Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives

by Satyajit Das

Traders Guns and Money is a wickedly comic exposé of the culture, games and pure deceptions played out every day in trading rooms around the world. And played out with other people’s money.

A sensational insider’s view of the business of trading and marketing derivatives, this revised edition explains the frighteningly central role that derivatives and financial products played in the global financial crisis.



 

 

This worldwide bestseller reveals the truth about those financial tools memorably described by Warren Buffett as ‘financial weapons of mass destruction’. Traders, Guns and Money will introduce you to the players and the practices and reveals how the real money is made and lost.

The global financial crisis took almost everyone by surprise and even now new problems keep appearing and solutions continue to be elusive. In the original version of Traders, Guns and Money, Satyajit Das provided a highly prescient insight into the structure and risk of the world financial system exposing the problems that are becoming readily apparent. In a 2006 speech – The Coming Credit Crash – Das argued "an informed analysis … shows that risk is not better spread but more leveraged and (arguably) more concentrated…. This does not improve the overall stability and security of the financial system but exposes it to increased risk of a "crash".

Genres: Finance, Economics, Nonfiction, Business, Money, History, Management

359 pages, Kindle Edition

First published April 20, 2006

About the author

Satyajit Das is an international specialist in the area of financial derivatives, risk management, and capital markets. He works as a consultant to banks and other financial institutions in Europe, North America, Asia and Australia providing advice on trading, pricing and risk management of derivative transactions.
Das, as he likes to be called, is well known in Australia, Asia, South Africa and Europe as an expert in the field and recognised for his capacity to communicate complex financial subjects and trends in simple and non-technical language.
Das was born in Calcutta, India in 1957 and now lives in Sydney. He holds Bachelors' degrees in Commerce (Accounting, Finance and Systems) and Law from the University of New South Wales and a Masters degree in Business Administration from the Australian Graduate School of Management.

Reviews

[Steve · Rating 3 out of 5]

All but a few financial storytellers fall short in comparison with Michael Lewis. Satyajit Dasis is no exception. Like the others who failed, he was not Lewis-like enough to carry the narrative. On the plus side, I give Das credit for his clear explanations of the many derivative products that are out there today. Let’s award points, too, for his title, even though the book couldn’t quite live up to the humor it was meant to project. As for the shortcomings, the worst, I thought, was the short shrift he gave to the more human elements. Lewis can get you involved with the people – smart or naïve, honest or corrupt, successful or beaten to a pulp. You want to know what happens to them in the unfolding story. Your understanding is helped by the fact that whole messy business has been personalized. With Das, it’s more just a laundry list of the financial products and recycled press accounts of famous meltdowns. Whenever he does involve people, they’re either fictitious stick figures or categories of investment subspecies lumped together a little too conveniently into bins of disrepute. I’m sure he has a point when he says many of today’s financial instruments can postpone tax bills, shift risks to less savvy clients, and obfuscate product deliverables, but in my mind he overplayed his cynicism and lost credibility in the process. Not all M&A activity is cannibalism, not all derivatives were created to dupe someone, and not all people in the industry are crooked. He weakens his case when he implies as much.

[Lobstergirl · Rating 3 out of 5]

Das, a derivatives and risk expert, takes a very snarky look at these complex products that exploded the financial world in 2008 (though he is writing in 2006). Few people understand them, but whenever investors are flush with cash, money has to end up somewhere, and it's often seeking the highest return. The quants who create them may understand the equations, but not the real world consequences. The salespeople who sell them don't really understand them, and the buyers - in a system ruled by asymmetric information, where the seller always knows more than the buyer - rarely ever do. Although not as dull or abstruse as a textbook, which Das also writes, this book does go into the weeds, and readers who have no knowledge whatsoever of derivatives will find themselves floating on a sea of mysterious acronyms, coupled with diagrams and flow charts.

Das keeps it punchy with chapterette headings such as "Rough Trade," "Bondage," "Dukes of Hazard," and "Tranche Warfare." He tells us that heading into a trial preparation as a plaintiff's expert witness, where an Indonesian noodle company that had been snookered on some derivatives was suing the issuer, he had looked up Portia's "quality of mercy" speech from The Merchant of Venice as a precaution.

