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."
BBC Trust agrees to axe channel from TV in favour of digital moveTV
Final Top Gear reviewTV
Arts & Ents blogs
- 1 Autistic teenager beaten up by bullies makes them watch 20-minute video about autism
- 2 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 3 Chris Moyles reportedly set to make radio comeback with new breakfast show on XFM
- 4 The Greece debt crisis explained in less than 100 words
- 5 Cristiano Ronaldo storms out of interview after being asked about possible sale of Manchester United target Sergio Ramos
Game of Thrones season 6: Daenerys actress Emilia Clarke says '50/50 chance' Jon Snow is alive
Chronixx interview: Reggae sensation on taking the opening spot at Glastonbury and calling Barack Obama a 'waste man'
Game of Thrones season 6: Director Jack Bender says showrunners 'communicate closely' with George RR Martin
Amy Winehouse film: Mark Ronson praises 'respectful' movie as it scores highest ever UK opening for British documentary
Chris Moyles reportedly set to make radio comeback with new breakfast show on XFM
More Britons believe that multiculturalism makes the country worse - not better, says poll
Osborne to cap family benefits at £23,000 – announced ahead of his post-election Budget
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
Sickness and disability benefits could be reduced by £30 a week as part of £12bn welfare cuts