Quotes from Frank Partnoy

Vincent Bailey, portfolio manager at BEA Associates, a New York money-management firm that managed $3 billion in Latin American funds, said that when Latin American derivatives are sold, "Mostly it's done for people who can't buy the actual securities

The sale would be treated as a transfer, merely part of a complex financing. Banamex's 20 percent ownership of the Bermuda company would allow it to avoid recognizing a sale, and Banamex could "sell" 80 percent of its Ajustabonos without generating the accounting loss it had feared.

That trip, the odds had been in my favor: I had practiced counting cards and could count well enough at blackjack to give me a slim edge over the casino. The basic premise of card counting is that the player can beat the house when there are more high cards than low cards remaining in the deck. If you increase your bets when more low cards have been dealt and more high cards remain, you'll have an advantage over the dealer. I planned to have an advantage, and I planned to win.

This extra cushion of collateral became known as "overcollateralization." For example, if you started with $100 worth of Ajustabonos, the PLUS Notes would be repaid in full even the Ajustabonos dropped to $80 because Banamex ate the first $20 of losses.

My strategy was simple: Bet $5 when there were more low cards in the deck, and bet several hundred dollars when there were more high cards. By switching my bets and counting cards, I obtained a narrow advantage over the casino. Blackjack is the only casino game in which the player can consistently beat the house, and it was the only game I played. As I continued winning, the pit bosses began watching me more carefully. They get nervous about anyone counting cards, regardless of betting size.

while the firm sailed along cautiously, more aggressive banks—especially Salomon Brothers and Goldman, Sachs—began making more money. This was a serious problem for Morgan Stanley. In investment banking, cash conquers all. A bank's goal was to make money, not to preserve its chastity. If Morgan Stanley could outearn rivals by capitalizing on its stellar reputation, fine. But if less-reputed banks were generating more cash, Morgan Stanley was doing something wrong.

In IBD, young associates spent twenty-hour days preparing "books," the bound presentations senior bankers flipped through during meetings with corporate executives. You took a job there at your peril. After several years preparing these flip books, you either would be fired or promoted, assuming you still were alive. After several more years you would be allowed to carry the books to meetings, and at some point you might even be permitted to speak.

FID employees sold and traded bonds, including government bonds, junk bonds, mortgages, and emerging markets debt. FID salesmen and traders took huge risks, and FID profits were much more volatile than those of IBD, but when Morgan Stanley had a really good year, it was because of FID. FID was on the trading floor, where there were no flip books. A new sales-and-trading associate had only three tasks: (1) Feed your boss, (2) withstand abuse, and (3) learn.

These were heady days at Morgan Stanley. No one seemed to care about how risky many of the hundreds of derivatives deals were. No one seemed to care about whether clients actually understood what they were buying, even when the trades had hidden risks. The group simply continued to pile trade on top of trade. Year by year, client by client, trade by trade, the venerable House of Morgan was building a precarious house of cards.

The Gang of Four consisted of: Bidyut Sen, the group's mastermind in New York; Steve Benardete, a politically connected New Yorker and former treasurer of the key derivatives lobbying group, ISDA—the International Swaps Dealers Association; George James, head of the London office; and Paul Daniel, leader of the booming East Asian offices, headquartered in Hong Kong.

steeper. In a way, the forward curve simply stretches or magnifies the shape of the current yield curve. And if you don't believe what the forward curve is predicting, then derivatives allow you to bet against the forward curve.

The downside risk made longer-maturity PERLS especially attractive to sell. Selling a five-year PERLS to a widow or orphan buyer meant you didn't have to worry about the repayment of principal for five years—an entire career on Wall Street—and even then there was a decent chance the buyer would have bet correctly and made money. Not even a widow or an orphan will complain about receiving $200 instead of $100 at maturity.

Ivar appreciated Berning's reconciliation. The message from Ernst & Ernst was that if Ivar decided he didn't like some numbers, they easily could be changed. As the old joke went, when an accountant interviewing for a job is asked, "What is two plus two?" the best answer is not "Four," but "What do you want it to be?

However, not even Soros could persuade Congress to pass any laws, and ultimately these proposals failed. Soros, Gonzales, Leach, and others were up against stiff competition. In the past two election cycles alone, legislators received an estimated $100 million in contributions from banks, investment firms, and insurance companies.

Although Ivar dominated every conversation, he did so with a modest, almost self-deprecating air. He seemed apologetic, even embarrassed, that he knew all these things. As he moved among the passengers, he left them feeling that they, not he, had been asking all the questions. Even as Ivar held forth, they wanted him to say more, not less.

I couldn't understand how they had lost so much money. When you bought stock in one of these companies, what were you buying? A manufacturing company or a derivatives speculator? How could you tell the difference? In each case, the DPG salesmen vowed that they had not sold any of the exploding derivatives. In each case, rumors bounced throughout the firm, then died. It appeared that Morgan Stanley had dodged these bullets, too.

In the early 1920s, Lee Higginson was one of the most prestigious and profitable banks in the world – just behind J. P. Morgan but ahead of Goldman Sachs and Lehman Brothers. The firm's roots were in Boston, not New York, yet even as America's financial business shifted from State Street to Wall Street during the early twentieth century, Lee Higginson remained one of a handful of global "money banks.

At the bottom of each page, in tiny, barely legible print, was a lengthy disclaimer written in impenetrable legalese. As far as I could interpret the language, it fed the reader two bitter blanket warnings: (1) that all of the information in the packet likely was wrong and should not be relied on, and (2) that First Boston probably has a secret relationship with someone else involved in this trade so that if you buy it, you are likely to be screwed.

From the firm's perspective it was important to make as much money up front as possible on these trades. Take out a big fee, plant the time bomb, walk away, and wait. Of course, after the explosion the derivatives losers would sue, but as long as the firm had made enough money up front and could defend the lawsuit adequately, it would be fine. The important message I took from the disclaimers was this: The way you made money selling derivatives was by trying to blow up your clients.

Unlike debentures, the 15.7 million dollars of participating preferred shares did not require repayment on a particular date. Effectively, International Match had shifted from a strict debt obligation to a more flexible equity obligation.

His stories were so popular that Edwin Lefèvre, the author of the articles in the Saturday Evening Post, assembled them into a bestselling book, Reminiscences of a Stock Operator.24 During the years after the book's publication, Livermore lost the entire $100 million he had made betting on the markets, and then shot himself

Indeed, what was remarkable about this scheme wasn't Ponzi. It was his victims. If people really would believe that a 34-year-old ex-bank clerk who had just served three years in prison for check kiting was capable of doubling their money in six months by exchanging millions of 10 cent postal coupons from Europe – well, if they would believe that, then they would believe anything.