The book is plagued by typos: missing apostrophes and quotation marks, and astonishingly, a consistent misspelling of Warren Buffett's name. Former Salomon head John Gutfreund is repeatedly referred to as "John Gutenfreund."

[J Roberts · Rating 5 out of 5]

And you thought a book on derivatives and option trading would be boring. WRONG! How can wiping out the global economy ever be boring? Oh sure, Option Trading is a wonky subject, and I’ve read many a dry book on the subject, but this one breaks the mold. It really does help you understand the mechanics of the derivative world as well as show you real world applications in a hilarious manner. Well, hilarious if you weren’t the one losing all your money in the deal. Or if somehow you weren’t part of the global economy within the last decade.

Let me step back at this point. Options. Basically, they’re for farmers. You plant a crop, spend all year tending to it, and need to be certain of a profit. Rather than relying on the weather and gods, you enter a contract. You limit your maximum profit, but put a floor on the downside. The baker does the same… he needs to ensure the price of flour stays low enough to keep his business going down the line. He enters into a buy contract for the farmer’s goods. Simple enough. And sure, why not scale that concept into new industries as well? Think fuel costs for a transportation company… now you’re getting the idea.

But here’s the thing. Why shouldn’t Wall Street take advantage of such a simple thing? I mean, little risk and profits from the sale of the contracts. How could these masters of the universe fuck that up? Just like everything else they touch, it’s gotta turn to gold for them. And that’s why this book shines.

When you seriously get to the causes behind all the messes caused by these guys, you’ll laugh so hard that you’ll cry. Mostly because a little part of you died on the inside and you were already crying to begin with. But you’ll laugh too! Now, I work on the ass end of this machine, but I’m still an insider. The book made me look around my office and laugh. Then cry.

You see, the formula is the same no matter where you go in this industry. A bunch of young know nothings running around selling crap that even their PhD financial quant engineers can’t understand. It’s perfect, the kids, most all who are in their 20s, peddle weapons of mass destruction to anyone dumb enough to buy their bomb. I see it every day at work. Kids ruining client’s people’s retirements because they’re just too stupid to…. Nah, wait, not stupid. They just don’t care. Either way, the stupid/not caring allows them rack in major paychecks. Wealth is not created by the financial industry, it is simply moved about.

Now you’re thinking, “Hey, great idea… let’s get smart people in there instead?” Wrong again, my friend. See, knowing ‘stuff’ in this industry is a bad thing. If you know stuff, you make the salesman feel bad about what they’re doing. This goes up the chain of command too. The author points out how management is based on hitting sales goals instead of skill or experience, because obviously this is a way to run the global economy. But it is. Sure, not everyone is horrid asshole when it comes to this industry, but we’ll never get far enough in this corporate climate to change things.

Given the fact that this book was written pre Great Recession, one could almost say it serves as a witty warning of things to come. Too bad that I’m writing this follow up in 2014… because I can tell you first hand that nothing has changed. And it’s not the industries fault. It’s yours. Yep, you know that boring guy you ignored when you tried to talk finance…? Remember how you brought all your money over to the 20 year old who kept blowing smoke up your ass instead?

[Bernard Chen · Rating 5 out of 5]

After reading this book, I learned how one of my annuities manages to guarantee the lesser of 6% per year or the actual market growth of my investments. (Zero coupon bond worth 106%, call option on my portfolio purchases, they keep a percentage for themselves.) I also learned that I was a sucker for buying into this annuity - except that I was lucky and did it a year before the market drop of 2008. Now if I can just get my 106% out...

I was a big fan of Frank Portnoy's Fiasco and this is the geekier version with more finance than most people want to read. The author, Das, also includes stories of derivatives deals which drive home how outmatched most purchasers, no matter how sophisticated they think they are (Fortune 500 CFO's et al), compared to the folks who spend their entire days thinking of novel financial vehicles.

