Patrice Riemens on Tue, 8 Jun 1999 18:38:06 +0200 (CEST)

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<nettime> Apocalypse Roulette (fwd) (from the j18 list)

----- Forwarded message from Mark Brown -----

Date: Sun, 6 Jun 1999 01:00:54 +0100 (BST)
From: (Mark Brown)
Subject: Apocalypse Roulette 

Hi all,

Here are probably too many notes and quotes from Apocalypse Roulette - the
Lethal World of Derivatives, by Richard Thomson (Macmillan 1998.)

Its description of the current potentially catastrophic situation (some
would argue that it's already catastrophic!) in modern financial markets is
more compelling than the political overview, which seems to want curbs
rather than a completely new start. 

A much slimmer selection will be found in London's forthcoming J18 agitprop,
in case this all seems far too much to be wading through...


Mark (London)


Apocalypse Roulette - the Lethal World of Derivatives

(single lines are chapter names; apologies for any typo's)

Apocalypse Roulette - The Lethal World of Derivatives 


By the mid-1990's: 'Many banks, not just Barings, had begun to treat the
financial markets as a glorified casino. Like men with a bad addiction,
international bankers had become mesmerised by the short term deal in their
scramble for higher profits and bigger bonuses. They were risking their own
capital in an unprecedented fashion, and the profits became more important
than relationships with clients. Bank managements were in thrall to the cult
of the dealer. Many industrial corporations and investment companies -
perhaps your own pension fund - had taken to placing multi-million pound
bets on which way currencies, shares or bonds would move next.

Despite the warning Barings, nothing much has changed since then in the
behaviour of the banks or other big international investors. Stupendous
dealing losses have become commonplace...

On the heels of Barings' bankruptcy almost every large bank in Europe, the
US and Japan claimed the same disaster could never have happened to them. 
Many were talking nonsense. There were, and still are, banks whose
internal controls were hardly better than Barings. Take, for example, the
GBP 19 million black hole uncovered by NatWest Bank in the spring of 1997
on its options trading... 

But not all such blunders become public knowledge. As everyone knows,
banking is to some extent a confidence trick - banks only last as long as
investors think their deposits are safe - so bankers see it as a duty to
reassure the public even if that means occasionally misleading them. It is
normally not until a bank is in the direst trouble that the public ever gets
to hear about it.'

Ultimate financial nightmare: what central bankers call 'systemic risk'.

'Regulatory and legal systems have been left so far behind that the new
world of derivatives is a kind of financial Wild West with few rules or
codes of behaviour...And it has left governments without the ability to
control, or even understand, the financial markets as the speculative
assault on sterling in 1992 and repeated attacks on other currencies since
then has shown.

Financial derivatives have grown, more or less from a standing start in the
early 1970s, to a $64 trillion (that's $64,000,000,000,000) industry by
1996...which is roughly sixty times the size of the British economy, or
about 6 times the size of the US and Japanese economies combined.

One thing is clear: derivatives have transformed the financial system. It
has never been so easy to move money from country to country and market to
market, nor to move it so quickly, nor to take on so much risk in the blink
of an eye. In this new age of finance the rewards and the dangers of making
money out of money are many times what they were only a few years ago.

Derivatives have built interconnections between markets that never existed a
few years ago; they have woven international finance into a single
fantastically tight and complex tapestry, yet the fabric seems thinner than

"Derivatives have the potential to create an unprecedented financial disaster."
 It could happen. If it does, it will almost certainly be in a way that no
one has foreseen. It may be triggered by an extraordinary event that nobody
in their wildest dreams had imagined. But more probably it will involve
nothing more remarkable than the sort of problems that regularly crop up in
the markets, only this time the particular combination of events will be so
unusual, so unexpected, the result will be lethal. In times of crisis the
financial system reacts in unpredictable ways. The more suddenly the crisis
strikes, the worse the trauma is likely to be. Investors, caught off-guard
and protecting their own individual interests, will react in all the wrong
ways; governments and financial regulators will be confused and paralysed,
perhaps making mistakes that worsen the situation; the crisis will spread
like lightning across countries and markets, faster than anyone can control
until suddenly a local problem has become a global disaster...

