Good Derivatives

A Story of Financial and Environmental Innovation

Richard L Sandor

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9780470949733
• eBook ISBN: 9781118216392
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Through the eyes of an inventor of new markets, Good Derivatives: A Story of Financial and Environmental Innovation tells the story of how financial innovation – a concept that is misunderstood and under attack - has been a positive force in the last four decades. If properly designed and regulated, these "good derivatives" can open vast possibilities to address a variety of global problems. Filled with provocative ideas, fascinating stories, and valuable lessons, it will provide both an insightful interpretation of the last forty years in capital and environmental markets and a vision of world finance for the next forty years.

As a young economist at the Chicago Board of Trade, Richard Sandor helped create interest rate futures, a development that revolutionized worldwide finance. Later, he pioneered the use of emissions trading to reduce acid rain, one of the most successful environmental programs ever. He will provide unique insights into the process of creating these new financial products. Covering successes and failures, the story describes the tireless process of inventing, educating and creating support for these new inventions in places like Chicago, New York, London, Paris and how it is unfolding today in Mumbai, Shanghai and Beijing.

The book will tell the story of the creation of the Chicago Climate Exchange and its affiliated exchanges (European Climate Exchange, Chicago Climate Futures Exchange and Tianjin Climate Exchange, located in China). The lessons learned in these markets can play a critical role in effectively addressing global climate change and other pressing environmental issues. The author argues that market-based trading systems are a far more effective means of reducing pollutants than "command-and-control". Environmental markets may ultimately help to find solutions to issues such as rainforest destruction, water problems and biodiversity threats.

Written in an engaging, narrative style, Good Derivatives will be of interest to both practitioners and general readers who want to better understand the creative process of financial innovation. In the middle of so much distrust of markets, it is also a recipe of how transparent, well-regulated markets can be a force for good in the environmental, health, and social areas.

Chapter 1

The Early Years

America is another name for opportunity.

—Ralph Emerson

I grew up in Brooklyn, New York, in the 1940s and 1950s, with a father who loved vaudeville and movies, and a mother whose memories of her wealthy upbringing in Europe dominated our home.

The House of Sandor and Mirner

My father, Henry R. Sandor, was dark-haired, olive-skinned, and heavy-set. A pharmacist by day, Henry worked six days a week from 10 in the morning until 10 at night, and came home well after I went to bed. The summer of 1950, when I was almost nine, he taught me how to make ice cream sodas and malted milkshakes at his store in Brighton Beach. The store was often filled with my father’s friends from show business, and I loved going to work every day. He measured his ingredients with precision as he ground medicines in his mortar and pestle, readying them to be put into capsules. It was wonderful watching him. A side effect from my summer job was a gain of 10 pounds, and it wasn’t until my junior year in college that I stopped being overweight. My father used to say that I had personality, and that it was almost as important as brains when it came to success. I felt his love and respect.

My father often told stories about his own father and grandfather. His father, Maurice Sandor, was a dapper and handsome man. He was going to be hung for anarchy at the ripe old age of 16 for conspiring with Leon Trotsky to overthrow the Czar. Maurice’s father, however, was the chief engineer for the Trans-Siberian Railroad, and through political connections at the court of the Czar, was able to arrange to have him leave for America that very day. Trotsky wrote letters to my grandfather, asking him to return to Russia, and came to the pharmacy to play chess when he visited New York. We never really knew what was fact or fable. Maurice, according to Ellis Island records, did not, in fact, sail to this country in steerage. He spoke no English when he landed in New York, survived by selling apples on Hester Street, and within 10 years earned a pharmacy degree from Columbia University and an MD degree from New York University. Before long, Dr. Maurice Sandor owned and ran a drugstore and practiced medicine. He met Frances Diamond, my grandmother, on the Atlantic crossing. Frances came from a family of performers—her cousin, Selma Diamond, was a comedienne.

While my father profoundly respected education and spoke proudly of his father’s degrees, he was more of a Bohemian than an intellectual. He had two particular quirks. I have the fondest memories of the different hats he would wear on whim, ranging from berets to fedoras. He also had a passion for cars. Most cars on our streets were Buicks or Chevrolets, but not ours. Henry drove foreign cars—mostly Jaguars and Volvos. There was an occasional American car like the Nash Rambler.