[Bradley · Rating 4 out of 5]

This book gets very technical and it is obvious that the author adapted his style to be similar to Nassim Taleb. If you can put up with it, Das gets into several very good explanations about the many types of derivatives used to bend tax-laws, redirect risk, and confuse investors.

[Themistocles · Rating 2 out of 5]

Definitely not one of the better books on the subject. There are two major faults with this one:

First, the writing is all over the place, with the author jumping hither and thither every other paragraph, with almost no cohesion.

Second, there are a great deal of technical bits that are not explained well at all, and some times they don't even need to be that technical.

Some interesting anecdotes and case studies, all marred by these downsides.

[Mark · Rating 3 out of 5]

A long walk for a medium sized drink that gets warm by the end. This is no Michael Lewis book, which is what I thing most readers desperately want it to be. The reader will be challenged which is good and bad. I have to admit this was one of the hardest books I've ever read as the material is pretty thick. The depth of the subject covered in this book not for a casual audience. I probably now know more than I'll ever want to about derivatives, and more than I probably should about the internal dealings of Wall Street. I agree with the Financial Times assessment from the cover that this is fascinating reading, but only for those who are deeply, deeply interested in the topic. I was pulled in by the title's inclusion of the word "guns" as I was hoping for a book similar to "Confessions of an Economic Hit Man" by John Perkins. I was looking for more adventure and explosions or something with at least hit of espionage, in fact I don't think a gun ever made an appearance, so I felt suckered by the title. This book really was closer to a text book study of derivatives or at least one man's life story of working in derivative markets on Wall Street, than anything having to do with guns. Though perhaps I just didn't go all in on the metaphor the author was trying to push on the reader. I prefer the analogy that derivatives are closer to WMD's, not guns.

The book is a bit more interesting reading in 2015, as it was published in 2006 before the big crash. The author makes many points that you cringe reading in hindsight about just how out of hand things had gotten during the era of his authorship. Many "shame on us" moments, but when has that ever stopped us (the American public) before, and doubtful it will stop us in the future.

If you are the right audience for this, dive right in, other wise pass on by as it's going to be a long journey.

[Richard Thompson · Rating 3 out of 5]

I did learn a few things about derivatives from this book. For example, I had not previously realized how mark to market accounting can be used to inflate profits and traders' bonuses and can lead to margin calls on illiquid top level CDO tranches when the failure of lower tranches causes a ratings downgrade in upper level tranches that would probably actually pay full value if held to maturity, so even if the models were right in predicting tiny risks of default, the accounting rules helped to accelerate the financial crisis. The book does a good job in showing how derivatives can create an economic house of cards rather than having positive value in increasing liquidity and stability. But in trying to be light and humorous, the author frequently becomes too cynical and snarky. And he could have gone a bit deeper than he did in explaining the math and the modeling. Surely it can't all be as much of a shell game as the author suggests, or if it is, I wish that he would have given me a little more substance to reach that conclusion on my own.

[Rohit Nair · Rating 4 out of 5]

Let me put it like this: TG&M is 'Liar's Poker' for the financial industry. Technicalities were never this much fun. Satyajit Das reveals the shenanigans behind the murky world of high finance and gives us a good laugh at the same time. What makes this book even better is that the first edition came out in 2006, just before the world went into hell. Everything was hunky-dory at the time and this book shows us, in retrospect, it wasn't. Wonder how many people even considered this book at the time. Of course, now we know what happened, this looks like the work of a genius. The book is genuinely funny, which is nothing short of a miracle considering the sheer amount of financial technicalities included in the book. If you're working in the financial sector, or plan to, read this book.

[José Gouveia · Rating 4 out of 5]

It's an easy and humorous read on the excesses of the financial industry over the past decades.
Along the way, you can expect to learn how many derivatives instruments are structured - from interest rates swaps to credit derivatives, which caused (in great part) the financial crisis in 2008.

I find it a great accomplishment to be able to teach such products while keeping me entertained with the many stories backing it up.

[Radhika · Rating 3 out of 5]

A humorous account of the post crisis financial institutions. While the key concepts around derivatives i.e. weapons of mass destruction are explained without use of jargon, it get repetitive and tedious towards the later chapters.