A Short History of Derivatives and Speculation
1891 Chicago Board of Trade (where spec first got going) report:
"Speculation stimulates enterprise; it creates and maintains proper values;
it gives impulse and ambition to all forms of industry - commercial,
literary and artistic; it arouses individual capacities; it is aggressive,
intelligent, and belongs to the strongest and ablest of the race; it
grapples undismayed with possibilities; it founded Chicago, and developed
the great West, which is the nation's prosperity and the impelling
commercial power of the continent."

'Leverage: the financial equivalent of lifting a boulder by placing a pebble
on the other end of a strategically positioned lever.'

As much a conceptual as a technical development.

The Exchanges
Yra Harris, Chicago Mercantile Exchange, in crisis mode: '"There was total
emptiness in the pit of my stomach. You try to concentrate and keep your
wits about you but it isn't easy when the world is caving in. There were a
lot of white faces around me - others who must have been caught by the
sudden move.' In general, whatever happens, it's a bad idea to let your
expression show your feelings in the pits because any sign of weakness puts
a trader in much the same position as a wounded deer surrounded by slavering
wolves..."That's the problem with this business. You travel the emotional
spectrum every day. Really, this business takes all the intestinal fortitude
one has."

As strong stomach, however, isn't the only physical attribute the average
pit trader needs. On any given day, the Merc's Eurodollar futures pit - home
to the most popular exchange traded contract in the world - resembles a
scene that Hieronymous Bosch might have painted, in one of his more
apocalyptic visions of hell.

In a space hardly bigger than a tennis court more than a thousand people
squeeze together in a heaving, yelling, jostling, multi-coloured mob, waving
their arms, flicking their fingers and scribbling furiously on small cards.
The floor is deep in litter. It sounds like a riot and there is a distinct
smell of sweating bodies in the conditioned air. Around the edge of the
crowd stands a ring of yellow-jacketed clerks, hanging over railings to
shout at people manning telephones several yards behind them. At the core of
the crowd, facing inwards, are others dressed in brightly coloured jackets
shouting at eachother.

It's at its worst early in the morning when most of the traders turn up to
secure a good dealing position in the pit; they are jammed together elbow to
elbow, so close that they can hardly move their arms. Occasionally, the
pressure of bodies is so great that the railings around the edge of a pit
have been known to give way and those at the bottom of the resulting heap
suffer broken ribs or limbs. Sexism aside, women and smaller people in
general tend to get shouldered aside or drowned out in the hubbub, so few
bother to venture into it. The traders are almost all in their twenties and
early thirties, built like rugby players with voices like foghorns, and
robust enough to spend the entire day wedged in this crowd, trying to turn a
profit from the billions of dollars that ricichet back and forth every hour
across the overcrowded space. In the bowels of the building is a first-aid
centre with stretchers to carry away anyone who collapses under the strain.
If the financial markets are a war zone, this is the theatre of hand-to-hand

It is said that in one of the pits one morning a trader died of a
heart-attack in the crush but his body was wedged in so tightly it could not
fall to the floor. Some time passed before the dealers around him noticed
his demise but when they did, they took immediate action. They began
feverishly filling  in dealing tickets which gave them handsome profits from
imaginary trades between themselves and the dead trader. Only when his
pockets were stuffed full of tickets did they drag him away and call the
medics. The problem for the exchange  was to determine the exact time of
death in order to judge whether the tickets in the dealers' pockets were
genuine. Apocryphal Whether it is or not, the story contains a grain of
poetic truth. In full cry, the pits are merciless places where everything,
including death, may be a market event.

"It's a war," Harris says.'

'No trader ever made a profit out of a static market. Volatility is the key
to wealth. As long as the market is moving up or down, there is the chance
of making money. The markets are deliberately designed to encourage
volatility. The options and futures contracts for the same month's delivery,
for example, never mature on the same day but usually about a week apart.
There is no reason for this except to make it impossible to achieve a
perfect hedge between the markets, which in turn creates uncertainty, which
causes volatility.

And when all else fails, dealers start telling eachother rumours...When
their financial wellbeing hangs on something as unpredictable as a rumour,
it is hardly surprising that pit traders, like gamblers, are profoundly
superstitious. There are as many ways of propitiating Luck as there are
dealers. One has a lucky tie - he owns a drawer full of the identical
article but wears one tie until it is little more than a collection of
ragged threads hanging round his neck before discarding it and starting on
the next. Another always comes into work through exactly the same security
turnstile each morning even if it means queuing. A third, when he is on a
winning streak, wears the same underwear every day without washing it until
the streak comes to an end.