Known as “Broadway Hank,” my father was a quiet person unless he was standing before an audience. He had a giant personality when he performed. An entertainer at heart, he loved stand-up comedy, singing, and playing the guitar. He received an offer to play in a big band in the 1920s but had to turn it down. His father had died at an early age, and he had to help raise and support his brother and sisters. He worked as a pharmacist to accomplish this and put his career as an entertainer on hold. His brother worked side by side with him at the drugstore. Two of his sisters went to Hunter College and became teachers, while his youngest sister became a housewife. My father’s brothers and sisters led typical middle class lives, working hard and placing a strong emphasis on education. The next generation of Sandors, following my father’s generation, produced two doctors, three dentists, one psychologist, one economist, and a teacher.

My memories of growing up were not dominated by my father’s profession, but more by the Bohemian lives of the people who traipsed through our house from time to time. I remember the first time I saw my father entertain. My brother, Frank, and I hid behind a chair in our house as Broadway Hank charmed everybody at the party with his humor and songs. My mother kept on coming out with food, and my piano teacher played the piano and they all sang late into the night. Her father was the lead violinist in the Moscow Symphony, and she herself was an attractive woman with a sassy attitude—there were often many allusions to sex in the adults’ conversions that I heard but never understood. I fell asleep that night to the sounds of song and laughter.

I loved Sundays. It was the only day of the week my father was home. He slept late and woke up to a sumptuous breakfast prepared by my mother. Sunday was also a day of rituals. We would all jump into a car and drive to Manhattan. We went to double features in one of the many movie theatres in and around Times Square. One memorable Sunday, we went to the RKO Palace for a double feature with 10 acts of vaudeville between two movies. Another wonderful memory is attending my first Broadway show starring Paul Muni, a famous movie actor of the day and a friend of my father’s. Paul captivated audiences in Scarface and The Story of Louis Pasteur. I felt a surge of pride that there, standing on stage, was my father’s friend. After movies, we frequented Chinatown. Henry had a great nose for restaurants and a small joint, Hong Fat Company at 69 Mott Street, became our regular stop. Unlike the many chop suey restaurants that dotted Brooklyn, that one was actually authentic.

On other Sundays, we frequented a Chinese restaurant owned by my father’s friend Tom Kwan. The restaurant was on the second floor of a two-story building. We sat in the kitchen for hours and watched Tom at work, tasting the pork and duck as he cut the meat and prepared the dishes with amazing precision. He often barked commands in Chinese to his Alaskan husky, whereupon the dog sat down or trotted away. It turned out that the dog understood not only Chinese, but also English. I was awed by that bilingual dog. I wondered, “How could a dog understand Chinese?”

My father first got to know Tom during the Roaring Twenties. Broadway Hank was performing in a speakeasy when Tom, a regular, stopped by one night wearing a lot of gold jewelry. My father noticed some local gangsters eyeing Tom, so he offered to store Tom’s valuables until the next time he came back. Tom did this without any sign of distrust or suspicion. My father also had him keep a small amount of cash handy, in case Tom needed to placate any thieves. Sure enough, Tom was mugged as he left. My father returned his valuables the next day and from then on, Tom visited our house every couple of years at some unexpected time during the Christmas season with bags of Chinese sausages, pork, and duck in tow. He sometimes even brought a large wok to cook food. I sat for hours watching him cook. The meal always ended with a big Christmas fruitcake.

At some point, Tom stopped showing up—in fact, he didn’t come for three consecutive years. He had always kept his personal life to himself, and my dad never knew where to contact him. I asked my father why we hadn’t seen him. My father said in a matter-of-fact way, “Tom always comes. He must have died.” It turned out that Tom had closed his restaurant and retired. Those wonderful days spent in Tom’s company taught me a lot about Chinese culture and loyalty—something that would prove invaluable later in life during my visits to China.

On the opposite side of Tom’s restaurant was Nathan’s Famous—the largest seller of hot dogs and hamburgers in Coney Island and a big threat to the smaller hot dog vendors. According to my father, competitors once spread word that Nathan’s food was unsafe. To recover his business, Nathan went to the local hospital and announced that any doctor or nurse who came in uniform would get a free meal. When locals and tourists saw so many white-uniformed professionals eating there, they stopped paying attention to the rumors of a dirty restaurant with unsafe food. The importance of perception and promotion was a life lesson that stayed with me.