[Daanve · Rating 5 out of 5]

Read it in 2006, a serious aha erlebnis. System made no sense, as proven 2 years later. History of the Asian crisis was another aha moment. Living there then, a lot also made little financial sense. Impressive book. Very personal.

[Tom · Rating 4 out of 5]

Great book. I learned a ton, but it jumps around a little and could use another review by the editor to clean up some typos.

[Matthew · Rating 3 out of 5]

I take back what I said earlier, which is that Traders, Guns and Money is rather disappointing for such a critically acclaimed book.

I still stand by what I said about the book's tone -- from the punchy three-word title you could recognise it for the way it reads, sort of a stand up comic routine on the derivative markets. The first half wasn't especially compelling, as the castigation of financial professionals is so generalised. You have to be offensive to be funny, I guess.

Once you get past that, the second half rocks -- perhaps because I don't take any personal offense, not being involved in derivatives. It's a great insider's view of how and why derivatives evolved, with great and simple (and cynical) explanations of why various structures were created (generally, to evade taxes, get around trading regulations, and other ways to give investors more yield and earn banks more fees). The anecdotes and narrative read like a late-night drink confessional -- probably exaggerated but sounding true enough in essence, and deeply educational.

As mentioned previously, it doesn't claim to be a rigorous, comprehensive risk management textbook (which Das has written) so it won't be that sort of educational if that's what you're looking for.
But through anecdotes it gives a sharp sense of the culture of the people involved, something you could never find even in very good textbooks.

[Fab · Rating 4 out of 5]

I love a book written by someone with deep experience in a field but who is cynical of the industry, they tend to have the best stories. The tone of this book is quite funny. It points out how most financial derivatives are just a sophisticated form of gambling but one where the house edge is often very unclear. You probably need a basic understanding of finance and derivatives to enjoy this book because it can get a little technical. I certainly learned a lot more about derivatives after reading this. Some chapters get a little repetitive but overall the book is really interesting. The examples of companies using derivatives to inflate their balances sheets or to comply with EU regulations before a merger just go to show how much craftiness and deception can come from the finance industry. A better title for this might be “everything you wanted to know about derivatives but were too afraid to ask”.

[Sepideh · Rating 3 out of 5]

This book was a fictionalized story about high finance that was less entertaining than anything written by Michael Lewis, but Lewis sets the bar pretty high. It is about a trader who worked in the British banking system and his attempt to defend an Indonesian company that blew itself up with derivatives and leverage. The fake names (Nero and Neverfail) that he gives people are just a little too ridiculous.

Most of the math that he is trying to explain is excellent. Off-hand, the only numerical error I noticed in this book was a point where I am pretty sure that a number that was supposed to be $1,000 million was written as $1,000 billion.

The book does explain things like derivatives and CDOs, but a lot of that went flying over my head.

His cynical view of the fail states of various business practices described in either chapter 2 or chapter 3 were hilarious.

[John McFarlane · Rating 5 out of 5]

This is really Michael Lewis....... IT'S BETTER
I've read so many reviews, it's doesn't explain this derivative well, etc. It's not a textbook! It's not marketed as one.
Look when it was published! It's absolutely genius. The last paragraph in the book is a prophecy!!!!!!
Michael Lewis has 20:20 vision writing after the crisis
Das has foresight writing in 2016

Laugh out loud funny. Very clever author.
Michael Lewis would have no qualms with my review. They are not the same thing at all. Too many comments here are reviewing apples with goats

[Stuart · Rating 3 out of 5]

"Good reminder that derivatives, securitization, financial engineering, excess liquidity, leverage, lax regulation, compromised rating agencies, and culpable home buyers were key factors in triggering the financial meltdown in 2008. ABS, RMBS, CDO, CMO, CDS, SIV, mezzanine tranches, warehouse loans, risk transfer, etc. No matter how hungry investors are for yield, if you don't understand the product, don't buy it"

[Eugenio Gomez-acebo · Rating 3 out of 5]

Detailed book on derivatives. Although it is an interesting read, it is so caustic in the generic description of the derivatives chaos that it quickly loses credibility. The author uses its experience to attack all bankers and financial institutions under all available lenses. Banking practices are joked about. Excesses, fraud and wrongdoing are not distinguished from serious, ethical work. It is hard to differentiate the joke from the reality.

