shipping and industry, uses the downfall of Barings Bank as a favourite case study. Barings was London’s oldest merchant bank when, in 1995, it collapsed after more than 300 years’ trading. One of its employees, Nick Leeson, had lost vast sums making unauthorised bets with the bank’s capital. He destroyed the bank single-handedly, assisted only by the gaps in Barings Bank’s supervision of him. ‘I used to speak to bankers about risk and accidents and they thought I was talking about people banging their shins,’ James Reason told me. ‘Then they discovered what a risk is. It came with the name of Nick Leeson.’ Another catastrophe expert who has no doubt about the parallel is Charles Perrow, emeritus professor of sociology at Yale. He is convinced that bankers and banking regulators could and should have been paying attention to ideas in safety engineering and safety psychology.

His approach is in sharp contrast to the prevailing regulatory philosophy, which unwittingly encouraged banks to become larger and more complicated, and actively encouraged off-balance-sheet financial juggling. I do not know for sure whether Kay has the right answer, but normal accident theory suggests he is certainly asking the right question. 8 Slips, mistakes and violations James Reason, the scholar of catastrophe who uses Nick Leeson and Barings Bank as a case study to help engineers prevent accidents, is careful to distinguish between three different types of error. The most straightforward are slips, when through clumsiness or lack of attention you do something you simply didn’t mean to do. In 2005, a young Japanese trader tried to sell one share at a price of ¥600,000 and instead sold 600,000 shares at the bargain price of ¥1.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

From time to time during the ‘great moderation’, the risks involved in banking were revealed as banks went bust. The collapses of Johnson Matthey in 1984 and BCCI in 1991 showed that banks could go bust the old-fashioned way: by lending money to people who could not pay it back. The failure of Barings in 1995 was a more modern story, linked to the derivatives market. It revealed an astonishing naivety and lack of controls on the part of the Barings management. Nick Leeson was a relatively junior banker operating out of Barings’ Singapore office. His early career did not suggest he was destined to become a star. What he was supposed to be doing was indulging in arbitrage between the Singapore and Japanese markets, buying low on one exchange and selling high on the other. It was the equivalent of combing the streets looking for dropped £20 notes. One might expect the odd gain, but not a bonanza.

‘It was not actually terribly difficult to make money in the securities markets,’ said Peter Baring, the firm’s chairman, just two years before the company’s collapse.22 The Barings failure revealed the dark secrets at the heart of the financial boom. First, high returns are nearly always accompanied by high risk. Secondly, traders have every incentive to take risks with ‘other people’s money’ to inflate their own bonuses, and few incentives to admit their mistakes. However, the bank’s failure was dismissed as a one-off. The title of Nick Leeson’s autobiography, Rogue Trader, tells the tale. He was operating outside the system, not within it. It was assumed by regulators that private businesses would have every incentive to control their risks, particularly as other banks would be trading with them every day, and thus be watching for signs of weakness. The ever-efficient market would supply the discipline. Indeed in 2004, the Securities and Exchange Commission, the leading US regulator, removed the caps on the amount of leverage that the leading broker-dealers (a category that included Bear Stearns and Lehman Brothers) could use.

If you borrow another £900 million at a cost of, say, 5%, and still earn a return of 10% on the bigger balance sheet, shareholders get £55 million. 15 Alessandri and Haldane, ‘Banking on the State’. 16 Luc Laeven and Fabian Valencia, ‘Systemic Banking Crises: A New Database’, IMF Working Paper No. 08/224, 2008. 17 Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, New York, 2010. 18 Quoted in John Cassidy, ‘What Good is Wall Street?’ New Yorker, 29 November 2010. 19 Bob Woodward, Maestro: Greenspan’s Fed and the American Boom, New York, 2001. 20 Admittedly, that would be very difficult in the case of the European Central Bank. Its mandate was set by treaty. 21 Michiyo Nakamoto and David Wighton, ‘Citigroup Chief Stays Bullish on Buy-outs’, Financial Times, 9 July 2007. 22 Quoted in Nick Leeson, Rogue Trader, London, 1996. 23 Pablo Triana, Lecturing Birds on Flying: Can Mathematical Theories Destroy The Financial Markets?, New York, 2009. 24 Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, London, 2008. 25 Peter Thal Larsen, ‘Goldman Pays the Price for Being Big’, Financial Times, 13 August 2008. 26 Andrew Haldane, ‘Why Banks Failed the Stress Test’, 9 – 10 February 2009. 27 Interview with the author, 25 October 2010. 9.

Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

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Albert Einstein, Bernie Madoff, Black Swan, commodity trading advisor, correlation coefficient, delayed gratification, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, Lao Tzu, Long Term Capital Management, market bubble, market microstructure, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Sharpe ratio, systematic trading, the scientific method, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

He also now owns the famed Liverpool Football Club in Britain. Red Sox price: $700 million. Liverpool: $476 million. He is not broke. How did he make that fortune? Trading in a very rigid, rules-defined, way. In 1995, Henry, a former farmer from Arkansas who began his trading career humbly hedging his crops, made speculative trading history. His trading strategies essentially won the money lost by rogue trader Nick Leeson of Barings Bank (often referred to as the “Queen’s bank”). Leeson bet wildly and lost $1.3 billion. The Queen’s bank collapsed. Leeson was the Time cover boy. Media ate up the bank’s implosion and coverage was nonstop. Leeson was the known loser. Henry was the then-unknown winner. Henry won practicing a form of trading called systematic trend following. His big win was never revealed (see my first book, Trend Following).