But while traders may try to manufacture volatility on their own, they
prefer it when speculators or corporate customers outside the exchange pitch
in and move prices. Most of the dealing  in the exchanges originates in the
trading rooms of banks and corporations, although only about a quarter of it
comes from genuine hedgers. The other three-quarters is all speculation -
and speculation is essential to any futures market because it supplies
liquidity and ensure that hedgers will find someone to buy their risk from them.

Do You Play Poker?
(135) "The derivatives department resembled a sandpit full of kids where the
adults had wandered away. We did our own thing, made our own mess and made
new kids feel miserable. It was the natural order of things." New dealer
Terry Grove in a British bank dealing room.

"The only question my interviewers seriously seemed interested in," said one
New York trader, "was: Do you like gambling? Do you play poker? They had
obviously decided that good gamblers made good dealers, that the qualities
were the same. And maybe they were right. Actually, I don't play poker but
since the answer they obviously wanted to hear was yes, I told them that I
did and everyone was happy."

(140) Clare Gervat joined Chemical Bank as a trainee straight after
university at Cambridge, and then spent two years at BZW in the late 1980's
as a swaps dealer. "It was fun as long as you didn't mind not having a life
outside work. If you leave for work at 6a.m., you fall asleep at 10.30p.m. -
even if you are in the middle of a dinner party. The people you spend time
with are those in the same sort of business, as they are the only ones who
find your arcane knowledge and jargon-laden conversations even remotely
interesting. I bought a flat and hardly ever saw the inside of it except to
go to sleep in. The fridge was empty most of the time apart from a bottle of
vodka in the freezer and a couple of half-bottles of Veuve Cliquot for when
it had been a bad day. Drink featured heavily in a trader's life: to blot
out a bad day or celebrate a triumph - the talk getting bigger and more
aggressive with every glass. At work, though, traders spend a lot of their
time at their desks.They probably even go to the loo less often than anyone
else. Our main team had a junior whose four main duties were the four 'F's:
filing, faxing, photocopying and food - especially food. At 8.00a.m. she
would order breakfast, and at noon buy huge expensive sandwiches for lunch.
None of us saw daylight in winter except for a few hours at weekends."

'It wasn't a lifestyle calculated to nurture rounded human beings with broad
experience and diverse interests. It was excellent at breeding rich,
neurotic people who saw the world in terms of numbers to be bought and sold,
as if it was all one massive video game. If there is any glamour in this
life it is all in the pay cheque. No one goes into investment banking to
make the world a better place. They go in to get rich. Since money is the
reason they are there, they make sure they get it.'

(143) 'The effect of a massive pay cheque on the psyche of the average
twenty-seven year old is by now pretty well documented in the literature of
financial markets. The feeling thay he is invincible and possibly divine
seems to be almost automatic. The desire for an equally big pay cheque the
next year is only natural. He knows all too well that the way to achieve
that is to play the video game in the markets with even greater intensity
and elan than ever before.'

'The trouble with the gambling that the bonus system encourages is that the
dealers are playing with someone else's money. This gives the game another
dimension of unreality. It is axiomatic that losing someone else's money is
never as bad as losing your own. It can even be fun. And if a dealer loses
heavily this year, he does not have to give last year's bonus back. The
system positively encourages greater risk taking.'

(144) 'The system, therefore, encourages thousands of young people to sit
down every day in the hermetically sealed security of their bank dealing
rooms to play roulette with the financial markets...And for the traders
involved it offers enormous improvements on mere gambling in a casino. As
one young dealer in London observed, "It beats playing roulette. The numbers
are bigger, it's not your money at risk and you always get paid whatever
happens." Unlike ordinary gambling, you win even when you lose.'

(152) Fundamental change: derivatives have triggered banks' transformation
from lenders to gamblers. 'The big banks still look like the traditional
bastions of conservatism, respectability and caution; instead they behave
more like high rollers at a casino, stacking their chips in front of them at
the roulette and poker tables.Some understand what they are doing better
than others, but all of them are taking risks they would not have
contemplated twenty years ago. While heightening the danger of individual
bank failures, this has also increased the fragility of the banking system,
undermining its resistance to unexpected shocks - indeed, raising the
likelihood that such shocks will occur.'

