Nick Leeson

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Ugly Americans: The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions by Ben Mezrich

index arbitrage, index card, invisible hand, Nick Leeson, profit motive, proprietary trading, short selling, vertical integration, white picket fence

It wasn’t the facts that mattered, it was the psychology behind them. Because this new class of expats needed to understand that it was the psychology that led people like Joe Jett and Nick Leeson down the paths of disaster. The psychology of the high-stakes gambler. The psychology of the adrenaline junkie, the big-time player, who chased the wrong thrill and the wrong high off the wrong goddamn cliff. “By January of 1995,” Danville droned on, “Nick Leeson, Barings’s star trader in Singapore, had accrued more than 1.3 billion dollars in losses, hidden in an error account he’d named 88888—‘the Five Eights.’ To try and recoup these losses before anyone found out about them, Leeson bet them on the Nikkei.

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0 222 889 -2371 0+ 41 85 29 4161 624 39 3⁄ 16 37 5⁄ 16 381 3⁄ 16 +1 1⁄ 4 11 1⁄ 8 11 1⁄ 8 52 51 3⁄ 16 51 5⁄ 8 - 1⁄ 16 6624 39 3⁄ 16 37 5⁄ 16 UGLY AMERICANS The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions Ben Mezrich - 1⁄ 8 6624 39 3⁄ 16 37 5⁄ 16 381 3⁄ 16 +1 1⁄ 4 11 1 Author’s Note While this is a true story, many of the names are fictitious, including “John Malcolm.” I have used the real names of historical figures or those widely reported in the news, such as Joseph Jett, Nick Leeson, and Richard Li. Otherwise, no character in the book is meant to refer specifically to a real-life person. Also, regarding job titles and positions at companies that were actually in existence at the time the events in the book took place, they should not be read to refer to any specific people who were actually employed by those companies at any time.

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An island of white faces in an ocean of Japanese, competing with one another to reap massive profits from the Asian markets. “Why are we doing better than the others?” he asked. There was a brief silence from the table, then the third Mike, a tennis player from Yale with a crooked smile and thick red hair, said, “It’s you guys, actually. It’s Carney. Nobody can match his profits. Not even Nick Leeson, Barings’s boy in Singapore. He’s supposed to be good, one of the best, but he’s no Dean Carney, and even he knows it.” There was an edge to the third Mike’s comments, and Malcolm wondered if it was more than simple jealousy. “So Carney’s quite a legend around here.” Akari nodded. “Carney is a legend all over Southeast Asia.

Rogue Trader by Nick Leeson

corporate governance, margin call, Nick Leeson, price anchoring, proprietary trading, the market place

Published by Sphere 978-0-7515-6364-1 Copyright © 1996 Nick Leeson The moral right of the author has been asserted. New Introduction copyright © 2015 Nick Leeson 2: Press Association, 8: Kevin Phillips, 10: Kevin Phillips, 11: Kevin Phillips, 29: Associated Press/Topham, 30: Rex Features, 31: Paul Massey/FSP, 32: Mirror Syndication International, 33: Dillon Bryden/Sygma London, 36: Press Association, 37: Kevin Phillips All other photographs are from private collections All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of the publisher.The publisher is not responsible for websites (or their content) that are not owned by the publisher.

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‘There’s going to be a lot of money on Argentina,’ I nodded. ‘Really? Without Maradona?’ ‘So the locals say.’ ‘Sounds interesting.’ ‘OK,’ I said, detaching myself from the door frame of his office. ‘Better get back downstairs.’ ‘Fuck!’ I cursed as the lift doors closed behind me. ‘Ash Lewis!’ ‘Can Nick Leeson from Barings please report to reception, Nick Leeson from Barings to reception, please,’ the SIMEX tannoy announced. I straightened my jacket and tie and wiped my hands on my trousers. Ron Baker and Ash Lewis were waiting by the barrier. They made an incongruous couple – Ron was short, dark and bearded, with a bit of a belly pushing out in front of him.

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The publisher’s blurb – “His Own Amazing Story” – is for once amply justified’ Irish Times ‘A graphic eye-opener’ Daily Mail ‘Reads as a real-life adventure story’ Times Literary Supplement ‘It’s got money, it’s got power, it’s got corruption… and if it wasn’t true you could be forgiven for thinking someone with a fertile imagination had dreamt the whole thing up… A cracking good read with a brilliant insight into the world of high-powered banking’ Irish News Nick Leeson now lives peacefully on the West Coast of Ireland with his wife Leona and their three children, Kersty, Alex and Mackensey. Nick is an accomplished and sought after Conference and after-dinner speaker and has lectured on a number of University and MBA Business courses. www.nickleeson.com live@nmp.co.uk Nick provides consultancy, training, advisory and investigation services through his latest venture, Risk Team.

Lying for Money: How Fraud Makes the World Go Round by Daniel Davies

Alan Greenspan, bank run, banking crisis, Bernie Madoff, bitcoin, Black Swan, Bretton Woods, business cycle, business process, collapse of Lehman Brothers, compound rate of return, cryptocurrency, fake it until you make it, financial deregulation, fixed income, Frederick Winslow Taylor, Gordon Gekko, high net worth, illegal immigration, index arbitrage, junk bonds, Michael Milken, multilevel marketing, Nick Leeson, offshore financial centre, Peter Thiel, Ponzi scheme, price mechanism, principal–agent problem, railway mania, Ronald Coase, Ronald Reagan, Savings and loan crisis, scientific management, short selling, social web, South Sea Bubble, tacit knowledge, tail risk, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, time value of money, vertical integration, web of trust

Something like the Brazilian straddle is the basic engine of a control fraud, much as trade credit is the engine of the long firm. The victim is usually someone who understands that risk is intrinsic to some part of his or her economic life, but hopes to manage it by delegation to a trusted outsider. Nick Leeson Nick Leeson was luckier than many convicted fraudsters in that he got Ewan McGregor to play him (and Anna Friel to play his wife) in the film of his story. In real life he had neither Hollywood dentistry nor a film-star physique; by the time he was captured, he had stress-eaten so many tubes of Fruit Pastilles that they had destroyed the enamel on his teeth.

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People like this do exist (albeit rarely), and we will meet some of them later on. But they are not typical of white-collar crime. The interesting questions are never about individual psychology. There are plenty of larger-than-life characters. But there are also plenty of people like Enron’s Jeff Skilling and Baring’s Nick Leeson: aggressively dull clerks and managers whose only interest derives from the disasters they caused. And even for the real craftsmen the actual work is, of necessity, incredibly prosaic. Even a master fantasist like Sir Gregor spent a lot of his time calculating agricultural yield tables and dealing with land claim documentation.

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There is nothing sadder in some ways than the managers of a fraudulent firm who then find they have a commercial success on their hands. They try desperately to repay their first plunderings, but the canker in the rose spreads inexorably and eats it all up. One way to close the gap, by the way, is to take big risks with the money which hasn’t been stolen yet. This is how ‘rogue’ traders like Nick Leeson tend to expand their concealed losses to levels that blow up banks. But it’s by no means unknown for even a small-time embezzler to take the float of company cash to a racetrack or casino in a last desperate gamble for redemption. But if compound growth is such a killer, how do frauds keep going for so long?

Day One Trader: A Liffe Story by John Sussex

algorithmic trading, Boris Johnson, credit crunch, fixed income, John Meriwether, Long Term Capital Management, Neil Kinnock, Nick Leeson, offshore financial centre, proprietary trading, Reminiscences of a Stock Operator, statistical arbitrage

I would also like to thank the following who have either contributed or agreed to let me write about them (there are no pseudonyms in this book): Clive Beauchamp, Darren Summerfield, Peter Lester, Nigel Bewick, David Roser, Keith Penny, Ted Ersser and David Helps who all worked with me at Sussex Futures and Alan Dickinson, Terry Crawley, Richard Crawley, David Wenman, Nigel Ackerman, Kevin Thomas, Tony Laporta, Danny Jordan, Mark Green and Roger Carlsson from the floor, also Nick Leeson, Matt Blom and Spencer Oliver. Finally Nick Carew Hunt, James Barr and especially John Foyle from Liffe and all the staff at John Wiley & Sons for their great support. Apologies to anyone I have forgotten. 1 The Chicago Inferno T he feeling captivated me. I opened the wooden swing doors and a barrage of noise erupted from an octagonal arena the size of a vast football pitch.

