Industry professionals are, or should be, carefully reviewing their derivatives policies in light of the recent severe losses taken by Barings PLC, Orange County, and other institutions. For that reason, the publication of "The Vandals' Crown: How Rebel Currency Traders Overthrew the World's Central Banks" (The Free Press, New York) couldn't have come at a better time.
Author Gregory J. Millman takes on the vaunting task of explaining derivatives markets in lay terms. For the most part, he succeeds, producing a good primer on derivatives, investment markets and macroeconomics in general. But he fails to offer much in the way of informed opinions on derivatives policy, regulation or risk management.
As a journalist and former international banker, he is well-suited to offer ideas on what should be done or not done with derivatives-related turmoil that has become a regular part of investing. Given his experience, he should have included, directly or indirectly, more of his thoughts.
Mr. Millman makes it clear that governments are bound to fail in attempts to manage investment markets. His stories of how governments repeatedly failed to control a market - be it gold, currency rates or money supply - underscore the strength of free markets. What should be done, if anything, about the power of the derivatives traders in those markets is left an open question.
When Mr. Millman tries to take a stand on an issue - e.g., active investment management - it's not supported throughout the book. "Clearly, the pension system in America .... would be a lot safer had pension funds paid due attention to the Nobel laureates who invented financial science," he writes, referring to active managers trying to outperform the market. While he makes valid points about whether active strategies are worth the effort, he later contradicts them. The author details the quantitative strategies of two little-known investment firms, Long Term Capital Management LP, Greenwich, Conn., and Millburn Corp., New York, implying their computers are somehow immune from flaws he attributes to active management.
But other chapters are interesting and relevant. He tells of the unsuccessful effort of Japan's regulators to stop the creation of futures contracts and warrants on the Nikkei 225 index in Singapore and New York. He quotes Ivers Riley of the American Stock Exchange, as saying, "I felt a couple of times that I was going to get the rubber hose treatment," in reference to meeting with Mitsuo Sato of the Tokyo Stock Exchange.
The book tells how a confluence of personalities - including Fischer Black, Arnie Staloff, Lisa Polsky and Joe Ritchie - was responsible for the success of options markets. And throughout the book, Mr. Millman shows the growing power of various currency and derivatives traders, including Andrew Krieger, George Soros and Richard Sandor, writing, "Like the vandals who conquered Rome's empire, they broke down the bureaucratic empire that once controlled international finance."
If Mr. Millman had stepped out of his role as an objective journalist and advocated stronger positions on derivatives, the book could have been a must-read. As it is, it is useful for those looking to bone up quickly on derivatives markets.