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The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . an by Nicholas Dunbar

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CHAPTER TWO

Going to the Mattresses

In 1994, a new model for measuring risk—value at risk (VAR)—convinced large segments of the financial world that they were being too cautious in their investing. Another new financial tool, over-the-counter derivatives, seemed to cancel out unwanted risks by transferring them elsewhere. Thanks to VAR and OTC derivatives, the trading positions and profits of banks grew exponentially. In 1998, the fatal flaw of this paradigm was exposed by the collapse of LTCM, but traders and regulators learned the wrong lesson from that near-death experience, setting the financial world up for an even bigger cataclysm.

The Sweet Bliss of Know-Nothing Regulators

Early in 1994, Peter Fisher was head of foreign exchange in the ...

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