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In essence, arbitrage involves buying a futures contract at a cheap price in one market while simultaneously selling at a higher price in another. The profit margins on this strategy are small so D AY O N E T R A D E R : A L I F F E S T O R Y | 55 arbitrageurs deal in large volumes to generate a good income. The most infamous arbitrager of them all was Nick Leeson. He was supposed to be using arbitrage to profit from differences in the prices of the Nikkei-225 futures contracts listed on the Osaka Securities Exchange in Japan and SIMEX in Singapore. Of course, his dealing strategies veered somewhat from being low risk. Spread traders would try to get an edge by trading two contract months at the same time – buying one and selling the other – before possibly buying back the short month to run a long position.

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But as far as the public was concerned, these types of incidents were just part and parcel of the world of finance and nobody really understood or cared what went on. People across the world would only wake up to risks posed by derivatives when a lad from Watford single-handedly bankrupted one of the world’s most famous banks. The words ‘rogue trader’ are synonymous with one man – Nick Leeson. He is not the first or last man to lose hundreds of millions of dollars on the financial markets. Others have followed similarly destructive paths. The most recent example at the time of writing was that of Jerome Kerviel, a judo enthusiast who somehow managed to accumulate losses of # 4.9 billion right under the noses of the senior management of Société Générale in the investment bank’s Paris head office.

Snakes and Ladders: The Great British Social Mobility Myth by Selina Todd

assortative mating, Bletchley Park, Boris Johnson, collective bargaining, conceptual framework, coronavirus, COVID-19, deindustrialization, deskilling, DIY culture, emotional labour, Etonian, fear of failure, feminist movement, financial independence, full employment, Gini coefficient, greed is good, housing crisis, income inequality, Jeremy Corbyn, Kickstarter, Mahatma Gandhi, manufacturing employment, meritocracy, Nick Leeson, offshore financial centre, old-boy network, profit motive, rent control, Right to Buy, school choice, social distancing, statistical model, The Home Computer Revolution, The Spirit Level, traveling salesman, unpaid internship, upwardly mobile, urban sprawl, women in the workforce, Yom Kippur War, young professional

These foreign banks were more open to recruiting men (and more rarely women) without public school or Oxbridge credentials.21 And they were expanding. Those upwardly mobile men who got a foothold in the City usually owed it to the creation of new jobs. Nick Leeson carved out a niche for himself in those branches of speculation that were ‘expanding rapidly, and few people really understood how they worked’. This offered some men the chance to scale the ladder.22 But rising through the financial hierarchy was far harder for those who began life on a lower rung. Nick Leeson observed that men from public schools or with contacts in the banks quickly became traders on the stock exchange floor, which was where ‘the real money was being made’.

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Those in south-east England were best placed to take advantage of the deregulation and expansion of the stock market. Often they came from families with no connection to the public sector, and where older strategies for getting on in life had persisted despite the welfare state. Among them was Nick Leeson. In 1985 eighteen-year-old Nick, the son of a Watford plasterer, got a job as a clerk at Coutts bank. Nick’s mother, who worked in factory, cleaning and secretarial work, was a huge influence on him. He felt indebted to her hard work. ‘She had fought for us all our lives’, he recalled. ‘Even if I’d wanted a silly thing like a Pringle sweater because all my friends at school had one, she’d work some extra overtime and manage to buy it.’

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Like James McBey back in the 1910s, he was aware that he had no support or patronage to rely on. ‘I had a clear sense of having to do it all myself’, he recalled.23 Women, meanwhile, continued to enter business and finance in very small numbers. The City was a macho world where cut-throat competition was strongly encouraged, bolstered by long drinking sessions after work. Nick Leeson, whose idea of a good night out was to ‘get out there and behave like an animal’, could fit in.24 Women could not. The few who did well tended to come from well-connected, wealthy families. Nicola Horlick was born in 1960 and educated at private school and Oxford, after which she worked for her family’s import firm.

Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, 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, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, 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, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, 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.

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,” 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.

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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.

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

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, 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, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, 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, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, 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

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.

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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.

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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.

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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, Bear Stearns, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, Glass-Steagall Act, index fund, invisible hand, junk bonds, light touch regulation, margin call, Michael Milken, moral hazard, Nick Leeson, Northern Rock, proprietary trading, 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, two and twenty, zero-sum game

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.

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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.

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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.

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

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

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.

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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.

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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.

Start With Why: How Great Leaders Inspire Everyone to Take Action by Simon Sinek

Apple II, Apple's 1984 Super Bowl advert, Black Swan, business cycle, commoditize, Do you want to sell sugared water for the rest of your life?, hiring and firing, John Markoff, low cost airline, Neil Armstrong, Nick Leeson, Pepsi Challenge, RAND corporation, risk tolerance, Ronald Reagan, shareholder value, Steve Ballmer, Steve Jobs, Steve Wozniak, The Wisdom of Crowds, trade route

Southwest’s remarkable ability to solve problems, Apple’s remarkable knack for innovation and the Wright brothers’ ability to develop a technology with the team they had were all possible for the same reason: they believed they could and they trusted their people to do it. The Definition of Trust Founded by Sir Francis Baring in 1762, Barings Bank was the oldest merchant bank in England. The bank, which survived the Napoleonic Wars, World War I and World War II, was unable to survive the predilection for risk of one self-proclaimed rogue trader. Nick Leeson single-handedly brought down Barings Bank in 1995 by performing some unauthorized, extremely high-risk trades. Had the proverbial winds continued to blow in the right direction, Leeson would have made himself and the bank extremely rich and he would have been hailed as a hero. But such is the nature of unpredictable things like the weather and financial markets.

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In such a case, the effort may be good for the individual and it may be good for the group, but the benefits, especially for the group, come with a time limit. Over time, this system will break down, often to the detriment of the organization. Developing trust to encourage people other than those with a predilection for risk, like Nick Leeson, is a better long-term strategy. Great organizations become great because the people inside the organization feel protected. The strong sense of culture creates a sense of belonging and acts like a net. People come to work knowing that their bosses, colleagues and the organization as a whole will look out for them.

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New York: Free Press, 2004. 97 Langley saw the airplane as his ticket to fame and fortune: Tobin, personal interview, February 2009. 97 “Wilbur and Orville were true scientists”: Tobin, personal interview, February 2009. 98 He found the defeat humiliating: Tobin, To Conquer the Air. 101 Southwest Airlines is famous for pioneering the ten-minute turnaround: Paul Burnham Finney, “Loading an Airliner is Rocket Science,” New York Times, November 14, 2006, http://travel2.nytimes.com/2006/11/14/business/14boarding.html?pagewanted=print. 103 “People at the London end of Barings”: Nick Leeson and Edward Whitley. Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World. New York: Little, Brown and Company, 1996. 105 Southwest will not tolerate customers who abuse their staff: Freiberg and Freiberg, Nuts! 106 A one-star general, John Jumper was an experienced F-15 pilot: General Lori Robinson, personal interview, October 2008. 108 he served as chief of staff of the U.S.

Beautiful security by Andy Oram, John Viega

Albert Einstein, Amazon Web Services, An Inconvenient Truth, Bletchley Park, business intelligence, business process, call centre, cloud computing, corporate governance, credit crunch, crowdsourcing, defense in depth, do well by doing good, Donald Davies, en.wikipedia.org, fault tolerance, Firefox, information security, loose coupling, Marc Andreessen, market design, MITM: man-in-the-middle, Monroe Doctrine, new economy, Nicholas Carr, Nick Leeson, Norbert Wiener, operational security, 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, SQL injection, statistical model, Steven Levy, the long tail, The Wisdom of Crowds, Upton Sinclair, web application, web of trust, zero day, Zimmermann PGP

In this section, we analyze two situations where catastrophic security incidents occurred and discuss how an effective security metrics program might have alleviated or even eliminated suffering and loss. Barings Bank: Insider Breach Let us first look at a breach with the most dire of consequences: bankruptcy. 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.

