Codes of Finance: Engineering Derivatives in a Global Bank

Codes of Finance: Engineering Derivatives in a Global Bank

Codes of Finance: Engineering Derivatives in a Global Bank

Codes of Finance: Engineering Derivatives in a Global Bank

Synopsis

The financial industry's invention of complex products such as credit default swaps and other derivatives has been widely blamed for triggering the global financial crisis of 2008. Codes of Finance takes readers behind the scenes of the equity derivatives business at one of the world's leading investment banks before the crisis, providing a detailed firsthand account of the creation, marketing, selling, accounting, and management of these financial instruments--and of how they ultimately created havoc inside and outside the bank.


Vincent Antonin Lépinay, a former employee of the bank, investigates the journey of a derivative through the bank's front, middle, and back offices. In the process, he provides a rare look at the strange world of quants, traders, salespeople, accountants, and others involved in a self-annihilating form of life in which securities designed by the bank eventually threaten its infrastructure. Throughout, he tries to understand the baffling languages of engineered financial products and the often-conflicting bodies of expertise that are mobilized to create them.



Codes of Finance highlights the massive costs of investment banking's hubristic dream of manufacturing global financial services that derive their value from multiple economies across the world. Yet the book challenges simplistic condemnations of financial engineering by showing that derivation is the central operator of economic life--stretching far beyond the phenomenon of financial derivatives themselves.


Essential reading for economic sociologists and financial economists, as well as for readers curious to decipher modern finance, this is the first serious study of the intellectual and organizational puzzles raised by the controversial products of contemporary financial engineering.

Excerpt

This book sets out to make sense of financial innovation by documenting how a new product—the capital guarantee product (CGP)—that was used by a bank, General Bank , caused disruption to the bank’s orderly organization. It is an attempt to understand what happened to financial actors (engineers, traders, salespeople, regulators) after they began to invent services that changed their way of making deals, eventually unsettling their businesses. Disruptive financial engineering not only left regulators puzzled and often unable to make sense of the risks generated by the innovative financial products, but also unsettled the bank that was expecting to adopt and exploit the innovations. What happens to an institution that sells products that undermine its organizational structure? Peeking into General Bank’s radical financial engineering offers us a rare glimpse of the relations among otherwise distinct modalities of innovations. in this text, products, processes, and organizations are studied together. This book uncovers a self-defeating form of innovation whereby a bank’s organization undermines its financial practices, and unstable securities designed by the bank destroy its infrastructure.

Over the past thirty years, financial innovations have dramatically changed the way in which companies and individuals can manage their assets. Now, as many companies and even more households observe the dire consequences of innovative financial products, it is fair to wonder whether any of these products are well understood by the financial actors themselves. Once set loose in General Bank, these innovative products produce a number of unexpected consequences, straining the ability of dozens of operators who are baffled by these tortured formulas—physicists, mathematicians, legal scholars, and, last but not least, folk psychologists in search of the ultimate law of the market. But who really understands the language of this new breed of finance? Codes of Finance is not a narrow book about the financial crisis that has struck the world economy since 2007. Many studies (MacKenzie, 2010; Tett, 2009) provide interested readers with illuminating accounts of the factors that led to . . .

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