Derivatives as narrated by Frank Partnoy (1999)

I fear I am becoming an armchair critic akin to those analysing every move made by the football (or rugby etc.) manager during their matches.

It is tremendously sad that I am writing about ‘Fiasco: The inside story of a Wall Street trader‘ rather than Charlie D, the ‘legendary’ and almost mythical trader at the Chicago Board of Trade. By way of exclusion and historical reconstruction, he was an honest and compassionate man.

The book’s synopsis caught me eye. Frank’s ‘revelations should stir fear in anyone who owns mutual funds, stock, or even insurance.’ (Again, I reiterate the need for your own research. Instrestingly, you may also find information on the recent global financial meltdown caused by the derivatives like Credit Default Swaps or Collateralised Debt Obligations.)

One topic raised was on PERLS or Principal Exchange Rate Linked Security. Partnoy indicates them as a unique kind of bond (an investment instrument that if held to maturity could return you the invested capital.) In practice, PERLS are ‘structured notes.’ A ‘popular’ PERL repaid the principal based on the changes in 3 currencies – the US dollar; Swiss franc; and British pound. Morgan Stanley sold PERLs as they earned 3.5% more in investment banking fees for them.

Some clients dabble in them because it offers the legal recognition of a bond (protection from legal liability) while offering over the top returns. (First Boston,  another bank sold  the ONE YEAR THAI BAHT BASKET-LINKED NOTE. It promised coupon rates of 11.25%! Now, you compare that with Singapore Government bonds…)  Others, however, bit off more than they could chew. One senior treasury officer from an insurance firm suffered a great shock when $85 million of PERLS fell to ‘a fraction of their original value.’ (He thought the bank was shouldering the exchange rate risk since they were not ‘even allowed to buy foreign exchange.’   These notes/PERLs often had AAA ratings  (since they were issued by government/federal agencies like Freddie Mac or major corporations like General Electric Credit) and complicated formulas.

The shit hit the fan as the Thai baht plunged in 1997 Asian Financial Crisis (AFC). Owners of such structured notes got burned. In one instance, SK Securities (South Korea) lost roughly $300 million to JP Morgan. They wagered that the baht would appreciate relative to the Japanese yen.

On another  note, even investing in specific companies can be extremely costly. Yakult (yes, the one selling drinks to aid your digestion), lost 200 yen per share on 20 March 1998. These were caused by losses from derivative investments; between $500 to 810 million in all. 300 employees were retrenched. Arguably, this was shocker in country known for lifetime employment.

It seems apart from knowledge, caution and awareness, the retail investor is heavily disadvantaged. Legal costs, if one can afford them, are daunting; to boot a winning suit is far from guaranteed. In sum, buyers beware!

[Note: The inspiration for the above are based on Chapters 2,3 and the Postscript of Partnoy’s book.]


Frank Partnoy. Faculty Biography. University of San Diego.

The New York Times. (21 March 1998). INTERNATIONAL BUSINESS; Japan Company Derivatives Loss.

Chester Dawson. (20 March 1998). Japan Co. Has Huge Derivatives Loss. The Associated Press.

Stephen E. Frank. (17 February 1998). J.P. Morgan Sues SK Securities, Seoul Bank in Derivatives Deal. The Wall Street Journal.



Change Management – The most loving place in town: A modern-day parable for the church. Thomas Nelson. (2008).

Unexpectedly, after beyond the various courses I have attended, the point that rings most true is this:

The foremost desire (one bordering on need), for people when meeting with change is information. In other words, what is happening? People very much would like to know what is coming up. (p. 123)

My experience implementing the IT project at work confirms the above.

Next, according to Ken Blanchard and Phil Hodges, is how the change would impact those involved. Following this would be an expounding of the action/implementation schedule. Subsequently, one can refer to the advantages of the change.  (You may want to compare what has been prescribed against your experience or education…)

On another note, the book is an example of using fiction/novelisation to bring across and effect real life actions. Although somewhat brief and rather too straightforward, it still reflects depth in thought. More preferred in this genre are the books, Who moved my cheese (Spencer Johnson); and The Goal  (Eliyahu M. Goldratt).  Hope that you too can find joy and solutions from such books!

Exams – Downsides and Ups

My thoughts after reading the 58-page Foreword penned by C.P. Snow (described as ‘… a massive and contentious presence in the twentieth century.’) The examination under scrutiny was the Mathematical Tripos conducted by Cambridge University, UK. (The British were likened to Chinese for their high prioritisation on examinations.)

The unfortunate downside to an exam based system is a mechanical dullness stifling the joy of learning and its accompanying creativity. Snow described Hardy as a ‘racehorse’ and the person training him for the Tripos as ‘sublimely uninterested in the subject itself.’ It is very likely that this regime ‘… effectively ruined serious mathematics in England for a hundred years.’ (p.22-23).  The role modelling was there all right, but only in a fixed function, that of Tripos extraordinaire. I am not sure how many can bear to live life like that…

Conversely, the exam does have its merits. It is at least a system to differentiate, on an agreed basis, who (at that point in time) should proceed up the educational chain. It is a wonderful prelude to those who would be in operational jobs. In considerable portions, one needs to be drilled in the Standard Operating Procedures (SOPs) and execute accordingly. The worker in such a role is often prized for their ability to execute their task as quickly as possibly. Finally, the exam trains us in handling a specific type of stress; the type of stress that forces us to make split minute (if not split second) decisions.

Occupational Choices

Why do we do what we do?

According to G.H. Hardy, there are only 2 reasons. We do so because we have the talent to do that one particular thing. The other, opining that few people can indeed do anything extremely well, one would simply take whatever life gives them. Basically, the job or occupation fell into my lap or something along those lines. Eventually, though, as I would argue, by practice and perhaps revelation, one could then become better in the job that fell into their laps.

Of course there are other factors that why one chooses a certain occupation (or organisation). A good work-life balance; high pay; structured and routine tasks; collegial and loving work environment; an honest and decent living: these are but a smattering of factors. Knowing these factors could help reduce the unnecessary areas during a job search. The conviction that you acquire in this soul searching would form a major foundation for your ‘live’ job interview. As I recall, telling the truth is most convincing after all…