Traders, Guns & Money - Satyajit Das

The full title of this book is Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives. The author chooses to make an impression by spoofing Jared Diamond's Guns, Germs and Steel, while also introducing us to the cryptic world of derivatives by referring to Donald Rumsfeld's famous musing about Unknowns Knowns and Unknowns Unknowns.

The book is really an exposé, written in a slapstick humouristic style and Satyajit Das does not hold his tongue (pen) in castigating the sub-world of derivatives in the financial system. Das has worked in the field of derivatives for more than two decades so he knows a lot about them, and most importantly, the actors. The insider information he reveals is not flattering at all.

The leitmotif of this narrative is the Knowns and Unknowns in the derivatives sales process: many corporations do not know that they "need" a product - the sales person (representing some big bank), will present that to the corporation who then realises that it should buy it as the profits it promises are goo. this is an unknown known (how foolish were we not to have realised this! Well, most of them end up being even more foolish to buy this product!)

Then you have the Known Unknown, which refers to the cornucopia of esoteric derivatives with exotic names that we have heard about, but do not know what they do (or what use they have - do they have any use, really?). for example, what does a Double Knockout Currency Option mean? Ah, that, you see is a Known Unknown.

Finally, how much should I pay for a Double Knockout Currency Option? Bless me if I do! That is an Unknown Unknown. This bit is best left to those indulging in arcane models.

What is clear from Das' account is that the universe of esoteric derivatives does not create any further wealth. The derivatives world could be viewed as a system where a zero-sum game is played. What I make in profits is simply what another counter-party is losing. In the epilogue, Das makes an analogy to pari-mutuel auctions. I will say that most of this system is a pari-mutuel. The lsoing betters ultimately pay the successful wagers plus the bookmakers' profits. What this area does seem to create, if you take a magnifying glass to it, is a lot of deceit, misrepresentations and cosmetics to fleece investors and naive corportaions.

Another leitmotif is Das' constant reference to Weapons of Mass Destruction, or WMD (which harken's again to Rumsfeld and that dark era of US military impulsiveness), following Warren Buffet. Derivatives, if not used carefully - remember they are here to shift risk, or hedge against risk - can potentially turn into WMD's.

The whole narrative is held together by the case of a noodle making company from Indonesia and their massive theoretical loss from investing in derivatives peddled to them by a huge US bank. In the end, the parties reach settlement thanks to a change in management at the bank.