BOOK REVIEW: The Devil's Derivatives: The untold story of the slick traders and hapless regulators who almost blew up Wall Street . . . and are ready to do it again.By Nicholas Dunbar; Harvard Business Review Press; €25.99

NICHOLAS DUNBAR has written a well-researched account of the forces and events that led to the implosion of the financial system three years ago.

Rich on detail from both sides of the Atlantic, it is at times a heavy-going read, informed by the author’s obvious familiarity with the world of complex financial instruments and markets as a specialist financial journalist.

There’s colour though too. Dunbar paints a picture of the private excess associated with the “men who love to win” who fuelled the credit derivatives boom.

There’s the one about the head of derivatives marketing who had one of his Italian supercars towed to the car pound, but couldn’t remember what car it was; or the one about the head of credit structuring notorious for preying on female staff and having his corporate credit card stolen by prostitutes.

A bit player on the scene through his work, Dunbar recalls men in well-cut Italian suits boasting about their deals, drinking £400 bottles of Belvedere Vodka in the VIP lounges of Knightsbridge nightclubs while eastern European blondes poised ready to pounce on them.

Understanding the mindset of these men – and they were invariably men – is crucial to understanding what went wrong. This is one of the key themes in this book, for most of our financial history banking was dominated by caution and the fear of loss.

This cautious mindset drove the creation of socially useful financial institutions run by a breed of safe, if somewhat boring, bankers.

Contrast that with those who thrive on risk, for whom an uncertain bet is a chance to become unbelievably happy. The culture and beliefs of this new breed spread like a virus infecting first bankers, then ordinary people who were encouraged to drop their risk-averse attitudes towards borrowing and home ownership.

As Dunbar sees it, one of the big lies being told by bankers and their cheerleaders is that the 2008 crisis was caused by poor risk management by the likes of AIG and Lehman Brothers, whereas the root cause in his view was the over-the-counter derivative system.

Huge incentives existed to take risks and then hedge them, a problem compounded by collateralisation and uncertainty associated with the web of counterparties.

Negligent regulators also contributed significantly to the crisis and the picture that emerges is of a co-ordinated campaign by financial institutions to circumvent rules on leverage and capital requirements. New fiscal instruments such as default swaps were exploited to get around the requirements of Basel.

Large banks including JP Morgan and Credit Suisse were politically savvy enough to offer regulators an intellectual justification for changing the rules. Their line was that if their activities with special purpose vehicles and credit derivatives happened to increase the speed at which they drove, that increase in acceleration could be justified by their new technology.

Banks argued that they knew best and that their sophisticated technology provided a more sophisticated radar to measure risk than that used by regulators.

Dunbar is not optimistic that banks and their regulators have learned their lessons. For starters, with the obvious exception of Lehman Brothers, the major players remain in the game.

RBS, AIG and Citigroup received big bailouts while others, such as JP Morgan Chase, BNP Paribas, Deutsche Bank and Barclays, have returned to rude health and are regaining their swagger.

The US Federal Reserve, despite its stark failure in preventing the boom and bust, emerged stronger than ever from the Dodd-Frank reforms and ready to print trillions more dollars to keep America out of a second recession, in what amounts to “bad business as usual”.

There is plenty of valuable background in this book for students of the financial crisis, even if the detail does drag in places, and Dunbar is not afraid to stick the boot in where he sees sharp practice in the boardrooms of the global banking elite.