The following is an excellent excerpt from the book “TRADERS, GUNS & MONEY: Knowns and Unknowns in the Dazzling World of Derivatives” by Satyajit Das from the Prologue: “Summary Judgment” on page 17 and the Epilogue: “Knowns and Unknowns” on page 319 and I quote from page 17: “Summary Judgment – It was the day of the hearing. The dealer was seeking summary judgment. In short, they were asking the court to enforce the signed written contracts. It was up to OCM to show the court that it had a reasonable defence to the claim.
I had sweated out a thick expert report that was part of the defence case against summary judgement. I had learned over the years that size really does matter in expert reports. In a curious anachronism, exports have a responsibility to the court, not to their client. The expert must not take sides. They must have a dispassionate expert’s view of the matters within their perview. This was patently impossible given that experts are in reality trained assassins employed by each party. Each was paid to deliver the killer blow to the opponent’s case. An alternative interpretation of the expert was that of a prostitute – they were employed to seduce the judge.
Given that OCM had signed all the documents, I couldn’t believe that the court would not award summary judgment to the dealer.
Just before 10a.m., the hearing being the first matter of the day for the court, Morrison ambled into view. With him was a bewigged and cloaked senior counsel – Stuart SC I walked up to them anxiously. ‘They have withdrawn their application for summary judgment. I told you there was nothing to worry about.’ Morrison was in a good mood.
Why had they withdrawn? It did not make any sense at all. ‘No idea, dear boy.’ Morrison shrugged his expressive shoulders. ‘Most helpful your report, by the way,’ he said as he wandered off with Stuart. When I had recovered from the initial shock, I was racked by morose doubts. It was merely a stay of execution. We would surely get done at the trial.
The next day I was at the airport waiting to catch a plane back to Australia. The Indonesian pair from OCM were there and it turned out that they were on the same flight. They would change planes at Singapore for the short flight to Jakarta.
Adewiko and Budi were in a good mood. They appeared to have spent the day shopping, judging by their hand luggage. ‘We win,’ Budi pronounced, showing his deep appreciation of the legal position. I smiled through gritted teeth; I had no sympathy for either the dealer or the noodle maker’s conduct.
On the plane, my mood soured further. I was in business class and the Indonesians were in first. For two disgraced executives of a near-bankrupt company, they were doing very well. How did I get here?
Many of today’s traders hadn’t been born when I stumbled accidentally into derivatives trading. I had spent over 25 years in this world of traders, guns, and money. The traders and money were clear enough. And you couldn’t have financial weapons more powerful than derivatives – they were the big guns of the trade. And lawyers? I seemed to be spending a lot of time with lawyers getting to the bottom of some very odd derivatives transactions.
How did I get there? I had followed the money. I had ridden the tides and currents of financial markets. I had not known very much about derivatives when I started. How did I get here? It was a long story. This is the story. It is also coincidentally the story of the rise and rules of derivatives trading – its ‘knowns’ and its ‘unknowns’.”
Page 319 – “Knowns and Unknowns – Derivatives are still hot: 25-plus years on they still continue to evolve. They are still causing controversy. New markets for hedging, making and losing money are emerging.
Derivatives linked to macro-economic indicators are being traded. Dealers trade exposure to gross domestic product, growth rates, rates of industrial production, retail sales, price indices and consumer confidence indices.
Macro-economic derivatives are based on a pari-mutuel auction system, the mechanism that underlies wagering on sporting events. Wagers are placed based on odds quoted, the person accepting the bets determines payouts if the wager predicts the outcomes correctly, there is no risk. The losing betters effectively pay the successful wagers plus the bookmaker’s profit, the odds quoted ensure this outcome. The bookmaker makes sure that the total premium received equals the subsequent payouts irrespective of the outcome of the event. Derivatives have gone full cycle. We really are off to the races.