Just as my father was the patriarch of his family, my mother was the matriarch of her family. My mother, Luba Mirner Sandor, was born in Poland in a city that ultimately became Russian. Luba was a petite, shapely brunette quick to smile. Her father, David, had changed his name from Berenson to Mirner for some unknown reason, and then migrated to Antwerp, Belgium, to become a successful diamond merchant. Family lore was that he was a cousin to Bernard Berenson, the preeminent art critic. I personally never knew what was fact or fancy. David Mirner became a member of the Diamond Bourse. He was recognized in Belgium for his charity and was reportedly one of the great chess players in the country. He lost his fortune investing in a diamond mine in South Africa and from his frequent visits to Monte Carlo. He and my grandmother, Penya Mirner, along with my mother, her sister, and two brothers, came to the United States penniless. My mother’s sister had Tourette’s syndrome and could not work. Her brothers got married and were partners in a dry-cleaning business together. Education was a critical part of the Mirner family’s values. The third generation of Mirners became chemists, musicians, and teachers.

All of the Mirners seemed to have settled into normal middle-class lives when things changed. My uncle Joe fell in love with a neighbor’s wife and left home. He moved into my room shortly after my brother moved into our basement apartment. My dreams of finally having my own room were dashed. Joe was an elegant dresser and articulate man with a small moustache, whose dress and demeanor reflected his European upbringing. To avoid World War I, David Mirner moved the family to London. All the children were sent to boarding school there and in Switzerland. Joe’s life in boarding school in England had left him adept at the art of conversation, and he was a wonderful companion. He also had a great sense of humor. His companion was a stylish woman many years his junior. Joe lived with us for a short time, only to have a fatal heart attack shortly after moving in with his companion.

My uncle Charlie, a kind man with boundless empathy for others, was the next to move into my room. He later dated Uncle Joe’s companion, in what others would at best call an odd set of circumstances.

My mother, Luba, had absorbed all that a privileged lifestyle enabled. She was a woman of boundless energy, fluent in five languages. While my father was not talkative when not performing, my mother was naturally outgoing and gregarious. She was filled with strong beliefs and passionate about every activity she participated in. According to my brother and me, she was “America’s Sweetheart.” My mother shared her father’s business skills and later in life became manager of a chain of women’s clothing stores. Although frustrated by not being afforded the opportunity to go into business and somewhat bitter about not receiving the things in life she thought she richly deserved, she gradually came to terms with the circumstances and genuinely enjoyed life.

Five years older than me, my brother, Frank, had been difficult as a child with learning disabilities, so Luba hadn’t wanted any more children. As she later told me, “You were unplanned.” We didn’t know it at the time, but he was dyslexic. Frank was much too old to be a companion to me, and my mother was always helping him work through his learning challenges. As a result, she was often not available for me. Frank was deeply loved and grew up as a generous human always concerned with others. He had a red Radio Flyer wagon that he was happy to give up when he learned that the war effort required iron—certainly an incredible sacrifice for an eight-year-old child. I understood his nobility but sorely missed that wagon. Frank went to medical school and later became a hematologist. He was and is a caregiver.

Given my father’s work schedule, my mother’s justifiable attentiveness toward my brother, and the age difference between Frank and me, I grew up often feeling alone in my own home. My mother’s eyes lit up whenever my brother walked into a room. They never lit up for me, but I was determined to make that different outside of our home. For as long as I can remember, friends became an important part of my life. By the time I was six years old, my mother began giving me an allowance of 25 cents per week. I would use 15 cents for a movie and candy, and my mother often asked me about the movie when I came back. She and the neighbors used to listen attentively as I faithfully described the plot and the characters. Their positive feedback only increased my desire to see more movies and tell people about them. This was further enhanced by the Sunday ritual of my father taking us out to movies. Movies were not only entertainment, but became a means to learn about life. I came to enjoy them as much as I did reading.

