Good Derivatives. A Story of Financial and Environmental Innovation

‘Eclectic’ is the adjective that best summarizes both format and content of Richard Sandor’s new book Good Derivatives in a single word, while the phrase ‘all over the place’ is the best multi-word characterization. The book’s overall format is intended to be autobiographical, and indeed the narrative at first follows a chronological path from Sandor’s humble roots in Brooklyn through his academic life, particularly as a young economics professor at Berkeley. Personal narrative is accompanied, however, by sections resembling materials for a class on futures markets and financial products – replete with numerical examples of, e.g. a hedger’s profit or loss under two hypothetical mortgage interest rate buying/selling scenarios. These textbook-like elements aim to impart the knowledge of commodity trading and exchange infrastructure readers need to fully understand the importance of Sandor’s critical contributions to financial markets – why he is known as the ‘father of’ critical derivatives products including mortgage interest rate futures and treasury bond and note futures, some of which became the most widely traded contracts in the world. The narrative traces the evolution of US commodity trading and the role of exchanges as institutions, from Sandor’s first engagement with them in the 1960s through the present – a fascinating history of modern commodity markets and financial innovation particularly relevant in the current context of the financial crisis. Unsuccessful attempts to meld this history with personal anecdotes, however, make for a rambling text that is hard to follow because it skips abruptly from descriptions of family members or friends to unrelated steps in Sandor’s career. Readers with an environmental policy background and experience in greenhouse gas management will find the second half of the book most relevant: it describes Sandor’s involvement in and creation of environmental markets from the early 1990s, including the sulphur emissions permit trading under the US EPA’s acid rain programme and global application of its cap-and-trade concept to mitigate climate change. These chapters illustrate the birth of many concepts and practices now ‘standard fare’ for greenhouse gas accounting professionals: the idea of offsetting emissions, additionality of those offsets, questions about ownership of environmental attributes, and creating demand for tradable permits were all new issues back then – ones Sandor and his team tackled in the process of creating the Chicago Climate Exchange. The narration gives the impression that neither the Exchange, nor the concepts its establishment involved, would have gone anywhere without the backing of a wellknown and well-connected businessman who nurtures contacts to influential decision makers – one two-page section about the late 1990s discusses being invited to testify at a US Senate hearing, presenting at a White House climate change conference hosted by president Clinton, ‘running into’ the head of the Carnegie Endowment for Peace and giving a speech there, being part of a private meeting hosted by the US lead negotiator for the Kyoto Protocol, and sharing insights with Al Gore after presenting on a panel with him. Indeed, the book is heavy on descriptions of Sandor’s relationships to and interactions with famous people, many of whom are unrelated to the story of his career or to the benefits of derivatives. Examples include lengthy descriptions of a close friendship with former Oakland A’s owner Charlie Finley and recollections of having played chess against champion Bobby Fischer as a child. The constant name-dropping often comes at the expense of opportunities to deepen the book’s more thoughtful points concerning the role of new financial instruments in e.g. reducing transaction costs. There is little reflection on what this means for society at