Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, Revised and Updated

Preface to the 2009 Edition

The original version of this book came out in spring 2006, near the tail end of what has been called “the great moderation,” a period of low volatility, low interest rates, flat yield curves, and strong global equity and property markets that made investors relatively complacent about risk. Since then, we have seen a dramatic unwinding of this paradigm as extreme volatility has been ushered back into the markets. Large and divergent interest rate movements have become common, and equity and housing markets have in many instances fallen sharply from elevated levels. Central banks and governments around the world have responded with creative liquidity measures and bailouts, as well as monetary and fiscal stimuli. These actions have not come without costs. Commodity prices exploded and then sold off, further complicating the inflation outlook for policy makers.

Stability seems to have bred instability, as Hyman Minsky once observed. Leverage, built up during the low-volatility quiet period, finally unraveled under its own weight, helped by central banks that raised interest rates. Although many were left naked as the tide receded, particularly exposed is the web of complex derivatives (SIVs, CDOs, CLOs, etc.) and the financial creativity in the home lending arena, which created so much credit around the world. It is now clear that home prices do not always go up, much to the chagrin of rating agencies, governments, banks, investors, and leveraged homeowners ...