Everyone is oblivious to the other side of the story: the winners and why. The academics locked away with job security tenure always come up short in their analysis: “It’s a zero-sum game. For every loser there’s a winner, but you can’t always be specific about who the winner is.”2 Not true. Bear markets cause events more than events cause bear markets. John W. Henry made a fortune going short the Nikkei, while Nick Leeson and Barings Bank were long. That’s a major winner right there.3 My political science background allowed me to see that; others should be able to see it too. However, many look at events through the wrong lens. Deep down the money elite know that standard finance theory has no explanation for the winners of low-probability, high-impact events.4 The bottom line is that big, unexpected events make trend traders rich.


pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

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Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

The old adage is that the market can stay irrational longer than you can stay solvent. This is why firms put trading limits on traders or cumulatively trading desks. There is a firm-wide limit, known as VaR or Value at Risk – the most a firm could lose on any given day. The better you get trading, the higher your personal limit and the bigger chunk of the firm’s capital you get to play with and turn into more money (or end up as a smoking hole in the ground, see Nick Leeson and JP Morgan’s London Whale.) Bond trading is a little different, but not much. Again, trading government bonds and munis and corporate debt is mostly facilitating trades for clients. But there is no exchange. These are negotiated transactions. It’s you against the client, even though you are providing a service for the client. Your job is to get the best price for your firm. Some view this as screwing the client.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

You’ve just borrowed $100,000 and through the power of modern financial instruments used it to lose $1 million. Whoops. It might seem unlikely that anyone would do anything that stupid, but in practice it happens all the time. The list of individual traders who have lost more than a billion dollars at a time betting on derivatives is not short: Robert Citron of Orange County, California; Toshihide Iguchi at Daiwa Bank; Yasuo Hamanaka at Sumitomo Corporation; Nick Leeson of Barings Bank; and now, most recently and spectacularly of all, Jérôme Kerviel of Société Générale. These are the traders who have each single-handedly managed to lose more than a billion dollars of their employers’ money. Hamanaka used to be the poster boy—he lost $2.6 billion betting on copper in 1996. But Kerviel’s $7.2 billion loss betting on European stock markets made that figure look a little dated and nineties, especially since, according to his bank, he began accumulating the losses the same month he was caught.

A very senior Treasury figure reports that a bank board member came up to him at a social function and said he had some good news: “We’re no longer going to get involved in things we don’t understand.” He added, “We now own his bank.” Derivatives are a central part of this new mathematical complexity. One of their main uses is in arbitrage. That’s the name of investments which effectively bet both ways on the market, exploiting small differences in price to make what should be risk-free profits. (It’s what Nick Leeson was supposed to be doing, exploiting tiny differences in the price of Nikkei 225 futures between the Osaka exchange, where trading was electronic, and the Singapore exchange, where it wasn’t. The gap in price would last only for a couple of seconds, and in that gap Barings would buy low and sell high—a guaranteed, risk-free profit.) The complexity of the mathematics involved in derivatives can’t be exaggerated.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

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airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, mass incarceration, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, zero-sum game

used to be smaller John Stopford (1998), “Multinational Corporations,” Foreign Policy, 113:12–24. Gardiner C. Means (1931), “The Growth in the Relative Importance of the Large Corporation in American Economic Life,” The American Economic Review, 21:10–42. Ronald Coase first Ronald Coase (1937), “The Nature of the Firm,” Economica, 4:386–405. Nick Leeson's Richard W. Stevenson (28 Feb 1995), “The Collapse of Barings: The Overview: Young Trader's $29 Billion Bet Brings down a Venerable Firm,” New York Times. Erik Ipsen (19 Jul 1995), “Bank of England Cites Fraud in Barings Collapse,” New York Times. Peter Culshaw (8 Jan 2009), “Nick Leeson: How the Original Rogue Trader at Barings Bank Is Thriving in the Credit Crunch,” The Telegraph. Kweku Adoboli Victoria Howley and Emma Thomasson (16 Sep 2011), “UBS $2 Billion Rogue Trade Suspect Held in London,” Reuters. Haig Simonian (24 Sep 2011), “UBS Chief Resigns Over Rogue Trade Affair,” Financial Times.

That much damage might previously have required ten smaller companies to defect. This means that as large corporations grow, fewer defectors can do even more damage. So society needs more security, to further reduce the amount of defection, in order to keep the potential damage constant. Individuals within a large corporation can defect from the corporation to a greater degree, for greater personal gain and to the greater detriment of the corporation. Nick Leeson's unauthorized trading while he worked for Barings Bank destroyed the entire company in 1995. Kenneth Lay, Jeffrey Skilling, and other senior Enron executives destroyed that company. Kweku Adoboli lost $2.3 billion for the investment bank UBS in 2011. Large corporations have more power to deliberately manipulate societal pressures. This includes getting laws passed specifically to benefit them, and engaging in jurisdictional arbitrage by deliberately moving certain operations to certain countries in order to take advantage of local laws.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

From the middle to the end of the 1990s, a number of banks—from Salomon Brothers and Goldman Sachs to Merrill Lynch and Drexel Burnham, Lambert—started to operate their own proprietary trading arms using the firm’s own rather than their customers’ money and investing mostly at the high risk end of the market. In this way profits were siphoned off to finance takeovers, invest in hedge funds or bet on commodities and currency movements. Such activity undoubtedly added considerable risk to the system as a whole. Nick Leeson, for example, was a key member of Barings proprietary trading team and at least some of the money he was investing came from the proprietary trading budget. As the investment banks were very lightly regulated, the authorities mostly had little idea about the scale or character of such activity. Such trading has become highly attractive to the banks. While they get paid a commission from managing money from clients, they pocket all the gains from managing their own money.

The world’s dictators from Africa to the Middle East have used their power to grow rich off the back of their country’s natural stores of mineral wealth. Other extreme examples include the myriad business scandals—from Robert Maxwell’s raid on the Mirror staff’s pension fund to jailed financier Peter Clowes fraudulent savings scheme—with tycoons lining their own pockets by fleecing staff and customers. When Barings was brought to its knees by the rogue derivatives trader, Nick Leeson, in 1994, the funds to finance his dealing had been provided by small savers who had subscribed to a bond issue issued by the bank. The bondholders lost everything. While there is nothing new about rogue businessmen, the deregulation of finance became something of a charter for abuse. The last twenty years of ‘self-regulation’ have been riddled with examples of the high level misselling of financial products, ones that have caught a majority of the population at some stage.


pages: 487 words: 147,891

McMafia: A Journey Through the Global Criminal Underworld by Misha Glenny

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anti-communist, Anton Chekhov, Berlin Wall, blood diamonds, BRICs, colonial rule, crony capitalism, Deng Xiaoping, Doha Development Round, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, forensic accounting, friendly fire, glass ceiling, illegal immigration, joint-stock company, market bubble, Mikhail Gorbachev, Nick Leeson, offshore financial centre, Pearl River Delta, place-making, rising living standards, Ronald Reagan, Skype, special economic zone, Stephen Hawking, trade liberalization, trade route, Transnistria, unemployed young men, upwardly mobile

The clients they represented sought out their services for a number of reasons: some were looking for the maximum rates of return, while others were seeking to avoid paying tax; companies were demonstrating their commitment to new markets; and some investors wanted to launder their money and remove the stain of its criminal origins. The sums involved were vast. By the mid-nineties, the foreign exchange markets alone reached a volume of trading that exceeded $1 trillion every day. This was more than forty times the value of daily global trade. In the world of licensed financial trading, malfeasance came to light only either when related losses destroyed an institution, as when Nick Leeson’s derivatives trading on the Japanese stock market brought down Barings Bank, or when outside regulators were tipped off about malpractice, as happened in the staggering case of the Bank of Credit and Commerce International (BCCI). Several scandals, from BCCI to Enron, have demonstrated that the world’s most famous private audit companies cannot be relied upon to alert governments to large-scale malpractice in the banking or corporate sectors.

While the motives of the Nigerian scammers were never in doubt, Sakaguchi’s gullibility beggars belief. There is no evidence to suggest that he was in league with the scammers—he was a genuine victim. But he was funding this wild gamble with somebody else’s money. Thousands if not millions of man-hours have gone into the Noroeste investigation, which stands as the third-biggest bank theft in history. (Nick Leeson’s destruction of Barings Bank and the looting of the Iraqi National Bank after the U.S. invasion of March 2003 take the top two places.) And yet not a single lawyer, judge, policeman, fraudster, or friend or spiritual adviser of Nelson Sakaguchi can answer the two central questions: Why did he do it? And how was he taken in? “It’s hard to see how he was fooled by this,” remarked Keith Oliver, holding up a letter from the fraudsters boasting the distinct letterhead: The Federal Reserve Clearing House, Chadwell Heath, Romford, Essex.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

If you lose, you repeat the strategy, doubling up after every losing bet. The paradox of this game, which has intrigued statisticians and attracted gamblers for centuries, lies in its two seemingly incompatible properties. The game is certain to be profitable if you play for sufficiently long, but if you play it regularly you will eventually be ruined. From time to time ‘rogue traders’ grab the headlines. The term came into popular language after Nick Leeson, a 28-year-old employee in the Singapore office of the venerable London investment bank of Barings, vanished overnight from his desk. The losses he had incurred led to the bankruptcy of the bank, and jail for Leeson. More recent ‘rogue traders’ include Jérôme Kerviel, that former employee of the French bank Société Générale (now in jail), who was ordered to repay €4.9 billion, and J.P. Morgan’s ‘London whale’ (Bruno Iksil), whose irregular trading was said to have lost the US bank $6 billion.

