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My Book Reviews

Category: Wall Street insider
Published: 1999
Read: 2001
Reviewed: Jun 2010

Published in 1997, F.I.A.S.C.O. (which stands for "Fixed Income Annual Sporting Clays Outing" and refers to a corporate outing the author went on) details the author's experience with getting a job as an emerging markets derivatives salesman on Wall Street. He began at investment bank First Boston and left to go to the more prestigious Morgan Stanley. He illustrates the different types of derivatives (PERLS, PLUS Notes, BIDS) and talks in detail about the various derivatives deals that he worked on, including the regulatory process, technical details, and marketing of the derivatives. There were a few random topics which were interesting, including: the profile of Morgan Stanley president John Mack, a brief history of First Boston and Morgan Stanley, his interview at Bankers Trust, and the annual bonus process.

This book talks in depth about the high-profile losses at Orange Country, Kidder Peabody (Jospeh Jett), and Proctor & Gamble. It does a good job in showing how and why derivatives blow-ups happen, specifically the lack of knowledge about the fundamentals of derivatives by most of the people involved with them. Although the author describes derivatives in a tongue-in-cheek manner as "financial gizmos that suddenly become worthless and then appear on the front page of the Wall Street Journal", this is not an altogether inaccurate description.

This book is more serious than the other books by Wall Street insiders (like "Monkey Business" or "License to Steal"). It is more about the products and processes than it is about colorful personalities. It blends details of real-life derivative deals with educational tutorials. The book talks about the need for greater regulation and presciently talks about the failure of the ratings agencies like Moodys to see the risks of derivatives.

"What makes CMOs especially dangerous is that although they're extremely risky, they can appear quite safe. One deceiving and dangerous aspect of CMOs is their credit rating; AAA. Because payments on most CMOs are guaranteed by an agency of the federal government, the companies who rate the bonds' credit quality, Standard and Poor's and Moody's, assign most CMOs their highest credit rating. But this AAA rating is misleading. Although an agency of the federal government is unlikely to default on its guarantee, default is only one of the risks associated with CMOs. Investors in CMOs can and do lose money for other reasons, including the risk of prepayment of principal. These additional risks are not captured by the AAA rating. . . . Because mortgage payments are so unpredictable, even the most sophisticated investment banks that actively trade mortgages have suffered significant losses."

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