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Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives Revised edition (Financial Times Series) Paperback
by Satyajit Das (Author)















Introduction

Why a Revised Edition?Before the global financial crisis or great recession, most people had no ideas about the extraordinary and arcane world of “derivative products”. In 2008, AIG almost went bankrupt because of its exposure to one type of derivative — CDS (credit default swaps, a form of credit insurance). Mortgage-backed securities (MBS) and collateralised debt obligations (CDOs) — also cheerily known as Chernobyl Death Obligations — helped to bring the global financial system to the edge of collapse.

The crisis has made people interested in knowing about this gigantic system of commercial bets in financial markets - the total outstanding amount of derivatives adds up to a mere $600 trillion (some 10 times the value of global production).

Given that Traders... was first published in2006 and anticipated some of the problems, it seemed appropriate to update the book and re-launch it.

Did you really predict the Global Financial Crisis?

As the crisis has become larger and the losses have become greater, the number of people who apparently knew this was going to happen has increased exponentially.
I don’t think Traders… said the crisis was going to occur on such and such date. The book anticipated many problems that have become apparent. It exposed the sophistry of derivatives and the structured credit market. It highlighted the moral hazards and distorted incentive structures that posed major threats to market stability.
In a 2006 speech to promote the first edition – ‘The Coming Credit Crash’ – I argued that: “an informed analysis of the structured credit markets shows that risk is not better spread but more leveraged and (arguably) more concentrated amongst hedge funds and a small group of dealers. This does not improve the overall stability and security of the financial system but exposes it to increased risk of a ‘crash’ during a credit downturn.” These problems are now becoming readily apparent. The enormous cost to ordinary investors and taxpayers to fix the problem has also become clear.

What’s new in the Book?

The paperback edition remains largely unchanged from the original text. I felt it would be intellectually dishonest to go back and embellish the original version, which remains a true record of my views as at the time. I have added a new Afterword that deals with the GFC and the role that derivatives and related financial products played in the crisis.