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Das' book Traders, Guns and Money is an interesting tale of derivatives but his scattered and somewhat vulgar writing style leaves some finesse to be desired. He does a great job of explaining the basics of derivatives to the average reader, while also appealing to more experienced investors and financiers. Although Traders, Guns and Money is an interesting read, it definitely was a challenging book to complete due to the nature of Das's writing. His writing style is very post-modern with deep-seeded sarcasm, and the stories are, at times, vulgar. It combines light, reading-for-pleasure with learning; an interesting twist on the usual finance book. It is not reminiscent of the cheesy semi-story-telling accounting pieces that crop up from time to time. Any reader is bound to learn something from this book, whether it be a different take on old methods or an area of risk management never considered. It is fascinating at times, if you can look past the over-the-top stories.
Das takes the reader through several aspects of derivatives: the buy and sell sides, types of derivatives, risk management, and credit risk. Interestingly, the book was written in 2006, pre-recession and credit-crisis. In this edition, there is an Afterword that has an explanation of the crisis through a derivatives-based lens; this is no easy task. There were so many things that went wrong: subprime mortgages, MBS issues, unregulated derivatives and the over-leveraging of credit. In the words of Das, "The risks of a diffuse, globally interlinked, highly leveraged financial system were ignored" (p.398).
A few highlights throughout the book are Das' take on risk management and explanation of the buy-side and sell-side of derivatives. He spins the evolution of each of these areas into a new light, showing how "dazzling" the world of derivatives has become. He claims the sell-side is telling beautiful lies to the sell-side, who is telling true lies. At the beginning of chapter three, Das states, "The buy side thinks they are smarter than the sell side, they think that dealers lie. The sell side thinks that they are smarter than the buy side, they think that clients lie. Clients think that dealer are overpaid... and dealers know that they are paid more than their clients." In my eyes, this is a great summation of both sides of derivatives trading.
Another highlight for me was his discussion of the Asian Currency Crisis throughout the novel, in chapter eight, and then in detail in the Epilogue. When Asia become "hot" with investors, the company could barely sustain the movement of capital in and out of their country. Also, China had become a major place for production due to their inexpensive labor force and cheap production system. The Asian countries had pegged their currencies to the US Dollar, and their currency depreciated greatly, leaving them in a crisis. The convertible bonds for Asian companies had been in US dollars, and no one had thought to hedge that risk. It started with the Thai Baht, and led to other currencies falling 50-80% (p.292). In the end, these countries were left in a bind
Traders, Guns and Money tells many stories, and one in particular regarding risk management. In chapter five, he discusses an early job at Alco where he was supposed to create risk reports within a +/- of 5%. Upon inquiring why this specific 5% was set, his boss returned days later with the answer: "It gives the amount of risk that everybody expects to see" (p.179). This story stuck with me throughout my reading because it embodies the job of so many financial analysts today- they never want to be too shocking and scare their bosses. It's a different frame of mind from a risk manager seeking every possible risk (in another story a woman says she has found 10,000 potential risks for the company). Das's conclusion about risk management was theory was this: "In practice, it seems, common sense isn't that common a all, especially among risk managers" (p.183). In other words, these theorists were relying on old proverbs and uneducated non-mathematical algorithms to determine risk management, which led Das to believe that there was much more to the derivatives universe than this.
Throughout the rest of the book, Das discusses the usual derivatives topics- algorithms, models, quants, structured products; he then concludes with a chapter on credit risk. He covers the credit derivatives boom of the 1990s and the evolution of CDS and CDOs. These are means of selling off the risk that the company does not want exposure to. I particularly enjoyed his coverage of "Tranche Warfare" in chapter nine, where he discusses different levels of payouts in the event of default. Mezzanine investors have always been a bit of a mystery to me, but the explanation here is quite good. Basically, they are receiving a higher payout- but not first payout- in the event of default. This is an important concept to cover, especially because of the recent real estate crisis that left mezzanine investors and regular investors bankrupt. The explanation of tranching is that not all investors are equal in a default situation.
Overall, Traders, Guns ad Money was an accurate representation of the derivatives market, which, to be fair, is a convoluted minefield. I was not a fan of Das's writing style, as aforementioned. The vulgarity and overuse of stories made the book less effective overall. It lacked finesse and some necessary editing throughout. The scattered writing with story-after-story made reading difficult. I would have enjoyed more meat and potatoes; at times it seemed overly superfluous in story telling. However, his coverage of credit risk and the Asian Currency Crisis in 1998 were extremely well written. The Asian crisis in particular really fascinates me, so this was a particularly interesting part in my opinion. I also enjoyed his thoughts on the Orange County mismanagement and other issues. It is a good read for someone interested in learning more about derivative securities, as well as a light read for an already experienced derivatives trader.