[Faisal · Rating 3 out of 5]

The book literally gave me the opportunity to get an insider's look into quantitative finance. At some point while reading, however, I felt The author sounded a bit delusional, especially when describing the people that ran exotic options and futures desks at big institutions and hedge funds. Overall, it's pretty much an average book. Expected better than this.

[P · Rating 5 out of 5]

The real deal.

[Amit Jain · Rating 1 out of 5]

I think the book is bizarre and nothing else....never in my life i had ever left a book in middle before I came across this....

[Ken Nickerson · Rating 4 out of 5]

Some new information in here about trading that was from a direct, "hands-on" perspective that I was lacking. A quick read that's both informative and enjoyable.

[Alex Gleason · Rating 3 out of 5]

Three and a half. Pretty great.

[Berk Gurhan · Rating 4 out of 5]

Best book on finance that I have read

[Aaron · Rating 3 out of 5]

I'll be blunt: sometimes this book is painful to read. It isn't because the author is a bad writer, I think it's just because he has no central narrative beyond "finance is a crapsack world". He also has no central story: it's basically a loosely (sometimes whiplash inducing) collection of short stories and narratives about his experiences in the derivative trading Universe.

Some of these would make GREAT articles. Collectively, they do not make a good book or a good read.

HOWEVER, the content, if you can slog through the books flaws, is excellent. They are, in fact, ideas and observations several years ahead of their time.

Nearly everything banking related that would go wrong in the great recession is talked about in this book, and that makes it an asset.

It also explains derivatives contracts and financial trading strategys EXTREMELY well, so in that respect, it is also an asset.

However, I cannot give it more than 3 stars. That's being generous.

However, it's a 3 star book that I will proudly keep stored in my library, so perhaps that can be considered a endorsement of sorts.

[Chris · Rating 4 out of 5]

The Skinny: Fun, fast read about the wild world of derivatives. Essentially a series of mini stories through which different derivatives are explained.

The Good: First off, the fact that this was written right before the global financial crisis makes it extra interesting. As you read the stories all I could think about is how the derivatives for the GFC were being created. I think The Big Short may have gotten some inspiration from this book. Overall the book is a good read. The stories are humorous, the material is digestible, and it sheds a lot of light on a sector that is often super confusing. Laughed out loud more than I expected for sure.

The Bad: You will need some passing familiarity with derivatives to appreciate it properly but most concepts are explained well enough to follow, although you will still get confused here and there. Some parts are certainly more interesting than others. Too many gosh darn grammar and typos.

[Steven H · Rating 5 out of 5]

A REVEALING PRE-2008 FINANCIAL CRISIS PORTRAIT OF DERIVATIVES, AND THE INDUSTRY THAT SELLS THEM

Sanyajit Das is a financial analyst who had written many books on derivatives and related topics, such as 'Extreme Money: Masters of the Universe and the Cult of Risk,' 'Risk Management and Financial Derivatives,' 'Credit Derivatives, Swap and Derivative Financing,' etc. He has also revised this 2006 book...

He wrote in the Preface, "[This book] is the record of my time in the derivatives industry. It is a collection of tales about the products, the people and the strange goings-on in the business... There is almost no literature that explains the industry in an accessible way. There is also little that sets out the practices, some of which are insane, of this mysterious area of finance. [The book] explains the industry, how it operates and what it does. The book does not attempt to make a case for and against derivatives, it just shows what REALLY goes on every day in the dealing rooms in major financial centers, the real life dramas and rational madness that shape modern markets. [The book] is intended for two audiences. People in banking and finance ... will find it a wry and entertaining read... This book is also for those who want an accessible introduction to this weird and wonderful world. It will perhaps confirm their worst fears and prejudices about these strange instruments, what they are used for and the people who trade them." (Pg. xiii)