., 2014, ‘The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?’, The New York Review of Books, 9 January. Ramsey, F.P., 1926, ‘Truth and Probability’, in Ramsey, F.P., 1931, The Foundations of Mathematics and Other Logical Essays, ed. Braithwaite, R.B., London, Kegan, Paul, Trench, Trubner & Co. Rappaport, A., 1986, Creating Shareholder Value: The New Standard for Business Performance, New York, Free Press. Rawnsley, J.H., 1995, Going for Broke: Nick Leeson and the Collapse of Barings Bank, London, HarperCollins. Reader, W.J., 1970–75, Imperial Chemical Industries: A History, London, Oxford University Press. Reich, R.B., 1990, ‘Who Is Us?’, Harvard Business Review, January. Reinhart, C.M., and Rogoff, K.S., 2010, ‘Growth in a Time of Debt’, American Economic Review: Papers & Proceedings, 100 (2), May, pp. 573–8. Rieffel, A., 2003, Restructuring Sovereign Debt: The Case for Ad Hoc Machinery, Washington, DC, Brookings Institution Press, pp. 289–94.

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

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Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business process, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, commoditize, computerized markets, corporate governance, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

From a technical standpoint, short vol trades create ample opportunities for inexperienced quants to produce diametrically incorrect answers.11 Generally, performance data are conditioned on a manager not having experienced the key low-probability event; if they had then they would be out of business.12 Subsequently, the event that would have provided the texture necessary to elicit an appropriate estimate of volatility is almost, by definition, never available—an odd form of financial Heisenberg’s uncertainty.13 This is one example of just why quantitative financial research is so darn difficult; it involves rational (or at least thinking) participants who are not typically bound by the persistent laws of the physical world. Doubling Up The most colorful episode of doubling up behavior involved the notorious trader Nick Leeson, who was instrumental in bringing down the House of Baring.14 By all accounts, he reacted in a classic manner to the OPM (other people’s money) agency problem; he had masterfully engineered a career-ending loss of “X” and concluded that there was no additional cost in losing “2X” (since it was not his money) and there was a substantial cost associated with not recouping the loss before it was detected.

Discussed this issue with my dad and he related a personal incident involving a college acquaintance by the name of Shirley Heisenberg; this is, of course, a different form of uncertainty involving the inability to simultaneously observe the position and momentum of a particle. 14. For an excellent analysis of these events see the work of Professors Brown and Steenbeek in their paper titled “Doubling: Nick Leeson’s Trading Strategy.” 15. Working definition here is “guy from outta town” or “guy with shiny shoes;” you take your pick. 16. A lot of traders found themselves temporarily unemployed. The ones with more significant losses managed to get book deals. Incidentally, if you’re going to lose, lose big. Big losses are generally indicative of an alpha male (excuse the pun) and tend to imply that you had significant responsibility, and are therefore deserving of it again. 17.


pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

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Bonfire of the Vanities, Bretton Woods, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, lump of labour, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

How Copper Came a Cropper In 1995 the world was astonished to hear that a young employee of the ancient British firm Barings had lost more than a billion dollars in speculative trading, quite literally breaking the bank. But when an even bigger financial disaster was revealed a year later—the loss of more than $3 billion in the copper market by an employee of Sumitomo Corp.—the story quickly faded from the front pages. “Oh well, just another rogue trader,” was the general reaction. It eventually became clear, however, that Yasuo Hamanaka, unlike Nick Leeson of Barings, was not a poorly supervised employee using his company’s money to gamble on unpredictable markets. On the contrary, there is little question that he was, in fact, implementing a deliberate corporate strategy of “cornering” the world copper market—a strategy that worked, yielding huge profits, for a number of years. Hubris brought him down in the end; but it is his initial success, not his eventual failure, that is the really disturbing part of the tale.

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

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Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, information asymmetry, liberal world order, Live Aid, Nick Leeson, Pareto efficiency, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus, Westphalian system

Wood when authority was granted to local stores during the 1950s and 1960s to set conditions for sales, marketing campaigns, and so forth. This decentralization continued until some local Sears auto service outlets in California engaged in a bait-and-switch operation that undermined the integrity of the Sears brand name (Miller 1992). In another example, the venerable British investment firm Barings delegated authority to, in effect, bet the company to a single young currency trader in Singapore, Nick Leeson. He then proceeded to make extremely large currency trades that undermined the capital structure of the company, forcing Barings into bankruptcy. Federalism poses a similar problem. Delegation of authority to state and local government means almost inevitably there will be greater variance in government performance. Often variance is desirable, as when states engage in competitive experimental policy reform.


pages: 238 words: 46

When Things Start to Think by Neil A. Gershenfeld

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3D printing, Ada Lovelace, Bretton Woods, cellular automata, Claude Shannon: information theory, Dynabook, Hedy Lamarr / George Antheil, I think there is a world market for maybe five computers, invention of movable type, Iridium satellite, Isaac Newton, Jacquard loom, Jacquard loom, John von Neumann, means of production, new economy, Nick Leeson, packet switching, RFID, speech recognition, Stephen Hawking, Steve Jobs, telemarketer, the medium is the message, Turing machine, Turing test, Vannevar Bush