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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. He failed his final math exam and left school with few qualifications. Despite this, he managed to land a job as a bank clerk, which led to a succession of additional jobs with other banks, ending up with Barings in the early 1990s.

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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 ).

Systematic Trading: A Unique New Method for Designing Trading and Investing Systems by Robert Carver

asset allocation, automated trading system, backtesting, barriers to entry, Black Swan, buy and hold, cognitive bias, commodity trading advisor, Credit Default Swap, diversification, diversified portfolio, easy for humans, difficult for computers, Edward Thorp, Elliott wave, fear index, fixed income, global macro, implied volatility, index fund, interest rate swap, Long Term Capital Management, low interest rates, margin call, Market Wizards by Jack D. Schwager, merger arbitrage, Nick Leeson, paper trading, performance metric, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, survivorship bias, systematic trading, technology bubble, transaction costs, Two Sigma, Y Combinator, yield curve

• Tail protect hedge funds that try and provide cheap insurance against large market moves, as practised by Nassim Taleb amongst others. • Short option strategies, e.g. selling equity option ‘straddles’ (pairs of call and put options). Such as Nick Leeson of Barings who lost around $1 billion selling straddles in January 1995.*** * See The Greatest Trade Ever by Gregory Zuckerman. ** See When Genius Failed by Roger Lowenstein. *** See Rogue Trader by none other than Nick Leeson. Trading speed: Fast vs Slow Very slow (average holding period: several months to many years) Very slow systems look almost like static portfolios, with additional gradual changes in position coming from their trading rules.

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Read after Mallaby, if you can cope with the sometimes technical treatment. 275 Systematic Trading When Genius Failed: The Rise and Fall of Long-Term Capital Management, Roger Lowenstein, 2001, Random House A negative skew disaster and a real-life example of the disadvantage of leveraging up too much on low volatility positions. Probably the most useful market history in this list and should be compulsory reading for anyone contemplating negative skew trading. Rogue Trader, Nick Leeson, 1999, Sphere Very famous example of when negative skew goes wrong; amongst other things Nick lost much of his money selling option straddles. Optional reading. The Greatest Trade Ever, Gregory Zuckerman, 2010, Penguin A great story about a positive skew trade that worked: John Paulson’s bearish bet on mortgage backed securities.

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

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, 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, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

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.

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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.

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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?

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

Alan Greenspan, Albert Einstein, Alvin Toffler, behavioural economics, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, disinformation, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, global macro, Jim Simons, Lao Tzu, Long Term Capital Management, managed futures, market bubble, market microstructure, Market Wizards by Jack D. Schwager, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Sharpe ratio, systematic trading, the scientific method, three-martini lunch, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

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.

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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.

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, 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, currency risk, 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, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, 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, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, 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

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.

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‘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.

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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.

Adapt: Why Success Always Starts With Failure by Tim Harford

An Inconvenient Truth, Andrew Wiles, banking crisis, Basel III, behavioural economics, Berlin Wall, Bernie Madoff, Black Swan, Boeing 747, business logic, car-free, carbon footprint, carbon tax, 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, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, financial engineering, Firefox, food miles, Gerolamo Cardano, global supply chain, Great Leap Forward, Herman Kahn, 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, SpaceShipOne, special economic zone, spectrum auction, Steve Jobs, supply-chain management, tacit knowledge, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen, Tyler Cowen: Great Stagnation, Virgin Galactic, web application, X Prize, zero-sum game

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.

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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.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

This same issue of intervention reappeared with the question of whether the US government should have rescued Chrysler in 1979, New York City in 1975 and the Continental Illinois Bank in 1984. (In fact Continental Illinois failed, although the depositors in the bank were made whole.). Similarly, should the Bank of England have rescued Baring Brothers in 1995 after the rogue trader Nick Leeson in its Singapore branch office had depleted the firm’s capital through hidden transactions in option contracts? The question appears whenever a group of borrowers or banks or other financial institutions incurs such massive losses that they are likely to be forced to close, at least under their current owners.

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Crash and panic, with their motto of sauve qui peut, induce many to cheat in the effort to forestall bankruptcy or some other financial disaster. A little cheating today may avert a catastrophe tomorrow. When the boom ends and the losses become apparent, some individuals will make a big bet in the hope that a successful outcome will provide an escape from what otherwise would be a disaster. Nick Leeson was a modest functionary – one of five or six employees – in the Singapore office of Baring Brothers, the venerable London merchant bank. Leeson traded options on stocks and especially options on the Nikkei, the primary stock price index in Tokyo. The London office of Barings had set a limit on Leeson’s position, the maximum amount of the firm’s capital that he could risk.

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These partnerships had names taken from Star Wars – JEDI, Chewco, and so on. The partnerships would borrow from the banks and other lenders as if they were independent from Enron and then invest the funds with Enron. Enron used some of the cash obtained from the SFV’s borrowings to support the price of its own stock. That is more or less a Nick Leeson go-for-broke strategy; if the stock price should fall, then the value of the partnerships would decline and they would be ‘under water’. But that is the traditional practice and it had been used by American railroads in the nineteenth century. The collapse of Enron led to the demise of Arthur Andersen, formerly the most respected of the large US accounting firms – although in the previous few years Andersen had been sued by the creditors of the Baptist Hospital of Arizona, Waste Management and several other audit clients that had gone belly-up.

Unknown Market Wizards by Jack D. Schwager

3D printing, algorithmic trading, automated trading system, backtesting, barriers to entry, Black Monday: stock market crash in 1987, Brexit referendum, buy and hold, commodity trading advisor, computerized trading, COVID-19, cryptocurrency, diversification, Donald Trump, eurozone crisis, family office, financial deregulation, fixed income, forward guidance, index fund, Jim Simons, litecoin, Long Term Capital Management, margin call, market bubble, Market Wizards by Jack D. Schwager, Nick Leeson, performance metric, placebo effect, proprietary trading, quantitative easing, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, Sharpe ratio, short squeeze, side project, systematic trading, tail risk, transaction costs

I bought a Porsche, and I was planning how I would live like a billionaire. Then the bull market ended. Within six months, I blew out the entire account. All I had left was the Porsche. I switched jobs, going to another brokerage firm. Eventually, I started trading my account again. I made a lot of money when Nick Leeson blew out. [Nick Leeson was a trader for Barings Bank who was able to successfully hide a string of mounting losses. By the time his deception was uncovered, he had lost $1.4 billion, causing the collapse of Barings Bank.] How did you make money off of that event? Leeson had a massive short option position in the Nikkei stock index futures when he was found out.

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They even had an outdoor swimming pool, which is ridiculous in the north of England because it barely gets above 20° Celsius [68° Fahrenheit] in the summer. I remember walking away with my mom and telling her, “I’m going to buy that house one day.” That experience set my ambition. I had no idea how; I just knew that I wanted to be rich. The other thing that got me interested in trading was the movie about Nick Leeson [Rogue Trader], who broke Barings Bank. The part about him being a shady character, of course, is not good. But I remember watching him on the trading floor with all the shouting and screaming, thinking, “That looks so cool.” How old were you then? I was in my young teens. I think you are the first trader I ever met who was inspired to become a trader by that movie.

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

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, 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, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

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.

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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.)

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

Abraham Maslow, airport security, Alvin Toffler, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, Dunbar number, experimental economics, Fall of the Berlin Wall, financial deregulation, Future Shock, Garrett Hardin, George Akerlof, hydraulic fracturing, impulse control, income inequality, information security, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Bogle, John Nash: game theory, joint-stock company, Julian Assange, language acquisition, longitudinal study, mass incarceration, meta-analysis, microcredit, mirror neurons, moral hazard, Multics, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, off-the-grid, offshore financial centre, Oklahoma City bombing, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, Recombinant DNA, 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, Timothy McVeigh, too big to fail, traffic fines, Tragedy of the Commons, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, Yochai Benkler, zero-sum game

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.

