4 April 2009

Satyajit Das ~ An old but cute interview

PB: Where does the title "Traders Guns & Money" come from?

A dead rock star and the American show "West Wing". I was thinking of Lawyers, Guns & Money except Warren Zevon who wrote a song of that name refused me use of that title. This was despite the fact that he was actually dead. I am also reliably informed that according to the spin doctor in "West Wing" it is best to do things in three's; apparently people remember them more readily - hence Traders, Guns & Money. I was also hoping that people might mistake the title for Jared Diamond's best seller Guns Germs & Steel - thought it might help sales.

PB: What's the book about?

A form of madness - we call it financial markets. The book's about the weird and wonderful instruments that are traded and sold by people in banks to people in companies and investment houses. Its focus is on this arcane world.

PB: Why would the average person want to read the book?

It's all done with your money - your pension money, the money you deposit with banks, the money of companies whose shares you own. It will help people understand what your money is sometimes used for. This is a world that few people know about and fewer understand. It's a world where a small group of gifted, if rapacious, individuals parlay their knowledge of financial products into wealth, leaving shareholders, clients, regulators, and the tax paying ordinary public to bear most of the risk. In brief, it will help explain why in the words of Goucho Marx “You worked yourself up from nothing to a state of extreme poverty.”

PB: Can you briefly outline what the book covers?

There is a frame story - a fictitious court case, whose characters can be found prowling the world of derivatives, including the cunning traders, the hapless clients and their wily lawyer. This page turning story illuminates the dangers companies face when handling derivatives (financial weapons of mass destruction). Sandwiched in between this story, the rest of the book describes various aspects of this world. The first chapter - Weapons of Mass Destruction - explains what derivatives are - even my mother understood what a derivative was when she read this. Other chapters describe the different players - Beautiful lies sets out what really goes on banks and True Lies explains what goes on in clients like companies and investors. Show Me the Money explains how money is really made and lost. Perfect Storms describes how most organisations pay lip service to managing risk. It also explains what goes on in different parts of the financial world - like the currently "hot" world of hedge funds and credit derivatives.

PB: Is this book hard to read?

No, it's not a technical book. Traders Guns and Money is part thriller, part expose. It a fun read but it teaches you something about the business. It will show how these markets work. It's also satiric, irreverent and black in its humour - is that too many adjectives?

PB: Any great stories in the book?

The book is a collection of lots of stories. Here's a few:

Story 1

A trader I know thought that it might be useful to have his business cards translated into Japanese. His official title was “Trader- Fixed Income”. The Japanese translation was “Trader on Fixed Salary”. The card brought strange looks from the bemused Japanese clients. It seemed more than a little was lost in translation.

Story 2

Around 1999, I met an ERM (Enterprise Risk Management) advocate,. Dudley , the head of risk for an investment bank. He wanted to meet me. I had no idea why. I soon discovered that Dudley had reached ERM. It was the “new”, best-est thing. It was revolutionary. Dudley was at the forefront. He would give me an example of the problems he was trying to model.

“Let’s say our head trader has a complex trading strategy only he understands, yes”. I nodded. I didn’t think any strategy could be that complex, at least if a trader had put it on. But it was quite likely that no one knew about it. The trader may have not told anyone. “Let’s say the trader bicycles to work”. I did not think this likely. Traders prefer Porsches. Not wishing to prolong the discussion, I did not disagree.

“On the way to work, he is hit by a bus. His mobile phone is knocked away from him and damaged. He is unconscious. Assume that simultaneously market prices move due to surprise news. This news is vital to the trader’s position. He does not know. Nobody knows what to do with his position”. I nodded. “That’s not all. Assume simultaneously, there is fraud in another bank”. I nodded in real agreement. That was very likely. “This bank goes into bankruptcy. It creates a financial crisis. This of course affects the trader’s position. He doesn’t know of course. He’s unconscious”. I was hoping he would get to the point soon.

“At the same time, assume there is an accident at a power plant. There is a blackout. The bank’s back-up generator fails. The mechanic forgot to check the fuel tank. The bank’s computer system goes down. The trader can’t get prices or model the risk on his position”. I reminded Dudley that the trader was unconscious, maybe deceased. “Exactly”, he replied cheerily. It went on.

Eventually after a tragedy of biblical proportions had been outlined, Dudley reached the end. “I am modeling the probability that such an event could occur”. For me, it was one step too far in the search for “holistic risk”. Risk management seemed to have completed its transformation into pure entertainment. Dudley seemed the epitome of a risk manager who would drown crossing a river that was 12 inches in depth on average.

Story 3

Nero and I marketed together a fair bit. I provided the technical bits. He smoozed the clients. Nero and I were making a pitch for a new structured product with a portfolio manager from an overseas fund over dinner. Dinner was a 3 martini, 2 bottles of French red wine and cigar and brandy affair. I kept looking for a moment to interject and explain the structure and benefits of the trade. I didn’t get a chance.

Towards the end of the evening, the fund manager turned to Nero and said: “The girls are coming up to my room, right?” I looked at Nero surprised. “You didn’t forget the stuff, it drives the girls wild?” Nero muttered something and carefully steered the conversation in a different direction. After dinner, Nero and I left the hotel. Nero stopped and drew his hand in a cutting motion across his throat. “Remember IBGYBG,” he said. “I be gone, you be gone. Got it kid.” A week later the portfolio manager was on the phone. “Been thinking about your deal. Like it a lot. Send me a term sheet. I think we can do something there.” We closed a juicy trade for $200 million booking profits of over $2 million.

Years later, one of Nero’s boys was pitching a deal to a client. Coincidentally, I happened to be a consultant to the customer. During the presentation, I asked some questions. Nothing personal, I was doing my job. The presentation wasn’t going to plan. Eventually, the salesman stood up and said: “The product is unsuitable for you. It is intended for someone less sophisticated.” I rang and told Nero. He killed himself laughing. True lies, all of them.

PB: Who do you think will buy the book?

Everybody, I hope. I don't think I am going to be the industry's favourite son after exposing its lies and dirty practices. So I am hoping that it's a best seller as I need the money. Joking aside, I think there are a few groups who will buy it. The first is people in banking and finance, whether or not they are involved in derivatives directly. They will find it a wry and entertaining read and may recognize themselves or people they work with. It 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. It will probably appeal also to people and graduates entering the industry who want to bluff their way through a interview for that high paying derivatives job - it’s a great Bluffers Guide to Derivatives.

PB: What makes you qualified to write the book?

Curiously, my working career has coincided with the development of these markets. I have been around them for almost 30 years working on almost all sides of the business - trading, managing and advising. I am almost a living fossil. Also my other technical book are standard references for market practitioners - the last one was 4 volumes, 4,700 + pages, weighed in at 8 Kgs, came in its own picnic hamper and took about 30 cms on your book shelf. In short, others tell me that I am something of an expert here - they tell me I know what I am on about. I have been caught that normal courtesy requires you to always believe what you are told.

PB: Why did you write the book?

Guilt and public service. Guilt because I was part of this world for so long. Public service because I thought others should know about what was going on with their money in this curious world. Also, I needed to explain to my partner, family and friends what I did for a living through all these years.

PB: Finally, any questions that you'd like to ask your readers?

Ask yourself: "do you really know what other people are doing with your money - the savings in the bank, your pension, your insurance policy?" Traders Guns & Money will tell you a little of the truth of what really does go on. You'll probably keep your money under the mattress after you read this.

http://www.pearsoned.co.uk/Bookshop/article.asp?item=903

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