He recalls, "Many of today's traders hadn't been born when I stumbled accidently into derivatives trading. I had spent over 25 years in this world of traders, guns and money. The traders and money were clear enough. And you couldn't have financial weapons more powerful than derivatives---they were the big guns of the trade... How did I get there? I had followed the money... I had not known very much about derivatives when I started. How did I get here? ... This is that story. It is also coincidentally the story of the rise and rules of derivative trading---its 'knowns' and its 'unknowns.'" (Pg. 18)

He points out, "The major defender of derivatives was Alan Greenspan, Chairman of the Federal Reserve Bank of New York... The head of the central bank's role as cheerleader for the derivatives lobby was curious." (Pg. 20) He recalls, "We needed 'innovation,' we were told. We created increasingly odd products. These obscure structures allowed us to earn higher margins than the cutthroat vanilla business... New structures that clients actually wanted were not that easy to create... The truth was that we weren't very creative but by golly, we were good at plagiarism. We chased our tails some more." (Pg. 41)

Later, he adds, "Survival requires keeping your head down. There was no point in resisting the latest fad. I just nodded and kept doing what I always did---trying to make money. No management fad lasted long. Before you know it, we would have a new 'business model' and would be entering a 'new paradigm.'" (Pg. 74)

He observes, "Greenspan had been right---risk had truly been unbundled. We had just packaged it right back up and shoved it down the eager throats of the wealthy taxpayers of Orange County. Warren Buffett was also right---when the tide did finally go out, as it did rapidly in 1994, we learnt that Orange County was swimming naked." (Pg. 50)

Later, he notes, "Some dealers warned Orange County about the risks they were running. At the time, Robert Citron regarded himself as a genius, encouraged in this belief by the dealers who were cashing in on his brilliance... Dealers love sophisticated investors. They are easy pickings." (Pg. 127) He concludes, "Who was paying for the party? It turned out to be Orange County taxpayers." (Pg. 214)

He comments, "Traders become locked into a life that is focuses exclusively on work and making money. They dress well and live well. Their reading consists of work materials, an occasional business book... and the odd pulp fiction or spy novel at airports... They exist in an isolated world of premium class business travel, limo transfers and five-star hotels. Butlers, valets, maids, cooks, lifestyle assistants and personal trainers surround them. This becomes the reality of existence. Others perform the simple acts of living for them. They cease to be capable of doing anything for themselves." (Pg. 78)

He observes, "There is a lot of activity around bonus time, very little of which has anything to do with trading... the day after the cheque clears there is frequently a glut of personnel announcements... Bonuses also drive spending. Luxury car dealers' fortunes are closely tied to the level of bonuses in banking..." (Pg. 147)

He recounts that "a mathematician, had taught at the university and, tired of seeing his students earn far more than he did, joined the migration to banking. From time to time he visited his former academic colleagues to discuss the latest research. They were derisive about his job: they were involved in interesting work. The maths he used to model derivatives was trivial, undergraduate stuff. He consoled himself with the fact that he took home, in a good year, ten times what they made. He was a POW---a prisoner of Wall Street. It was about the money." (Pg. 183-184)

The book can be somewhat disconcerting, in how it flits from one topic to another, interspersed with Das's personal recollections. Nevertheless, this is a fascinating (and somewhat prescient!) view of the derivatives and financial services industry, originally written just before the financial collapse of 2007-2009. It will be very welcome reading for anyone studying this era.

[Jeannie Hardeman · Rating 4 out of 5]

This book is a very cynical (yet I suspect highly accurate) account of derivatives trading from a guy that's been there and done that. You do not need to be a financial geek to appreciate this book. It is written in a very entertaining way. For those that are interested you can expend some mental effort and get a basic understanding of derivatives, but you can ignore the details and still enjoy the story. The chapter on credit derivatives is particulary entertaining given the recent meltdown

[Charvak Patel · Rating 4 out of 5]

This book is long and I wished it was longer.

This book does it all. Goes into details when necessary, throws quips when required, uses anecdotes and personal experience in a wonderful and enjoyable way.

This book has long chapters but divided into sections in a manner that makes this book very much digestible despite its size.

Even if you don't want to know about derivatives, this book is worth reading for the author's sense of humor.