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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.

How to Kick Ass on Wall Street by Andy Kessler

Andy Kessler, Bear Stearns, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, eat what you kill, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, low interest rates, 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

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.

The Greed Merchants: How the Investment Banks Exploited the System by Philip Augar

Alan Greenspan, Andy Kessler, AOL-Time Warner, barriers to entry, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, business cycle, buttonwood tree, buy and hold, capital asset pricing model, Carl Icahn, commoditize, corporate governance, corporate raider, crony capitalism, cross-subsidies, deal flow, equity risk premium, financial deregulation, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Gordon Gekko, high net worth, information retrieval, interest rate derivative, invisible hand, John Meriwether, junk bonds, Long Term Capital Management, low interest rates, Martin Wolf, Michael Milken, new economy, Nick Leeson, offshore financial centre, pensions crisis, proprietary trading, regulatory arbitrage, risk free rate, Sand Hill Road, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, systematic bias, Telecommunications Act of 1996, The Chicago School, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, tulip mania, value at risk, yield curve

The industry has always attracted free spirited, independent minded individuals who think they know best. Managers have to know when to stand up to their stars and when to let them have their own way, when to back off and allow entrepreneurship its head, and when to turn every stone. When do you leave a Joseph Jett or a Nick Leeson to do their own thing because their results are great, and when do you dig up the drains because you smell a rat? Risk taking is an essential part of the business and managers have to create an environment where people take necessary risks without being reckless. It is an instinctive thing. A reason that firms such as GE, generally acclaimed as well managed in the other financial and industrial fields where they operate, had difficulties with investment banking is that it appears not to follow normal business rules.

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Risk awareness had increased after the equity market crisis of 1987 but before 1994 it was not yet engraved in the culture and risk management was still seen as a low status, bureaucratic and not very well paid occupation. After 1994, and particularly after the unsupervised activities of ‘rogue trader’ Nick Leeson brought down Barings, the venerable British investment bank, in 1995, it was taken more seriously. Risk departments increased in size, were staffed by better qualified and better paid people and became more influential. The IT revolution of the nineties helped this new commitment. The internet permitted the real-time data downloads that were needed to feed the risk models.

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

"World Economic Forum" Davos, Adam Curtis, air traffic controllers' union, Alan Greenspan, AOL-Time Warner, 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 cycle, 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, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial engineering, 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, job polarisation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, Larry Ellison, light touch regulation, Londongrad, Long Term Capital Management, low interest rates, low skilled workers, manufacturing employment, market bubble, Martin Wolf, Mary Meeker, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, proprietary trading, Right to Buy, rising living standards, Robert Shiller, Robert Solow, 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, 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.

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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.

Money and Government: The Past and Future of Economics by Robert Skidelsky

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

The ‘self-serving’ culture of banks needed 365 A N e w M ac roe c onom ic s to be challenged, as without this, banks would circumvent the regulations.20 ResPublica proposed a banker’s oath, modelled on the Hippocratic oath sworn by doctors, which would enjoin a duty of care on bankers towards their customers. There are proposals to detach financial compensation from shortterm stock-price performance, to fine bankers for unethical practices, and to cap or claw back bonuses. Nick Leeson, the original ‘rogue trader’ whose exploits brought down Barings Bank in 1995, has cut through the thinness of these precautions: ‘If we are going to try and change a banker’s bonus structure, I think within 15 minutes they will have a new structure that works in the same way. They have the best accountants and lawyers.’21 The root of the problem is the greed for money.

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The Liikanen Report proposed a similar system of ring-fencing for banks in the European Union, but has yet to be legislated. 14 ‘Riskier’ assets – loans held by the bank where the borrowers had higher chances of defaulting – were given a larger weighting than ‘safer’ assets, such as cash or government bonds. 15 Congdon and Hanke (2017). 16 Riecher and Black (2013); see also Wallace (2013). 17 Prynn (2016). 18 Foreword to ‘The Bank of England’s approach to resolution’, Bank of England (2017d). 19 Hoenig (2014). 20 Restoring ‘virtue’ in banking is defined as the ‘re-introduction of purpose into banking as both an economic need and a moral necessity’ and to promote the ethos required to inculcate that purpose ‘into all of the industries’ operations and behaviour’. 21 Nick Leeson, quoted in Baxter (2014). 22 Lord Turner, quoted in Private Debt Project (2015). 424 No t e s 23 For an individual bank, lending against real estate seems more secure, but system-wide ‘lending against real estate – and in particular against existing real estate whose supply cannot be easily increased – generates selfreinforcing cycles of credit supply, credit demand, and asset prices’ (ibid.). 24 Woods (2017). 25 Keynes (1980b), p. 384. 26 Source: World Bank (2017d). 27 The stationary state was later developed into the idea of balanced growth, with population and wealth increasing at the same rate, and unchanged tastes. 28 Summers (2013, 2014); Krugman (2013a, 2013b). 29 Keynes (1978), p. 328.

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Bank of England Monetary Policy Committee (1999), The Transmission Mechanism of Monetary Policy. Available at: http://www.bankofengland. co.uk/publications/Documents/other/monetary/montrans.pdf [Accessed 10 July 2017]. 428 Bi bl io g r a p h y Barro, R. J. (1974), Are government bonds net wealth? Journal of Political Economy, 82 (6), pp. 1095–117. Baxter, D. (2014), The big interview: Nick Leeson, the original rogue trader. Business Reporter. 3 August. Available at: https://staging.businessreporter.co.uk/2014/08/03/the-big-interview-nick-leeseon-the-original-roguetrader-on-regrets-and-revival/ [Accessed 6 December 2017]. BBC (2010), Irish deficit balloons after new bank bail-out. Available at: http://www.bbc.co.uk/news/business-11441473 [Accessed 4 July 2017].

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

Alan Greenspan, asset-backed security, bank run, Basel III, Bear Stearns, beat the dealer, Big bang: deregulation of the City of London, Bletchley Park, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial engineering, financial innovation, G4S, Glass-Steagall Act, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, long term incentive plan, low interest rates, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, proprietary trading, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk, warehouse robotics

If New Labour won power there would have to be changes in the way the City of London and financial services were regulated, in order to make them fit for Brown’s new era. City scandals certainly suggested change was necessary. In 1991 BCCI, the Bank of Credit and Commerce International, the London-based international bank, imploded. Then the historic merchant bank Barings (founded 1762) was brought down in 1995 by the ‘rogue trader’ Nick Leeson. The answer, Brown concluded, was a dose of New Labour modernisation, and a shift to new systems and regulators not dependent on what he saw as the dominance of the old school tie and suspect connections. On Tuesday 6 May 1997, the new Chancellor made his first move. Less than a week before, Blair and Brown had not merely defeated a tired Tory Party contaminated by allegations of sleaze.

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He had left the auditor Arthur Andersen in 2001, only months before it collapsed in 2002 over its involvement in the Enron scandal, and he later departed the FSA in July 2007, hailed at the time for the good job he had done regulating financial services. Arriving at the FSA’s offices in the North Colonnade of Canary Wharf, Tiner was no greenhorn when it came to banks. He had led the team at Arthur Andersen hired by the Bank of England to investigate the collapse of Barings Bank when it was brought down by the activities of the trader Nick Leeson in 1995. Tiner knew about bank runs and how quickly a piece of exotic trading could go wrong. The FSA boss, supported by the organisation’s new chairman Callum McCarthy, subscribed to a then fashionable theory. If the banks had become so intricate, with vast risk-management teams and access to the cleverest thinking and computing, then no state regulator or state employee could hope to outsmart them.

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

Asian financial crisis, behavioural economics, 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, precautionary principle, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, Suez crisis 1956, tacit knowledge, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, vertical integration, Washington Consensus, Westphalian system

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.

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, 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, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, 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, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

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.

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., 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.