The images and motion don't have to be confined to a computer screen; they can come out here where we are. Smart Money Barings Bank was founded in 1762. In its long history it helped to finance the Louisiana Purchase (providing money Napoleon needed to keep fighting his wars), and counted the Queen among its loyal customers. In January of 1995 a twenty-eight-year-old trader for Barings in Singapore, Nick Leeson, lost most of what eventually proved to be $1.4 billion by trading futures in the Japanese Nikkei Index. That was twice the bank's available capital; by February the bank had folded, and in March it was sold to the Dutch bank lNG for £1. In July of that same year, Toshihide Iguchi, a trader for Daiwa Bank in New York, confessed to the bank that he had lost $1.1 billion trading apparently harmless U.S.


pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

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activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

But as the interviews piled up, the inevitable logic behind yet another scandal began to become clear. Early in the life of the blog, the Swiss bank UBS was forced to acknowledge that one of its traders, Kweku Adoboli, had lost $2 billion. Contrary to the London Whale, Adoboli had broken lots of rules and laws, making him a so-called ‘rogue trader’. Every few years a scandal of this kind breaks out, the best-known examples being British trader Nick Leeson who in 1995 singlehandedly brought down the centuries-old British bank Barings, and French trader Jérôme Kerviel who in 2008 managed to lose €4.9 billion for Société Générale. In court, the prosecution portrayed Adoboli as a selfish man craving status and ever-bigger bonuses. This was the familiar trope of finance as a casino for greedy monsters. However, banking staff and financial professionals had far more interesting things to say.

Global Governance and Financial Crises by Meghnad Desai, Yahia Said

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Asian financial crisis, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

The 1866 crisis coincided with the run on the City bankers Overend, Gurney and Company. This was the first crisis that the Bank of England (reformed in 1844) intervened in decisively. Indeed, its intervention was the beginning of modern central banking by some accounts. And it seems to have succeeded. In the fifty years after 1866, there was only one crisis in Britain and this was the Baring crisis, which had more to do with Baring Brothers’ Argentine investments (shades of Nick Leeson a century later which scuppered the bank) than anything in London. Indeed, the Baring crisis of 1890 was very much a global crisis like the Asian crisis of 1997. It started with German investors withdrawing capital from Argentina. This led to the failure of an offering by Buenos Aires Drainage and Waterworks Company of £3.5 million in November 1888. This forced Baring 12 Meghnad Desai Brothers to lend to Argentina on acceptance credits.


pages: 254 words: 79,052

Evil by Design: Interaction Design to Lead Us Into Temptation by Chris Nodder

4chan, affirmative action, Amazon Mechanical Turk, cognitive dissonance, crowdsourcing, Daniel Kahneman / Amos Tversky, Donald Trump, en.wikipedia.org, endowment effect, game design, haute couture, jimmy wales, Jony Ive, Kickstarter, late fees, loss aversion, Mark Zuckerberg, meta analysis, meta-analysis, Milgram experiment, Netflix Prize, Nick Leeson, Occupy movement, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, stealth mode startup, Steve Jobs, telemarketer, Tim Cook: Apple, trickle-down economics, upwardly mobile

Dunning and Kruger caution that “poor performers do not learn from feedback suggesting a need to improve”—just the sort of people who’ll plow money into a financial vehicle they stand little chance of understanding. Derivatives trading without serious experience and industry knowledge is likely to lead to an illusion of control. Even with that experience you can still seriously lose your way. Just ask Nick Leeson, who single-handedly brought Barings Bank to bankruptcy in 1995 by losing $1.2 billion through trading equity derivatives. You can get some quick wins, and the low minimum investment makes it easy to gloss over early losses. The interfaces used by the web-based exchanges make the experience feel much like a game of chance with some added pseudo-skill built in. There are pretty graphs and glossy buttons with an invitation to enter a call if the derivative looks like it’s going up, or a put if it’s going down.


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

When rogue traders impose multi-billion-dollar losses on their employers, this is big news.36 By contrast, when banks suffer huge losses from systematic mistakes in lending decisions or from the maturity mismatch between their assets and their liabilities, the problem may not really make the news even if the bank’s difficulties create huge problems for others. In 1995, for example, Barings Bank in the United Kingdom was brought down by Nick Leeson, a trader in Singapore who had made a gigantic bet that Japanese stock prices would go up, a bet that created huge losses after the Kobe earthquake. Mr. Leeson became an instant media personality—and remained one until he was sent to jail. Yet the losses on his trades, roughly £1 billion, were only one-tenth of the losses from bad loans that brought down the French bank Crédit Lyonnais shortly afterward.

This effect can make individual defaults and bankruptcies less likely and improve financial and economic stability. However, the new markets and new techniques have also expanded the scope for gambling, and they can be used in ways that increase rather than reduce risks in the system.38 Over the past twenty or thirty years, many scandals in which banks and their clients lost enormous amounts of money have involved derivatives. In Chapter 4 we mentioned the case of Singapore banker Nick Leeson, who brought down the United Kingdom’s Barings Bank in 1995 when he bet that Japanese stock prices would go up and instead they went down. By using derivatives rather than buying stocks, Mr. Leeson was able to build up extremely large positions in a very short time, with little control from the bank’s senior management. Since then, at least twenty incidents involving losses of more than $1 billion each have arisen from the speculations of individual traders, carried out using derivatives.39 In the case of Orange County, California, in 1994, this involved a significant loss of public money.40 Speculation and gambling have always played a role in financial markets.


