Humour in derivatives

Readers of my column would recall my criticism of the complex, structured derivatives being marketed to unsophisticated corporates in India, and how some public sector banks seem to have been used as intermediaries to take on the credit and other risks in relation to the corporate client. Many of my young friends in bank treasuries describe me as having a "negative outlook", because of my insistence on advising clients to use derivatives with price transparency and easy exit. I therefore experienced a sense of "dejà vu" while reading Satyajit Das' Traders, Guns and Money.

Das has spent a lifetime in the derivatives business, initially on the "sale" side, i.e. working for a bank, and subsequently on the "buy" or corporate side of the derivatives business. (A parallel at least in the sequence: I too worked in a bank for about 20 years before leaving in 1976, when the word "derivatives" was not really a part of a banker's dictionary; the pioneering World Bank: IBM currency swap was five years in the future.)

Das' three-volume magnum opus The Swaps & Financial Derivatives Library: Products, Policy, Applications and Risk Management, priced at $450 and currently in its third edition, is of course the standard reference work on the subject, which I have had occasion to refer to quite often. That book had hardly prepared me for Traders, Guns & Money, which is written in a very lively, irreverent and sometimes cynical style. Das obviously has a great sense of humour and I burst out in guffaws perhaps a hundred times while reading the book. (Which author on derivatives would quote people from Groucho Marx to Ronald Rumsfeld in a book on the subject?) It clearly is a description of "what really goes on every day in the dealing rooms in major financial centres", from one who has been there, and seen it all "" and confirms all my "conspiracy" theories about the marketing of complex, structured products.

Consider some gems:

About dealers/salespeople

The treasury marketing head talking to a junior dealer: "Sonny, give the guy a win first up. A nibble. He'll be hooked. Then, you reel him, real slow. That's how you land the big ones.'"

"Groucho Marx once observed that 'the secret of life is honesty and fair dealing; if you can fake that you've got it made'. Salespeople live that secret every working day."

"it helps if the buyer has no idea of what they are buying or its worth."

"As markets become more efficient and products become standardized, dealer profitability suffers so they ... promote structured products (generally low-margin standard products, packaged into complex-sounding configurations)"

"I was waiting for the UFOs (Unspecified Fund Obligations). It would be a tranched portfolio of unknown assets. It was designed as a surprise for the investor."

Risk Management

"The model made assumptions about the workings of markets but the markets just hadn't read the assumptions."

"it is still the ancient practice of reading entrails, updated for more politically correct and squeamish times."

"(Rothschild) always lent to both sides in any war. The winner would always ensure that both debts were repaid; if the borrower didn't repay, then Rothschild might finance a new war against the winner to enforce his debt. The cunning man was well-versed in risk management."

Banks and bankers

"Groucho Marx noted with great prescience that: 'military intelligence is a contradiction in terms'. Given the opportunity, he may have offered interesting insights on 'bank management' or 'banking strategy'."

"When I began in banking, the premise was that you stayed with the same organization for life. You could rise to head the firm. It was a beautiful lie, like so many we told our clients, our bosses and ourselves all through our careers."

"There is something odd about an industry that celebrates its successes with a tombstone."

But the book is of course not just fun and games. Now that derivatives have become an integral part of the Indian financial markets, I would strongly recommend it to bankers, corporate treasurers, risk management and credit professionals "" and even for the general reader with some knowledge of and interest in financial markets. With all the jokes and banter, it communicates sense and advice from somebody with a huge amount of experience on both sides "" and a specialist in the field. The only book of comparable wit, liveliness and insight about banks and financial markets I can think of is Michael Lewis' Liar's Poker.

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Traders, Guns & Money

Satyajit Das
Prentice Hall
331 pages; $29.99