Rule Britannia: Brexit and the End of Empire by Danny Dorling, Sally Tomlinson

3D printing, Ada Lovelace, Alfred Russel Wallace, anti-communist, anti-globalists, Big bang: deregulation of the City of London, Boris Johnson, Brexit referendum, British Empire, Bullingdon Club, Cambridge Analytica, centre right, colonial rule, Corn Laws, correlation does not imply causation, David Ricardo: comparative advantage, deindustrialization, disinformation, Dominic Cummings, Donald Trump, Edward Snowden, electricity market, en.wikipedia.org, epigenetics, Etonian, falling living standards, Flynn Effect, gentrification, housing crisis, illegal immigration, imperial preference, income inequality, inflation targeting, invisible hand, Jeremy Corbyn, knowledge economy, market fundamentalism, mass immigration, megacity, New Urbanism, Nick Leeson, North Sea oil, offshore financial centre, out of africa, Right to Buy, Ronald Reagan, Silicon Valley, South China Sea, sovereign wealth fund, spinning jenny, Steven Pinker, Suez canal 1869, Suez crisis 1956, The Wealth of Nations by Adam Smith, Thomas Malthus, University of East Anglia, Wayback Machine, We are the 99%, wealth creators

One wrong move and your profits can be wiped out, your reputation destroyed, and your job gone.30 With no sense of what might be just around the corner, the BBC ended its report on City traders in January 2008 with the following warning: ‘But the system can break down, as in the case of Barings in 1995. There, Nick Leeson was able to hide huge losses, as he was the trader and manager and looked after the back office.’ And then, within a few months of the BBC making that statement, the entire banking system of London was in freefall. No longer was one ‘rogue trader’ the bad apple: it turned out that the whole barrel had gone sour. When British banker turned rogue trader Nick Leeson was jailed for his exploits in 1995, he was unlucky to have been caught out when the trades went sour. In 2008, thousands of trades went sour and no one was jailed, despite such similar circumstances.

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

Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Bear Stearns, Black-Scholes formula, Bob Litterman, Bonfire of the Vanities, book value, Bretton Woods, Brownian motion, business cycle, business process, butter production in bangladesh, buy and hold, 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, currency risk, discounted cash flows, disintermediation, diversification, Donald Knuth, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, full employment, George Akerlof, global macro, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, Ivan Sutherland, John Bogle, John von Neumann, junk bonds, linear programming, Loma Prieta earthquake, Long Term Capital Management, machine readable, margin call, market friction, market microstructure, martingale, merger arbitrage, Michael Milken, Myron Scholes, Nick Leeson, P = NP, pattern recognition, Paul Samuelson, pensions crisis, performance metric, prediction markets, profit maximization, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Richard Feynman, Richard Stallman, risk free rate, risk-adjusted returns, risk/return, seminal paper, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, subscription business, 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.

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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.

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

"World Economic Forum" Davos, Alan Greenspan, Bonfire of the Vanities, Bretton Woods, business cycle, carbon tax, 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, It's morning again in America, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, plutocrats, price stability, rent control, Robert Solow, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

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.

How Will You Measure Your Life? by Christensen, Clayton M., Dillon, Karen, Allworth, James

air freight, Black Monday: stock market crash in 1987, Clayton Christensen, disruptive innovation, hiring and firing, invisible hand, Iridium satellite, job satisfaction, late fees, Mahatma Gandhi, Nick Leeson, Silicon Valley, Skype, Steve Jobs, working poor, young professional

All of those people surely began their careers with a true passion for what they were doing. No rising young athlete imagines that he or she will need to find ways to cheat to stay on top. Athletes believe they can work hard enough to earn their success. But then they are faced with that first opportunity to try something that might help them get an edge. Just this once … Nick Leeson, the twenty-six-year-old trader who famously brought down British merchant bank Barings in 1995 after racking up $1.3 billion in trading losses before being detected, suffered exactly this fate and talks eloquently about how marginal thinking led him down an inconceivable path. In hindsight, it all started with one small step: a relatively small error.

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "World Economic Forum" Davos, anti-communist, Anton Chekhov, Berlin Wall, blood diamond, 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, Global Witness, Great Leap Forward, illegal immigration, joint-stock company, low interest rates, market bubble, Mikhail Gorbachev, Nelson Mandela, Nick Leeson, no-fly zone, offshore financial centre, Oklahoma City bombing, Pearl River Delta, place-making, rising living standards, Ronald Reagan, Shenzhen special economic zone , Skype, special economic zone, Stephen Hawking, trade liberalization, trade route, Transnistria, unemployed young men, upwardly mobile

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.

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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?

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

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, book value, break the buck, business cycle, 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 engineering, financial innovation, financial intermediation, fixed income, George Akerlof, Glass-Steagall Act, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, junk bonds, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, Paul Volcker talking about ATMs, peer-to-peer lending, proprietary trading, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, subprime mortgage crisis, 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.

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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.

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

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, Large Hadron Collider, light touch regulation, London Whale, Money creation, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

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.

When Things Start to Think by Neil A. Gershenfeld

3D printing, Ada Lovelace, Bretton Woods, cellular automata, Charles Babbage, Claude Shannon: information theory, Computing Machinery and Intelligence, disinformation, Dynabook, Hedy Lamarr / George Antheil, I think there is a world market for maybe five computers, information security, invention of movable type, Iridium satellite, Isaac Newton, Jacquard loom, Johannes Kepler, John von Neumann, low earth orbit, 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, world market for maybe five computers

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.

Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, 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, Japanese asset price bubble, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, low interest rates, market bubble, Meghnad Desai, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Post-Keynesian economics, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

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.

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, drop ship, Dunning–Kruger effect, en.wikipedia.org, endowment effect, game design, gamification, haute couture, Ian Bogost, jimmy wales, Jony Ive, Kickstarter, late fees, lolcat, loss aversion, Mark Zuckerberg, meta-analysis, Milgram experiment, Monty Hall problem, Netflix Prize, Nick Leeson, Occupy movement, Paradox of Choice, pets.com, price anchoring, recommendation engine, Rory Sutherland, Silicon Valley, Stanford prison experiment, stealth mode startup, Steve Jobs, sunk-cost fallacy, TED Talk, 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.

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, bond market vigilante , bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, foreign exchange controls, Glass-Steagall Act, guns versus butter model, Hyman Minsky, index fund, intangible asset, interest rate swap, inverted yield curve, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", joint-stock company, junk bonds, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, low interest rates, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, proprietary trading, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

But either these models were flawed or the risk managers were simply overwhelmed by the power of the traders, who could point to the short-term profits they were generating. Top traders can take home earnings (including their bonuses) that easily stretch into six figures and often top a million. If not properly monitored, however, their activities can endanger the health of the bank, as Barings found with Nick Leeson and the French bank Société Générale found with Jérôme Kerviel. Derivative instruments, such as futures and options, can be difficult to understand and can behave in unpredictable ways. It can be easier to disguise losses for long periods. Even when traders are not careless or fraudulent, they can just be wrong.

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, 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, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, 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, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, 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.

How to Be Champion: My Autobiography by Sarah Millican

Albert Einstein, call centre, Downton Abbey, index card, Johann Wolfgang von Goethe, Nelson Mandela, Nick Leeson

There’s a kitchen rules one that is so passive-aggressive it practically says ‘Eat this or fuck off’, but in curly writing. Our massive cinema lightbox would regularly be spelt wrong, but it was such a fanny to go back up that we’d just leave it. Some classics included Sphere spelt Spear and the Nick Leeson story Rouge Trader. The bad spelling was everywhere. We’d leave work messages for each other on the white board behind the popcorn stand, where I worked. My favourite was: ‘Deepest appollogies. There’s a projeter falt in sceen 8.’ The first time I ever had a milkshake was at this cinema. There was a milk bar where the kids got hammered (on sugar) and threw balls at the heads of some unfortunate members of staff in Velcro hats.

