Book Review: Something absurd in the City
Wednesday 18 March 1998
Share options are probably their most basic form, but they also include "Inverse floaters", "zero cost dollars" and other innovations conjured up by bankers for special circumstances.
As these strange names suggest, this is a strange world, made worse by the fact that the stakes are so high. As Richard Thomson, former deputy City editor of The Independent on Sunday, points out in his just-published book, Apocalypse Roulette (Macmillan), since it usually takes only a small down-payment (the margin or premium) to purchase the obligation to buy or sell an asset at an agreed price and time, "any movement in the value of the underlying asset above or below the agreed price can produce immense profits or losses relative to the original down payment".
Accordingly, Barings, brought down by the Singapore dealings of the so- called rogue trader Nick Leeson, is anything but the only big name to come a cropper through dabbling in this area of activity. Daiwa, Sumitomo, NatWest Bank, Union Bank of Switzerland, the food and drinks company formerly known as Allied Lyons and local authorities as far apart as London's Hammersmith and Fulham Council and California's Orange County have all found themselves on the losing end in a game that Thomson claims has grown from just about nothing in the early 1970s to one worth $64 trillion by 1996.
Indeed, the real value of this easily-read volume is as a primer to an area of activity that perhaps more than anything else has been responsible for the triumph of the bright young trader over the traditional well-connected City gent. Instead of lurid details about rogue traders and numbered offshore accounts, the reader is told of how the various scandals fit into context and help to form a pattern of a once-obscure technique getting out of control.
While share options have attracted their own high degree of interest because of their role in enhancing executive pay, they are not the centre of the action as far as derivatives as a whole are concerned. Not surprisingly, it tends to be at the more exotic end that all the trouble occurs. For the simple reason that not enough people understand them.
The result has been a host of codes, guidelines and revised accounting rules as industrialised countries have sought to control the worst excesses of the early years of this decade. But Thomson's highly entertaining gallop around the field will only confirm cynics in the belief that the financial markets are - whatever may be said about the efficiencies of capitalism - full of absurdities.
"However efficient the checks and balances become, the financial system is inherently more fragile than it used to be," he writes. "Derivatives, the freedom of the markets and tyranny of the traders make it easier than ever before for excessive concentrations of risk to build up into pressure points which may prove more than the system can bear."
Having pointed out that the pressure on often young and highly ambitious dealers to produce ever bigger profits has caused bigger dealing disasters in the past few years than ever existed in the supposedly money-obsessed 1980s, Thomson concludes: "The unavoidable fact about derivatives is that while helping to limit risk, they have also encouraged unprecedented speculation."
TV reviewBroadcasting House was preparing for a visit from Prince Charles spoiler alert
Glastonbury Michael Eavis reveals final headline act 'most likely' British pair
Film Ewan McGregor joins star-studded Beauty and the Beast cast as Lumiere
TVThe Island with Bear Grylls under fire after male contestants kill and eat rare crocodile
Grace Dent on TV The Secret Life of the Pub is sexist, ageist and a breath of fresh air
Arts & Ents blogs
- 1 Migrant crisis: Greek soldier saved 20 people singlehandedly off Rhodes beach
- 2 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 3 UK weather: Britain braced for snow as arctic air mass moves in
- 4 Aaron and Melissa Klein: Oregon anti-gay bakers ordered to pay $135,000 after refusing to make cake for same-sex wedding
- 5 'Isis' schoolgirls: Missing British teenager tweets picture of her Syrian takeaway
Poldark, series 1 finale, review: How a costume drama became a Sunday night swoon-fest
Al Pacino admits he was nearly fired from The Godfather and it's still his most 'difficult role'
Warner Music owner Len Blavatnik tops Sunday Times Rich List
Game of Thrones season 5 episode 3, review: Sansa and manhood-lopping torturer Ramsay Bolton - really?
The day I starred in Only Fools and Horses
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove