Combining wit and humor, Satyajit Das shares some brutally honest yet enlightening insights in Traders, Guns and Money, collected during his 25 years in the derivatives market.
Having witnessed the evolution of the derivatives through numerous market cycles, Das is a recognized international expert and a consultant advising banks and corporations.
Using a cynical tone, Das does an excellent job of capturing his disillusionment with the derivatives industry.
In particular, his distrust of the intellectuals and the academics in the derivatives industry is apparent in depictions like, “Quantitative finance is a modern cult and quants [quantitative analysts] are the cult leaders.”
His expressions are even more striking as he describes the deceptive nature of the industry as a whole: “There are salespeople — they lie to clients. Traders lie to sales and risk managers. Risk managers? They lie to the people who run the place — correction, think they run the place.”
The meat of the book, however, lies in the real accounts of how investment banks and dealers use structured derivatives to obfuscate and “play” the under-informed clients. From selling over-leveraged derivatives to repackaging toxic assets, Das exposes in detail the insider tricks that dealers and traders have employed for years, often at the expense of unsuspecting investors.
By revealing the mind-numbing flexibility of the derivatives to be swapped, embedded, packaged and repackaged, Das captures the essence of the financial engineering at its zenith: “investors wanted to do something; the dealer would just engineer the structure from bits available in the market.”
Das’ audacity is commendable as he does not hesitate to challenge the greatest intellectuals of quantitative finance like Myron Scholes and Fischer Black. Through a systematic analysis of assumptions upon which the prominent Black-Scholes options pricing model is based, Das shows that the reality rarely conforms to such assumptions.
Citing numerous failures of prominent institutions which boasted mastery of financial models, Das arrives at an interesting analogy: “Like supermodels, financial models are idealized representations of the real world, they are not real, they don’t quite work in the way that the real world works.”
Das’ cynical tone reaches a climax in the last chapter as he methodically picks apart some bewildering derivatives engineered by the traders hell-bent on packaging credit risk as a tradable commodity. Overall, he does a splendid job of portraying the obsessive mentality of the traders that anything can be traded as well as the traders’ never-ending endeavor to design increasingly obscure derivatives in order to confuse and exploit the investors.
Traders, Guns & Money is no doubt an enjoyable and thought-provoking read. However, readers without a basic understanding of the derivatives may find the book to be quite challenging as Das introduces complex products one after the other, with fairly involved examples interjected in between.
As an author of numerous reference books on derivatives, Das’ explanations are lucid but limited in length as his primary intent is not to explain, but to detail the shortcomings and the exploitations of the derivatives. For anyone with a genuine interest in the derivatives market, however, this book is palpable with some external research.