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History by Liam Vaughan

algorithmic trading, backtesting, bank run, barriers to entry, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Bob Geldof, centre right, collapse of Lehman Brothers, data science, Donald Trump, Elliott wave, eurozone crisis, family office, financial engineering, Flash crash, Great Grain Robbery, high net worth, High speed trading, information asymmetry, Jeff Bezos, Kickstarter, land bank, margin call, market design, market microstructure, Market Wizards by Jack D. Schwager, Navinder Sarao, Nick Leeson, offshore financial centre, pattern recognition, Ponzi scheme, proprietary trading, Ralph Nelson Elliott, Reminiscences of a Stock Operator, Ronald Reagan, selling pickaxes during a gold rush, sovereign wealth fund, spectrum auction, Stephen Hawking, the market place, Timothy McVeigh, Tobin tax, tulip mania, yield curve, zero-sum game

One of Europe’s biggest banks had been brought to the brink by a lone trader with oversize ambitions and inadequate oversight. Later, Kerviel was sentenced to three years in jail and ordered to pay back the entire $7.2 billion he lost, the biggest fine ever levied on an individual. His desperate buying spree placed him among history’s most notorious rogue traders, a name uttered alongside the likes of Nick Leeson of Barings Bank and Kweku Adoboli at UBS. It also gave a young day trader from Hounslow the capital he needed to take his trading to new heights. CHAPTER 5 ◼ RISE OF THE ROBOTS The more money Nav made, the bigger the positions he took, as if he were climbing the levels of the ultimate computer game.

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, Cornelius Vanderbilt, 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 engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, Glass-Steagall Act, God and Mammon, Golden arches theory, Gordon Gekko, greed is good, Hyman Minsky, income inequality, industrial research laboratory, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", 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, price stability, principal–agent problem, profit motive, proprietary trading, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, 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

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.

I Never Knew That About London by Christopher Winn

Alfred Russel Wallace, British Empire, Clapham omnibus, Desert Island Discs, Edmond Halley, Edward Lloyd's coffeehouse, God and Mammon, Isaac Newton, John Snow's cholera map, joint-stock company, Khartoum Gordon, Mahatma Gandhi, Nelson Mandela, Nick Leeson, old-boy network, Ronald Reagan, South Sea Bubble, Suez canal 1869

They made their reputation by helping to finance the Napoleonic Wars and the Louisiana Purchase, and eventually became so important to the City and the British Government that, in 1890, the Bank of England stepped in to bail them out when Edmund Baring, 1st Lord Revelstoke, lost millions during a reckless venture in Argentina. There was to be no second chance in 1995, however, when Nick Leeson, a young accounts clerk working out of Baring’s Singapore office, lost over £800 million after gambling on the Japanese futures market. Baring’s Bank collapsed and was sold to a Dutch bank for £1. THE WORLD’S OLDEST PSYCHIATRIC HOSPITAL, the BETHLEHEM ROYAL HOSPITAL, was founded just outside Bishopsgate in 1247 as the Priory of St Mary Bethlehem.

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

Alan Greenspan, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, blue-collar work, Bretton Woods, business cycle, clean water, company town, 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, flying shuttle, full employment, George Santayana, global village, Great Leap Forward, hiring and firing, Howard Rheingold, income inequality, informal economy, invention of the sewing machine, invisible hand, Jane Jacobs, Joseph Schumpeter, Kickstarter, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Mahbub ul Haq, Marshall McLuhan, mass immigration, McJob, Meghnad Desai, microcredit, moral panic, Neal Stephenson, Network effects, new economy, Nick Leeson, night-watchman state, North Sea oil, offshore financial centre, pension reform, pension time bomb, pensions crisis, Robert Solow, Ronald Reagan, Silicon Valley, Snow Crash, spinning jenny, The Death and Life of Great American Cities, the market place, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tobin tax, Tragedy of the Commons, two tier labour market, very high income, War on Poverty, winner-take-all economy, working-age population

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.

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

Alan Greenspan, Albert Einstein, Apollo 11, Asian financial crisis, asset-backed security, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, bond market vigilante , British Empire, business cycle, 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, currency risk, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, Ford Model T, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, junk bonds, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, low interest rates, market clearing, mass immigration, Minsky moment, moral hazard, mortgage debt, Neil Armstrong, 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, risk free rate, Savings and loan crisis, seminal paper, 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 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.

Wait: The Art and Science of Delay by Frank Partnoy

algorithmic trading, Atul Gawande, behavioural economics, Bernie Madoff, Black Swan, blood diamond, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, cotton gin, 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, MITM: man-in-the-middle, Nick Leeson, paper trading, Paul Graham, payday loans, Pershing Square Capital Management, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Saturday Night Live, scientific management, six sigma, social discount rate, Spread Networks laid a new fibre optics cable between New York and Chicago, Stanford marshmallow experiment, statistical model, Steve Jobs, systems thinking, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel, work culture

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.

The Unknowers: How Strategic Ignorance Rules the World by Linsey McGoey

Alan Greenspan, An Inconvenient Truth, anti-globalists, antiwork, battle of ideas, behavioural economics, Big Tech, Black Lives Matter, Branko Milanovic, British Empire, Cambridge Analytica, carbon tax, Cass Sunstein, Clive Stafford Smith, conceptual framework, Corn Laws, corporate governance, corporate raider, Credit Default Swap, David Ricardo: comparative advantage, Donald Trump, drone strike, en.wikipedia.org, European colonialism, fake news, Frances Oldham Kelsey, hiring and firing, Howard Zinn, income inequality, it is difficult to get a man to understand something, when his salary depends on his not understanding it, joint-stock company, junk bonds, knowledge economy, market fundamentalism, mass incarceration, Michael Milken, minimum wage unemployment, Naomi Klein, new economy, Nick Leeson, p-value, Paul Samuelson, Peter Thiel, plutocrats, post-truth, public intellectual, race to the bottom, randomized controlled trial, rent-seeking, road to serfdom, Robert Mercer, Ronald Reagan, Scientific racism, selective serotonin reuptake inhibitor (SSRI), Social Justice Warrior, Steven Pinker, Suez crisis 1956, The Chicago School, The Wealth of Nations by Adam Smith, union organizing, Upton Sinclair, W. E. B. Du Bois, Washington Consensus, wealth creators

His superiors claimed he traded without their authorization, but as one law professor points out, ‘the bank failed to investigate even known breaches by Kerviel of market risk limits.’24 A similar pattern can be seen in the collapse of Barings investment bank in the UK in the 1980s, when 27-year-old derivatives trader Nick Leeson lost the bank £860 million. ‘In a sense,’ sociologists Bridget Hutter and Michael Power write, ‘the Barings Bank organization had all the information which might have alerted it to Leeson’s unauthorized trading.’ They decided not to act on this information.25 The usefulness of strategic ignorance in avoiding liability, especially for those at the top of corporate hierarchies, remains a little-understood problem.

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, foreign exchange controls, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, Post-Keynesian economics, price stability, profit maximization, proprietary trading, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, Suez crisis 1956, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, work culture , Y2K

They had never even attempted to talk to me. It followed a familiar pattern. There were plenty of journalists writing about rogue traders and there were plenty of academics spending time in libraries researching rogue traders. Some clearly disliked the rotten apples in the financial industry, but others wrote more sympathetically about Nick Leeson, Kweku Adoboli, Jérôme Kerviel or the others who featured on the shortlist I was now very familiar with. Few, however, seemed to have met any of them, whether in person or electronically. Yet, new theories about how traders behave or why traders sometimes go rogue were continuously proposed based on knowledge in the public domain.

Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

(See Equation 6.7, Volatility Calculation with Equal Probability.) σ= 1 N −1 2 ( xt − μ ) ∑ N t =0 where xt continuously compounded return at time t N number of samples t time, where t = 0 is the most recent sample μ mean return. This is calculated by the formula: μ= 1 N −1 ∑ xt N t =0 Case Study: Which Is the Best VAR to Use? The Collapse of Barings due largely to extremely large trades made by one of its traders, Nick Leeson. Trading out of the Singapore office, Mr. Leeson lost $1.3 billion on unauthorized investments on the Singapore International Money Exchange (SIMEX). These losses wiped out the firm’s entire equity capital and ultimately led to its collapse. At the time of the collapse, even under normal market conditions, this position would have had a 95 percent monthly VAR of approximately $835 million.