pages: 350 words: 103,270

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 by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, break the buck, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

Appendix A timeline of some significant historical events referred to in the book, and episodes involving the book’s key characters. 1973 Fischer Black, Myron Scholes, and Robert Merton publish seminal papers on option pricing 1974 Robert Merton publishes paper using option theory to link debt and equity 1986 Start of S&L crisis 1987 Oldrich Vasicek publishes working paper applying Merton’s work to credit portfolios Federal Reserve protects Wall Street securities firms from October stock market crash by ensuring that banks lend 1988 Basel I bank capital accord agreed Nick Sossidis and Stephen Partridge-Hicks set up Alpha Finance for Citibank 1994 VAR models protect commercial banks from market turmoil 1995 Barings Bank almost bankrupted by Nick Leeson’s rogue trading Sossidis and Partridge-Hicks set up Sigma 1996 Basel Committee agrees to incorporate VAR-based trading book rules into bank capital accord Citibank launches Centauri SIV Moody’s binomial expansion technique CDO rating model published 1997 J.P. Morgan launches BISTRO synthetic CDO Emerging market debt crisis begins 1998 U.S. Financial Accounting Standards Board (FASB) introduces fair value accounting for derivatives AIG Financial Products sells super-senior protection on BISTRO to J.P.


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

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algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

And the equations often are vulnerable to unrealistic assumptions. Most recently, the financial crisis was caused in part by overreliance on statistical models that didn’t take into account the chances of declines in housing prices. But that was just the most recent iteration: the collapse of Enron, the implosion of the hedge fund Long-Term Capital Management, the billions of dollars lost by rogue traders Kweku Adoboli, Jerome Kerviel, Nick Leeson, and others—all of these fiascos have, at their heart, a mistaken reliance on complex math. Nassim N. Taleb has written widely and wisely about the deception in financial models, most notably in his book The Black Swan: The Impact of the Highly Improbable (Random House, 2007). In retrospect, many economic models look absurd. For my college honors thesis, I wrote computer code, using something called “simplicial algorithms,” that was supposed to accurately depict Mexico’s economy.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

This is because their speculative activity is more often than not about trying to trade their way out of loss-making positions incurred on behalf of their employer. They do this by taking further big, risky bets, a practice sometimes referred to as gambling for redemption. In times gone by there was a modicum of honour among thieving traders. When Lazard Brothers, the London arm of the Lazard banking empire, was brought to its knees by a rogue trader in its Brussels office in 1931, the miscreant made a confession and shot himself. Nick Leeson, a trader who provided a fine example on the trading floor in Singapore of the delusional behaviour mentioned earlier by Edward Chancellor, brought down Barings, another great British investment bank. Yet he and other recent rogue traders such as Jérôme Kerviel at Société Générale appear to have no shame gene. Nowadays it is only a mild exaggeration to say that European rogue traders serve relatively short jail sentences before taking to the lecture circuit to tell the world that the damage they wrought was largely the fault of their arrogant and stupid bosses.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

As Warren Buffet once said, about financial-sector conduct during a previous boom, “It was the bankers who were wearing the ski masks.” Barings The oldest investment bank, or merchant bank as they used to be called, in England. In the long list of investment bank scandals and failures of the last few decades, Barings is the only bank to have been destroyed by the actions of a single individual. The man responsible was Nick Leeson, and the fateful moment came in January 1995. Leeson had been using tiny differences between the prices of stocks in Singapore, where he was based, and Tokyo. His trades were supposed to be a form of arbitrage, exploiting small differences in the price to make guaranteed profits, but Leeson had gradually, and unauthorizedly, begun to make bigger bets on the movement of the shares. These quickly began to go wrong.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

In the public sector, the benefit structures are determined nationally . . .19 Put another way, whereas companies can cut the pension benefits of their current employees, if not their past employees, it’s much more difficult to do the same within the public sector. In addition to legal restrictions, there’s an obvious reason for this: it’s politically deeply unpopular. Far better, then, to let sleeping dogs lie even if, as with Illinois’s credit rating, the dogs eventually wake up and administer a nasty bite. In the murky world of pension finance, the temptation is too often to sweep problems under the carpet. It is the Nick Leeson approach to dealing with bad financial news. The implications, however, are distressing. Unless pension benefits are cut – through, for example, a significantly higher retirement age, lower retiree income or bigger employee contributions – the costs will fall on others, most obviously taxpayers and recipients of public services. In other words, public pension shortfalls as a result of poor asset returns require a tightening of fiscal policy that, other things equal, will drain demand from the economy, lead to slower growth and, hence, threaten a continuation of poor asset returns.


words: 49,604

The Weightless World: Strategies for Managing the Digital Economy by Diane Coyle

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barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, blue-collar work, Bretton Woods, clean water, computer age, Corn Laws, creative destruction, cross-subsidies, David Ricardo: comparative advantage, dematerialisation, Diane Coyle, Edward Glaeser, everywhere but in the productivity statistics, financial deregulation, full employment, George Santayana, global village, hiring and firing, Howard Rheingold, income inequality, informal economy, invisible hand, Jane Jacobs, Joseph Schumpeter, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Marshall McLuhan, mass immigration, McJob, microcredit, moral panic, Network effects, new economy, Nick Leeson, night-watchman state, North Sea oil, offshore financial centre, pension reform, pensions crisis, Ronald Reagan, Silicon Valley, spinning jenny, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tobin tax, two tier labour market, very high income, War on Poverty, winner-take-all economy, working-age population

It will involve mediating between the global and the local, and maintaining economic institutions — at a minimum, making markets work properly. Let me give four examples here. International financial regulation The financial markets represent the ultimate weightless economic activity, located as they are in cyberspace. The popular view that the markets are the playground of lawless fiscal vigilantes is an exaggeration but there is a grain of truth in it. There have indeed been extraordinary scandals. Rogue derivatives trader Nick Leeson lost nearly £1 billion and brought down Barings Bank, one of the oldest and most blue-blooded in the City of London. Copper trader Yasuo Hamanaka did not topple Sumitomo in Japan, but caused it severe embarrassment as well as losses of billions of dollars. Proctor & Gamble lost $102 million after tax on two derivatives transactions arranged by Bankers Trust in 1994. It alleged that the bank had not explained the risks, al- Redesigning Government 223 though the matter was settled out of court two years later.


pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Globalization and Armageddon It used to be said that emerging markets were the places where they had emergencies. Investing in far-away countries could make you rich but, when things went wrong, it could be a fast track to financial ruin. As we saw in Chapter 2, the first Latin American debt crisis happened as long ago as the 1820s. It was another emerging market crisis, in Argentina, that all but bankrupted the house of Baring in 1890, just as it was a rogue futures trader in Singapore, Nick Leeson, who finally finished Barings off 105 years later. The Latin American debt crisis of the 1980s and the Asian crisis of the 1990s were scarcely unprecedented events. Financial history suggests that many of today’s emerging markets would be better called re-emerging markets.az These days, the ultimate re-emerging market is China. According to Sinophile investors like Jim Rogers, there is almost no limit to the amount of money to be made there.16 Yet this is not the first time that foreign investors have poured money into Chinese securities, dreaming of the vast sums to be made from the world’s most populous country.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

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affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, intangible asset, Jeff Bezos, John Meriwether, London Interbank Offered Rate, Long Term Capital Management, loose coupling, margin call, market bubble, market design, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

Bankers Trust was sued by four major clients—Procter & Gamble, Gibson Greetings, Federal Paper Board Company, and Air Products—big and ostensibly smart companies that asserted they had been misled by Bankers Trust concerning the risk and valuation of derivatives they had purchased. Far greater than the nearly $200 million in damages from the cases was the damage to Bankers Trust’s reputation. At least P&G could absorb the losses. Other firms were wiped off the map. Nick Leeson, working in the hinterland of Barings Bank’s Singapore office, traded unauthorized positions for several years, a simple matter because he was both the trader and the back office for its futures operation. In July 1992 a clerk at Barings mistakenly entered an order to purchase 20 Nikkei futures contracts as a sell. Leeson failed to notice the £20,000 error until that Friday night, and it slipped his mind to correct it when he returned to work on Monday.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

(The value of a stock option depends on the price of the stock; the value of a dollar-yen futures contract depends on the value of the dollar.) In 1994, Orange County was forced into bankruptcy after its treasurer, Bob Citron, took the county’s $7.6 billion investment pool, borrowed more money from Wall Street firms, and invested it in some derivative securities known as “inverse floaters.” A year later, the misplaced bets of a single derivatives trader, Nick Leeson, brought down the venerable Barings Bank. In 1998, the giant (and unregulated) hedge fund Long-Term Capital Management, which was a big player in many derivatives markets, had to be propped up and then wound down by a consortium of Wall Street banks, with the Fed playing a coordinating role. The demise of Long-Term Capital, which had two economics Nobel winners as partners—Robert Merton and Myron Scholes—demonstrated the limitations of counterparty regulation.


pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

One stemmed from a deal between Merrill Lynch and Orange County, California, which left the county with such large losses that it filed the largest municipal bankruptcy in U.S. history. Another involved a sale of derivatives by Bankers Trust to Proctor & Gamble, which led to a lawsuit by the latter and to the release of some crude and damning audiotapes. A third was the escapades of a single rogue trader, Nick Leeson, whose wild gambles in Singapore literally broke Barings, Britain’s oldest investment bank—and wound up as a movie. An inauspicious start, you might say. But that was nothing compared with what happened in the summer and fall of 1998, when losses at the now-infamous hedge fund Long-Term Capital Management (LTCM) helped set off a worldwide financial crisis—one that seemed monumental until it was dwarfed by the stunning events of 2007–2009.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

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Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, buy low sell high, capital controls, central bank independence, Chance favours the prepared mind, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, John Meriwether, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Paul Samuelson, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond, zero-sum game

