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Editorial: Holiday reading: Devil's Derivatives
26 August 2011
It was not until 1954, 25 years after the event, that JK Galbraith published his much celebrated tome on stock market crash of 1929.
Galbraiths book, The Great Crash, is widely regarded as the definitive book on the 1929 stock market crash brilliantly capturing the spirit of the day, while incorporating a full economic analyses of the human folly behind the crash.
Whoever finally puts pen to paper on the definitive record of the turbulence of our times will not find themselves short of source material. Go into any bookshop today and you will find forests of books on the financial crisis of 2007-2008.
From Andrew Ross Sorkins Too Big to Fail, the fast paced, journalistic account of the frantic scramble to save the economic system during September 2008 to Joseph Stiglitzs Freefall, a left wing economic critique of the response to the crisis; from Gillian Tetts Fools Gold, an analysis of the role of super-senior debt and un-ashamed exoneration of the role of JPMorgan in the crisis, to Scott Pattersons somewhat misguided attempt to pin the blame on geeks in his book The Quants there is no shortage of books on the financial crisis.
Adding his two pence to the debate most recently is Nicholas Dunbar, the former technical editor of Risk magazine in his book Devils Derivatives. Dunbar has the advantage of having specialised in writing about over the counter derivatives and can therefore tackle the subject head on with a deep understanding of the hugely complex credit derivatives that led to the financial crisis.
Dunbar pulls no punches with assaults on banks who sold complex derivative products to unsophisticated investors and deserved criticism of the management of AIG for their apparent ignorance of the no free lunch rule.
Devils Derivatives is a great technical analysis of the products and events leading up to the crisis and one that will be enjoyed by people in the industry who have tired of opening chapters explaining what a call option is. Its focus on CDOs gets to the heart of the problem in a way that other accounts have glossed over, possibly due to a lack of understanding.
Dunbar has no such failing. However, he does not quite capture the characters behind the crisis in the same way as Tett or Sorkin and the book losses some of its pace as a result. But for those looking for a solid account of the root cause of much of the financial turmoil, Devils Derivatives will not disappoint.
Dunbar has given us one piece of the jigsaw. We might have to wait another 25 years for the definitive impression of the completed puzzle and it may well be that the Lehman collapse will only constitute the first chapter.