Why I Left Goldman Sachs: A Wall Street Story by Greg Smith

Alan Greenspan, always be closing, asset allocation, Bear Stearns, Black Swan, bonus culture, break the buck, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, East Village, fear index, financial engineering, fixed income, Flash crash, glass ceiling, Glass-Steagall Act, Goldman Sachs: Vampire Squid, high net worth, information asymmetry, London Interbank Offered Rate, mega-rich, money market fund, new economy, Nick Leeson, proprietary trading, quantitative hedge fund, Renaissance Technologies, short selling, short squeeze, Silicon Valley, Skype, sovereign wealth fund, Stanford marshmallow experiment, statistical model, technology bubble, too big to fail

He was aware of his status, yet carried himself with an air of quiet confidence and humor, never arrogance. In the early 1990s, as a young derivatives trader in Tokyo, he had done something that has become an urban legend within Goldman Sachs: he made tons of money in the aftermath of the rogue derivatives trades by Nick Leeson that brought down Barings Bank. Remember: for every loser on a trade, there are ultimately winners as well. No one ever confirmed this to me, but Heller’s brilliance was said to have made the firm millions, and in gratitude and recognition of his skills, Goldman made him a partner at age twenty-eight, one of the youngest in the firm’s history.

Broke: How to Survive the Middle Class Crisis by David Boyle

anti-communist, AOL-Time Warner, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, call centre, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, delayed gratification, Desert Island Discs, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial deregulation, financial independence, financial innovation, financial intermediation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, gentrification, Goodhart's law, housing crisis, income inequality, Jane Jacobs, job satisfaction, John Bogle, junk bonds, Kickstarter, knowledge economy, knowledge worker, low interest rates, market fundamentalism, Martin Wolf, Mary Meeker, mega-rich, Money creation, mortgage debt, Neil Kinnock, Nelson Mandela, new economy, Nick Leeson, North Sea oil, Northern Rock, Ocado, Occupy movement, off grid, offshore financial centre, pension reform, pensions crisis, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, positional goods, precariat, quantitative easing, school choice, scientific management, Slavoj Žižek, social intelligence, subprime mortgage crisis, too big to fail, trickle-down economics, Vanguard fund, Walter Mischel, wealth creators, Winter of Discontent, work culture , working poor

He explained how he judged new recruits: ‘If he spends money on parties and racehorses, I say fine, because he will want more.’[30] It was a different world for the Barings managers charged with overseeing this new approach, so alien to the traditional middle classes. It was the world of derivatives and instantaneous electronic trading, and it was their Far East operations that were to bring about their downfall. When Barings Bank collapsed in 1995 because of the activities of one trader, Nick Leeson — who lost $827 million in Singapore betting on currency futures — it turned out that his London bosses had no idea what he was doing. They didn’t really understand the derivatives market that he was trading in, and had seen themselves as rather above finding out. The tragedy of the middle classes is that they still don’t know.

Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World by Tom Wright, Bradley Hope

"World Economic Forum" Davos, Asian financial crisis, Bear Stearns, Bernie Madoff, Boeing 747, collapse of Lehman Brothers, colonial rule, corporate social responsibility, Credit Default Swap, Donald Trump, failed state, family office, financial engineering, forensic accounting, Frank Gehry, Global Witness, high net worth, junk bonds, low interest rates, Michael Milken, middle-income trap, Nick Leeson, offshore financial centre, Oscar Wyatt, Ponzi scheme, Right to Buy, risk tolerance, Savings and loan crisis, Snapchat, South China Sea, sovereign wealth fund, Virgin Galactic

For a financier like Leissner, there was an upside to all that volatility. Among foreign bankers, Asia had developed a reputation as a place to turbocharge a Wall Street career. Competition out in Hong Kong and Singapore was less fierce, and bankers were given more latitude to make big financial trades. In 1995 a rogue trader at Britain’s Barings Bank named Nick Leeson made unauthorized bets on Japanese stocks that led to the bank’s collapse. But as Leissner was arriving, activity in capital markets—the raising of money through selling stocks and bonds—was drying up thanks to the crisis. Lehman wasn’t too exposed, though, and it began to advise the region’s cash-strapped governments on a wave of privatizations to raise money.

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

Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Black Swan, Black-Scholes formula, bonus culture, book value, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delayed gratification, diversification, Edmond Halley, facts on the ground, fear index, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, Greenspan put, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, proprietary trading, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Salesforce, Savings and loan crisis, seminal paper, shareholder value, short selling, statistical model, subprime mortgage crisis, 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.

The Reckoning: Financial Accountability and the Rise and Fall of Nations by Jacob Soll

accounting loophole / creative accounting, bank run, Bear Stearns, Bonfire of the Vanities, British Empire, collapse of Lehman Brothers, computer age, corporate governance, creative destruction, Credit Default Swap, delayed gratification, demand response, discounted cash flows, double entry bookkeeping, financial independence, Frederick Winslow Taylor, Glass-Steagall Act, God and Mammon, High speed trading, Honoré de Balzac, inventory management, invisible hand, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, new economy, New Urbanism, Nick Leeson, Plato's cave, Ponzi scheme, Ralph Waldo Emerson, scientific management, Scientific racism, South Sea Bubble, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route

It became common for British businessmen and bankers to pose for portraits smiling and with their account books open on their desks. These portraits were a sign of confidence in modern techniques of accounting. The Baring Brothers—whose bank was founded in 1762 and folded only in 1995 because of the famed rogue trader Nick Leeson, who was also his branch’s auditor—were painted by Sir Thomas Lawrence poring over their main ledger like conquering explorers with their fingers on a map. A prominent businessman in India, John Mowbray, was depicted sitting cross-legged at his desk, with an air of satisfied confidence, his account books strewn around him as a local messenger brought him a report.

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

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

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

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, 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, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, 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, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, 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, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

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.

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, AOL-Time Warner, asset allocation, automated trading system, barriers to entry, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, equity risk premium, fault tolerance, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, information security, interest rate swap, invention of the telegraph, job automation, junk bonds, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, National best bid and offer, Nick Leeson, open economy, passive investing, pattern recognition, payment for order flow, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, proprietary trading, race to the bottom, random walk, Reminiscences of a Stock Operator, rent-seeking, risk free rate, risk tolerance, risk-adjusted returns, search costs, selection bias, shareholder value, short selling, short squeeze, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, vertical integration, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

The rogues try to hide these losses while they take large positions in an attempt to trade out of their problems. If the positions prove to be profitable, and their subterfuges go undetected, they keep their jobs and may even receive substantial bonuses. If the positions create substantial losses, they lose the jobs that they would have lost anyway. * * * ▶ Nick Leeson and the Fall of Barings Bank In 1994, Nick Leeson was head trader and head of settlements for Baring Futures Singapore, a branch of Barings Bank. His supervisors thought that he engaged in arbitrage trades that would profit from differences in the prices of Nikkei 225 futures contracts listed on the Osaka Securities Exchange (OSE) in Japan and on the Singapore Monetary Exchange (SIMEX).

The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History by David Enrich

Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, call centre, centralized clearinghouse, computerized trading, Credit Default Swap, Downton Abbey, eat what you kill, electricity market, Flash crash, Glass-Steagall Act, Goldman Sachs: Vampire Squid, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, London Whale, Long Term Capital Management, Michael Milken, Navinder Sarao, Nick Leeson, Northern Rock, Occupy movement, performance metric, profit maximization, proprietary trading, Savings and loan crisis, tulip mania, work culture , zero-sum game

He looked at each of them, asking what they did for the bank. “Prop trading,” came the proud response. The CEO looked queasy. After all, what business did a Scottish bank really have employing high-stakes gamblers on the opposite side of the globe? Years later, Hayes would recall that Goodwin appeared to be “a bit nervous that there was some Nick Leeson waiting in the wings in Tokyo.” Leeson was the Singapore-based trader whose unauthorized, money-losing gambles caused the 1995 collapse of Barings Bank, what had been the United Kingdom’s oldest investment house. But Goodwin wanted growth. That meant taking risks—by the company and by its legions of ambitious young traders.