Markets are going to go where they’re going to go.Yes, sure, on one or two days when I was liquidating, it pushed it down, but the moment I stopped selling, it went where it was going to go. 80 INSIDE THE HOUSE OF MONEY 250 Yen per Pound 225 200 Siva-Jothy Liquidating Sterling/Yen Position 175 150 No v9 Ja 3 n94 M ar -9 M 4 ay -9 Au 4 g9 Oc 4 t-9 De 4 c9 M 4 ar -9 M 5 ay -9 Ju 5 l-9 Oc 5 t-9 De 5 c9 Fe 5 b9 Ap 6 r-9 Ju 6 l-9 Se 6 p9 No 6 v96 Fe b9 Ap 7 r-9 Ju 7 n9 Se 7 p9 No 7 v97 Ja n9 M 8 ar -9 Ju 8 n9 Au 8 g98 125 FIGURE 5.2 Sterling/Yen, 1993–1998 Source: Bloomberg. Markets are immense but if people know there’s a big position out there that is being liquidated, they’ll go for it. Nick Leeson at Barings Singapore and Long Term Capital Management are the classic cases. The market sniffed their unwinding and traded against them. Did the sterling/yen experience prove useful later on? Yes, definitely. The 1998 LTCM/Russia episode for me was the reverse. The firm didn’t have a great 1998, but the prop group did and I attribute it to the lessons learned in 1994. In 1998, GS had a risk arbitrage group that was set up a few years earlier.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

Weatherstone, I was told, would give the inventors three slots of fifteen minutes to explain the product to him. If at the end of that he still did not understand the product, the firm would not sell it.28 In 2008 there must have been many executives who wished they had followed Weatherstone’s heuristic. Just before Barings Bank, one of the oldest banks in the world, collapsed in 1995 under the weight of losses of $1.4 billion caused by a rogue derivatives trader, Nick Leeson, in its Singapore branch, the senior managers in London told the Bank of England that they were pleased with the trading results but slightly puzzled as to how its Singapore business had earned such a large profit. A useful heuristic for managers and regulators alike is to probe not only those parts of a business that are losing a lot of money but also those that are making a lot. The second example is the problem of how to regulate a bank.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

The trader’s explanation of anomalies was accepted without further investigations, despite oddities like products scheduled to mature on days when the market was closed. Eurex queried Kerviel’s trading in late 2007. SG responded, but considered the queries “technical.” Daniel Bouton, SG’s chief executive, admitted that the bank’s derivatives business designed to run at 80 mph was actually doing 130. Evil Kerviel Whenever a bank loses a large sum trading, it is always blamed on a rogue trader. In 1995, Nick Leeson of Barings lost £860 million ($1.4 billion) in equity trading. In 1996 Yasuo Hamanaka of Japan’s Sumitomo lost $1.8 billion in copper trading. In 2006, Brian Hunter and hedge fund Amaranth lost $6 billion in natural gas trading. Recycled French homilies could not explain the largest derivative trading loss in history. Banks do not want to admit that risk taking and profits from speculation are part and parcel of modern finance.


Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Kerviel may have been the rogue trader with the biggest loss, but he’s by no means unique. Before Kerviel, there was Kweku Adoboli (UBS, 2011, $2.3 billion loss), Boris Picano-Nacci (Caisse d’Epargne, 2008, €751 million loss), Chen Jiulin (China Aviation Oil, 2005, $550 million loss), John Rusnak (Allied Irish Banks, 2002, $691 million loss), Yasuo Hamanaka (Sumitomo, 1996, $2.6 billion loss), Nick Leeson (Barings, 1995, £827 million loss), and many others before them. Loss aversion applies not only to traders and investors, but to any individual facing a choice between a sure loss and a riskier alternative that may bring redemption. The same pressures even apply to those people charged with governing financial institutions. Take bank regulators, for example. When a bank supervisor first identifies a troubled bank—for example, one that invested its deposits in bad loans that have defaulted—she must decide whether to require the bank to raise additional capital, or to wait and see whether the bank’s assets will rebound.


pages: 1,088 words: 297,362

The London Compendium by Ed Glinert

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1960s counterculture, anti-communist, Big bang: deregulation of the City of London, Bob Geldof, British Empire, Brixton riot, Corn Laws, Dava Sobel, double entry bookkeeping, Edward Lloyd's coffeehouse, Exxon Valdez, hiring and firing, invention of the telegraph, Isaac Newton, John Harrison: Longitude, John Snow's cholera map, Khartoum Gordon, Mahatma Gandhi, mass immigration, Nick Leeson, price stability, Ronald Reagan, Sloane Ranger, South China Sea, South Sea Bubble, spice trade, the market place, trade route, union organizing, V2 rocket

Barings had insufficient funds to pay the huge debt, but City powerbrokers reasoned that if the bank collapsed it would drag down with it too many firms and confidence in the Square Mile would be shattered. So in November 1890 a consortium led by the Governor of the Bank of England bailed it out, resulting in the bank’s being reconstituted as Baring Brothers & Co. Ltd and Revelstoke ruined. Around 100 years later a trader, Nick Leeson, working out of Barings’ Singapore office, lost $1.3 billion after a gamble that the Japanese stock exchange would rise went awry. Leeson blamed management in London for the débâcle, they in turn blamed him, but he was arrested and held for nine months in a Frankfurt prison before being extradited to Singapore where he was given a six-and-a-half-year sentence. The bank collapsed and the parts that were salvageable were subsumed into the ING corporation in the late 1990s