Bobby Fischer and My Days at School

Friendship helped combat the isolation I felt on most days. Public School 99 (“P.S. 99”) provided all that I needed in kindergarten through third grade. School was easy, and I had plenty of friends. My world was shattered when my mother announced that we had bought a house and were moving. I began fourth grade at a new school with a great deal of apprehension. I soon learned that I had been put in class 4-5, which in those days meant that I would be among the slowest students in the fourth grade as well as those who were troubled and had behavioral problems. 4-1 was reserved for the brightest students. As the year went by, I was forced to get along with classmates who were very different from those in my earlier grades, which actually turned out to be a wonderful learning experience. After several months, the teacher recognized how quickly I was learning and responded accordingly. She started to treat me more like an assistant than a student, and I helped her prepare lesson plans and pointed out how she could reach some of the other students. Teaching thrilled me. In some ways, these days turned out to be some of the happiest days of my childhood. At the end of the year, my teacher told me that I had “made her year” and recommended that I be transferred to 5-1. I came back later on to see her as I grew up, and it always thrilled us both to speak about my year there.

Meanwhile, I made friends with Robert Friedman, who was a year younger than me. We played stickball, softball, and cards together and ultimately taught ourselves how to play chess, another driver in my life. We met Raymond Sussman, who lived in the neighborhood. He easily beat both of us in chess. His father, Dr. Harold Sussman, a nationally ranked player and dentist from Brooklyn who played in the Manhattan Chess Club, taught us strategies such as sacrificing pieces for positions known as gambits and how to think about chess in terms of opening, middle, and end games. He emphasized the importance of controlling the central four squares on the board, a life lesson for business and politics.

One day, out of nowhere, a boy a year or two our junior passionately pleaded to be included in Dr. Sussman’s classes. His name was Bobby Fischer. We played blitz chess—one second per move—and initially Bobby was rattled. He went away and came back more polished and in each game became harder to beat. The last time we played together, he came back to play in a tournament organized by Dr. Sussman. Robert had eliminated him in an early round, and we were faced off for the final match. I won a closely contested game. The next thing we heard from Dr. Sussman was that Bobby had been studying chess from five in the morning until school began and then from the time school ended until he went to sleep. He wanted a rematch with both of us. We declined. And that’s how Robert Friedman and I managed to have a lifetime winning record against the one and only Bobby Fischer.

Fifth grade was harder. I was the new kid in class and had to make a new set of friends. As the next two years went by, I became bored and often misbehaved. My sixth-grade teacher was a martinet and berated me in public for my behavior until I became silent and refused to answer any of her questions. Eventually, she found a solution by assigning me to the principal’s office to prepare tests and outlines for teachers. I learned how to type, a skill that proved invaluable, and relished the hours outside the classroom. Before long, I went to junior high at yet another new school. The experiences, feelings, and challenges resembled those I had gone through in grade school.

A friend of my father’s found a job for my brother as a counselor in a summer camp in the Berkshire Mountains and I was sent along as a camper. As it turned out, one of my classmates from junior high school had poisoned the well for me and made it hard for me to make friends. I was miserable and wanted to go home after the first week. My parents told me ...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgments
• Chapter 1: The Early Years
• Chapter 2: Trying to Change the World
• Chapter 3: The Berkeley Years
• Chapter 4: The Chicago Board of Trade Years
• Chapter 5: The Chicago Board of Trade Years
• Chapter 6: Educating Users and Building the Market
• Chapter 7: Treasury Bond and Note Futures
• Chapter 8: The Decade of the Eighties
• Chapter 9: Globalizing Chicago Exchanges
• Chapter 10: Environmental Finance
• Chapter 11: Blame It on Rio
• Chapter 12: The Beginning of the Entrepreneurial Years
• Chapter 13: You’re Gonna Trade What?
• Chapter 14: From the Pit to the Box
• Chapter 15: Conceiving a New Kind of Exchange
• Chapter 16: The Twenty-First Century Lighthouse
• Chapter 17: CCX Market Architecture
• Chapter 18: Chicago Climate Exchange
• Chapter 19: The Rise of the Chicago Climate Exchange
• Chapter 20: The Fall of the Chicago Climate Exchange
• Chapter 21: The Chicago Climate Futures Exchange
• Chapter 22: The European Climate Exchange
• Chapter 23: India
• Chapter 24: Opening New Markets in China
• Chapter 25: Good Derivatives
• Appendixes
• Acronyms
• Glossary
• Photo Insert
• Index