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

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, 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.

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business logic, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, foreign exchange controls, Glass-Steagall Act, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, long term incentive plan, low interest rates, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, proprietary trading, quantitative easing, risk free rate, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, vertical integration, wikimedia commons, yield curve

American banks were cross-subsidizing their entry into London from their hugely profitable home market, driving up staff costs and committing vast amounts of capital. The crunch came in 1995 when the investment banking strategies that the old merchant banks had dived into in 1986 unravelled spectacularly. In February, the venerable house of Barings was brought down by the fraudulent activities of a junior trader in Singapore, Nick Leeson. In May, Warburg, which had unwisely expanded its bond business in 1994 just as the markets crashed and then bungled an attempted merger with the American bank Morgan Stanley, sold itself to the Swiss Bank Corporation. In June, Kleinwort concluded that it was, after all, too small to compete and agreed to sell itself to the German bank Dresdner.

Masters of Management: How the Business Gurus and Their Ideas Have Changed the World—for Better and for Worse by Adrian Wooldridge

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, affirmative action, Alan Greenspan, barriers to entry, behavioural economics, Black Swan, blood diamond, borderless world, business climate, business cycle, business intelligence, business process, carbon footprint, Cass Sunstein, Clayton Christensen, clean tech, cloud computing, collaborative consumption, collapse of Lehman Brothers, collateralized debt obligation, commoditize, company town, corporate governance, corporate social responsibility, creative destruction, credit crunch, crowdsourcing, David Brooks, David Ricardo: comparative advantage, disintermediation, disruptive innovation, do well by doing good, don't be evil, Donald Trump, Edward Glaeser, Exxon Valdez, financial deregulation, Ford Model T, Frederick Winslow Taylor, future of work, George Gilder, global supply chain, Golden arches theory, hobby farmer, industrial cluster, intangible asset, It's morning again in America, job satisfaction, job-hopping, joint-stock company, Joseph Schumpeter, junk bonds, Just-in-time delivery, Kickstarter, knowledge economy, knowledge worker, lake wobegon effect, Long Term Capital Management, low skilled workers, Mark Zuckerberg, McMansion, means of production, Menlo Park, meritocracy, Michael Milken, military-industrial complex, mobile money, Naomi Klein, Netflix Prize, Network effects, new economy, Nick Leeson, Norman Macrae, open immigration, patent troll, Ponzi scheme, popular capitalism, post-industrial society, profit motive, purchasing power parity, radical decentralization, Ralph Nader, recommendation engine, Richard Florida, Richard Thaler, risk tolerance, Ronald Reagan, science of happiness, scientific management, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, Steven Levy, supply-chain management, tacit knowledge, technoutopianism, the long tail, The Soul of a New Machine, The Wealth of Nations by Adam Smith, Thomas Davenport, Tony Hsieh, too big to fail, vertical integration, wealth creators, women in the workforce, young professional, Zipcar

One newly minted boss ruefully complained that “it’s not as lonely at the top as I had hoped.” However, Sloan’s biggest worries would have been about command and control. Companies are finding that the shift from formal to informal management structures is rife with risks. The Baring family lost its bank because the management over-empowered one individual, Nick Leeson. Enron’s embrace of the post-Sloanist mantras of delayering and empowerment allowed it to cover up a financial Ponzi scheme. In theory, all these external sources of control are supposed to be replaced by “trust” and “self-discipline.” But the power of trust and self-discipline is constantly being undermined by all the other things modern management is up to.

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

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, 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, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, 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, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, 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 Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

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.

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

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, 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 engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

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.

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, book value, 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, currency risk, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial engineering, financial innovation, fixed income, friendly fire, full employment, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, junk bonds, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market clearing, market fundamentalism, McMansion, Minsky moment, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, Paul Volcker talking about ATMs, price mechanism, proprietary trading, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, vertical integration, 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.

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

Airbus A320, Alan Greenspan, Albert Einstein, Albert Michelson, algorithmic trading, anti-fragile, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Bear Stearns, behavioural economics, Benoit Mandelbrot, bitcoin, Black Swan, Boeing 737 MAX, Bonfire of the Vanities, Brexit referendum, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, DeepMind, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, Dutch auction, easy for humans, difficult for computers, eat what you kill, Eddington experiment, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Goodhart's law, Hans Rosling, Helicobacter pylori, high-speed rail, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Jim Simons, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Kōnosuke Matsushita, Linda problem, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, military-industrial complex, Money creation, Moneyball by Michael Lewis explains big data, Monty Hall problem, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, nudge theory, oil shock, PalmPilot, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Phillips curve, Pierre-Simon Laplace, popular electronics, power law, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, reality distortion field, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Suez crisis 1956, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, world market for maybe five computers, World Values Survey, Yom Kippur War, zero-sum game

Computers don’t do empathy, and we have learnt from studies of high-functioning autistics that people who lack insight into the feelings of others can do very well the sorts of things that computers, or Max Planck (who was not at all autistic), can do very well, but that they struggle with activities which are part of most people’s everyday lives and the working lives of almost everyone who is successful in organisations. 5 Shortly before Barings Bank went bust in 1995, chairman Peter Baring congratulated himself and his colleagues on the extraordinary profits that rogue trader Nick Leeson falsely claimed to be making in Singapore, asserting that ‘it is not actually terribly difficult to make money in the securities business’. 6 As a result of Leeson’s trades, the bank was actually haemorrhaging cash while reporting large profits. There is no more salutary example of the need to ask ‘What is going on here?’

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, 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, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, 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, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, 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 Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

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.

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

Alan Greenspan, 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, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, 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, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

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.

Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

Corporate Governance and Managerial Preferences,” Journal of Political Economy 111 (2003), pp. 1043–1075. When corporations are better protected from takeovers, wages increase, fewer new plants are built, and fewer old plants are shut down. Productivity and profitability also decline. 5Baring Brothers, a British bank with a 200-year history, was wiped out when its trader Nick Leeson lost $1.4 billion trading in Japanese stock market indexes from a Barings office in Singapore. Leeson was gambling for redemption. As his losses mounted, he kept doubling and redoubling his trading bets in an attempt to recover his losses. 6“One firm cannot unilaterally withdraw from the business and maintain its ability to conduct business in the future,” he said later.

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The nearby Finance in Practice box describes how the French bank Société Générale took a $7.2 billion bath from unauthorized trading by one of its staff. The bank has plenty of company. In 2011 the Swiss bank UBS reported that a rogue trader had notched up losses of $2.3 billion. And in 1995 Baring Brothers, a blue-chip British merchant bank with a 200-year history, became insolvent. The reason: Nick Leeson, a trader in Baring’s Singapore office, had placed very large bets on the Japanese stock market index that resulted in losses of $1.4 billion. BEYOND THE PAGE ● ● ● ● ● Metallgesellschaft brealey.mhhe.com/c26 These tales of woe have some cautionary messages for all corporations. During the 1970s and 1980s many firms turned their treasury operations into profit centers and proudly announced their profits from trading in financial instruments.

The London Compendium by Ed Glinert

1960s counterculture, anti-communist, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Bob Geldof, British Empire, Brixton riot, Charles Babbage, Corn Laws, Dava Sobel, double entry bookkeeping, Edward Jenner, Edward Lloyd's coffeehouse, Exxon Valdez, gentrification, hiring and firing, invention of the telegraph, Isaac Newton, John Harrison: Longitude, John Snow's cholera map, Khartoum Gordon, Kickstarter, Mahatma Gandhi, mass immigration, Nick Leeson, Panopticon Jeremy Bentham, price stability, Ronald Reagan, Sloane Ranger, South China Sea, South Sea Bubble, spice trade, Suez crisis 1956, 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.