'The big banks are like a group of mountain climbers roped together by their
swaps activity; if one of them falls into a crevasse there is a danger that
it will drag the rest of them with it.'

'As the saying goes, the only perfect hedge is in a Japanese garden. As soon
as you cease to have a perfect hedge you become, to some extent, a
speculator. You are betting on the market.'

(162) On Nick Leeson, the rogue trader who brought Baring's Bank to its
knees in 1995: 'The fact that Barings, the Singapore International Monetary
Exchange (Simex) and the Bank of England all accepted his star status
without serious question is a testimony to the enduring gullibillity of
financial folk, and to the important role fantasy plays in finance. Banks
are in thrall to the myth of the Master of the Universe, the champion
trader, the Napoleon of the markets who carries all before him and makes
legendary profits. They so badly want to believe it because it means easy
money, better pay and, in a way, that they are, after all, blessed by the gods.'

'What is striking about his own account of his antics, however, is that
profits and losses appear to have meant little to him. The thing that really
mattered in his eyes was the outward impression of a successful trader: the
stir he caused on the Simex trading floor, the adulation he received in
Barings, the respect he got from Simex which loved him for all the business
he bought to the market. The huge sums of money he gambled with evidently
had little reality for him.He dealt as though spinning a roulette wheel with
increasing abandon. For three years, everyone went along with the fantasy.'

'The Leesons travelled on to Borneo as Nick chomped his way through
mountains of Big Mac hamburgers to which he had become addicted.'

'traders these days rely utterly on computers. The screens are not only
their windows onto the market, but their auditor and back office too.
Computers, as far as the trader is concerned, are the source of almost
everything: market information, the financial instruments themselves, the
financing, delivery, payment, profit and loss calculations. There is no real
world of bonds and cash and payment slips anymore. The dealing world is in
the computer, it is all electronic, all unreal. This does not necessarily
encourage common sense but it certainly encourages a deep dependence on
computers. Dealers are not used to questioning them. To do so would be to
question the underpinnings of their world.'

Everything is Bigger Than It Should Be:
(214) On Arthur Benson: 'He had worked for Metallgesellschaft once before in
the 1980's but had left after he reportedly lost the company $50 million in
the markets. He joined Louis Dreyfus Energy, where his daredevil dealing was
saved by the start of the Gulf War which pushed up the value of a massive
long futures position in jet fuel he held and made him $500 million overnight.'

The Golden Horde:
(223) Soros thought he was God when he was a boy.
'Hedge fund managers have no commitment to anything that does not look
likely to produce a higher than average profit over the reasonably short
term - which could mean the next ten minutes.'
'The funds don't linger in markets where the returns do not look unusually
good, and since their investment conditions are constantly changing around
the world, their money is on a perpetual migration from market to market,
country to country. They are the Golden Horde of the financial world. To
make their migrations possible, they stick to the most liquid markets - and
none are more liquid than futures and options.

Soros to his Quantum investment manager just before hitting strerling: "I
told him to go for the jugular. It's like shooting fish in a barrel. As long
as the barrel holds up you keep shooting the fish.'

Who's in Charge?:
(249) Lack of regulation of City institutions: 'Financial services are the
country's biggest industry. They are also the biggest foreign currency owner
for Britain - bigger than oil or tourism or pharmaceuricals - and banking is
an important contributor. In short, banking and other kinds of financial
business make a vast amount of money for Britain. This is largely because of
London's positions as one of the world's great financial centres. To ensure
this status doesn't change, the hundreds of financial institutions, both
British and foreign, which operate there must be kept happy and they are
happiest when they do not have a regulator breathing down their necks every
day. Bankers prefer to be left alond to do what they want. If the regulators
get too heavy-handed, a lot of banks may simply decamp to Paris or Frankfurt
or Singapore or Liberia, or wherever will offer them good telephone
communications, decent restaurants and, above all, relaxed regulation.'


...the tide of global resistance rises: 42 countries and counting...
For info on resistance to Big Oil in the Niger Delta, see
            Oh, and Go here today:

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