Derivatives on emissions are hot. The Kyoto Protocol was coming in – ‘carbon’ trading would explode. Polluters wouldn’t actually stop polluting but would buy pollution quotas from ‘clean’ industrial companies and agrarian countries with forests (carbon sinks). It wasn’t clear how this would actually reduce emissions or reverse the greenhouse effect. Traders talked about ‘market processes’. There was talk about trading in rights to clean air, water, and access to fishing grounds; basics of human life that I had always taken for granted were going to be ‘derivatized’.
Even the WFP (World Food Programme) had embraced derivatives. WFP was responsible for saving the starving. They proposed that they issue catastrophe bonds linked to low rainfall; if there was sufficient rainfall then the WFP would not need to intervene, they would just pay out higher interest to the catastrophe bondholders. If there was low or no rainfall, then the WFP would be able to suspend interest payments or cancel principal repayments on the bond. The saving in interest and principal would fund relief efforts.
I wasn’t sure how the catastrophe bonds would cover bad government or civil wars; traders thought a bad government or civil unrest index would be feasible. They were just trying to boost flagging volumes in the weather derivatives market. I wondered what the starving in the Horn of Africa would make of all this.
The people that I had worked with were mostly out of the business; they talked of the market changing. The ‘new’ world was ‘dull’, they bemoaned the lack of ‘characters’, there was no ‘innovation’. I didn’t agree with these sentiments: I believed that in reality little had changed. The old truths were still relevant. New generations of derivative traders were going to just discover them for themselves.
There were still the knowns and unknowns. There were many WMDs – new ones were invented every day. The lies – beautiful and true – were still the currency of trading. People still wanted to see the money, every day. The latest, greatest super models would still come up short in the crucible of markets. Perfect storms were lurking over the horizon; they would blow in suddenly, leaving death and destruction in their wake. Games without frontiers would still be played in the world of structured products. In equity markets, the pain would be shared and shared alike. The new credit markets were prospering, albeit under dubious premises. You had to give credit where credit is due. In the end, there were always the traders, the guns and the money. After all, this was the dazzling world of derivatives.”
(THE FOLLOWING IS FROM THE BACK OF THE BOOK AND I QUOTE:
“Make room for another must-read on the shelves of any City or Wall Street trader, salesman, or victim. Traders, Guns & Money is filled with dirty little secrets, some old and some new. Anyone who has worked on a trading floor will nod and laugh. Those who have not will shake their heads and cry. When ‘derivatives’ and ‘f******’ appear together on every other page, you know someone has written the truth about financial innovation. Be afraid.” –Frank Partnoy, author of FIASCO and Infectious Greed and Professor of Law at the University of San Diego
“Very, very real. Risk management at the front line, and unlike anything you’ll have seen in the textbooks.” –Paul Wilmott, writer, mathematician and author of quantitative finance website www.wilmott.com
“Warren Buffett once memorably described derivatives as “financial weapons of mass destruction”. Read this sensational and controversial account of the often dazzling business of derivatives trading, and see if you agree.
No money is ever really made in financial markets. Markets merely transfer wealth. As to how to make money? Well, it is basically theft, misrepresentation, lies, cheating, deception or force. It is impossible to make the staggering amounts made in derivatives in good years honestly.
Traders, Guns & Money is a wry and wickedly comic expose of the culture, games, and pure deceptions played out every day in trading rooms around the world, usually with other people’s money. Whether you move in the financial world yourself, know people who do, or have money invested in stocks, shares or derivatives, this is a fascinating read guaranteed to make you think.”
MY COMMENTS: THIS WHOLE ISSUE, AFTER ENGLAND GOT OUT OF THE EU TOOK PLACE BECAUSE OF UNREGULATED HEDGE FUNDS AND TOXIC DERIVATIVES AND THAT’S WHY IF THE CUSTOMER ISN’T EDUCATED, THEY COULD BE EASILY EXPLOITED BY THESE CON MEN THAT CALL THEMSELVES CAPITALISTS. AFTER READING THIS BOOK, I HOPE YOU COME TO THE CONCLUSION THAT IT IS “BUYER BEWARE.”
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran