# Interview with Sylvain Raynes

#### Andy Nguyen

From a relatively unknown figure, Sylvain Raynes thursts into national spotlight after his appearance on CNBC's Jim Cramer TV show gained numerous media coverage. For many of us at Quant Network, it came as no surprise. After all, his essays are no less controversial.

As the media hoopla subsides, QuantNet sat down with Sylvain Raynes to talk about various issues, among them career advice for students of financial engineering.

Can you give us a recap on your education background and career?
I have a Diploma in numerical analysis from the von Karman Institute in Brussels, Belgium, a Diploma in the German language from the Goethe Institute, a Masters in numerical analysis and a Ph.D. in Aerospace Engineering, both from Princeton University.
I came to Wall Street and worked in consumer finance at Citibank (credit card master trusts) in 1989. I left Citibank for Goldman Sachs and worked there for two years in derivatives analysis and DPC credit modeling, followed by two years at Moody’s Investors Service, followed by two years each at Credit Suisse and UBS. Last, but not least, Ann Rutledge and I started R&amp;R Consulting in 2000 out of our disagreement with current analytical methods in structured finance and to offer a grounded valuation method for structured securities. We succeeded, and the result is called ABSTRAK.

How did you end up in finance?
I don’t remember. It was probably a mistake. Everyone who has been unfortunate enough to be my boss on the Street has told me so. I’m sure they’re right.

What do you consider as your accomplishments up to this point?
I believe that one day, ABSTRAK will be the most useful tool in the structured markets, once we get serious about transparency. Today, transparency is the kind of buzzword you tell your girlfriend when she asks you why you’re not doing anything with your life, just sitting around hoping God will kick-start the markets, because you obviously can’t. Some would say that staying alive for 11 years at R&amp;R Consulting in an extremely hostile environment is itself an accomplishment. I’m not sure that would qualify though. On the other hand, making inroads in a field as close-minded and reactionary as structured finance is somewhat of an accomplishment.

You talk about “transparency”. From what we know about the Abacus case, how would a newer/better valuation method (such as your ABSTRAK) help to evaluate a deal if you don’t have all the information, or in this case blatantly mislead? Shouldn’t the current investor-rating agency relationship be changed first before we even discuss better deal evaluation methods?
Regrettably, I can’t comment on this topic.

Can you explain the idea behind ABSTRAK and how is it different from the current valuation methods on the market today?
This is very commercial Andy, but I thank you for the question. The best thing I can do is to send, to anyone who emails me, a free copy of an article published last year in the Journal of Structured Finance, and in which the ABX HE 0601 index is deconstructed and synthesized using ABSTRAK. This was a labor of love that shows clearly how the structured market was asleep at the proverbial switch when all Hell was breaking loose. The author is Jerome Fons, the architect of the Moody’s bond default studies while he worked there. I wrote the middle section on ABSTRAK, and I think it’s the best thing out there on ABSTRAK. By the way, complicit organizations like Reuters and others, who now swear up and down there isn’t any credible valuation method in structured finance, have purposely ignored the paper because it’s not convenient to their main client base.

If you have a chance to start your career anew, what would you like to do differently knowing what you know now? Would it still be in finance or some other fields?
Thanks for the easy question. It would definitely not be in finance; it would be in Aerospace Engineering. Believe it or not, that’s what I wanted to do in the first place. However, there are entrenched interests everywhere, so nowhere is there some sort of intellectual Nirvana to be found that would fill one’s career with utter joy. You need to make your mark the same way everywhere you go.

You have worked in various Wall Street firms and now have your own consulting firm. What do you miss most about your time on Wall Street? And what you rather forget about?
Wall what? I miss nothing, because I know the nothing.

What would you contribute to your successful career as a quantitative finance professional?
You are assuming that I have had a successful career. I’m not sure myself, but let’s run with that assumption anyway. The most important factor is perseverance in your beliefs, assuming you have some. Most people don’t. Instead, they have fears that can only be alleviated with pats on the back and large bonuses. Belonging to a club or a “Society” is how the average man makes peace with himself. Otherwise, that fear is unbearable. Someone once called it “the unbearable lighting of being”. He was right.

Most people would define someone having their own firm, making appearances on CNBC, Bloomberg TV, publishing books, doing deals (and assumingly making non trivial amount of fee) “successful”. You are not sure so you probably have a different definition of success. Do you have a non-material ultimate goal in life?
Making Ann happy is my primary goal. If I can do that, I think I’m hitting 300 already. I want to reformulate finance as cybernetics; that’s my second goal. None of these involves cash. Being remembered as having made a difference in the lives of my students is the best recompense a man can get. Cash can always be made in mundane and commonplace ways. Look at Wall Street!
As you know from talking my class Andy, money has two meanings. There is money qua cash, and money qua value. By being obsessed with cash, one never can understand value. This is the original sin, by the way. Wall Street is not really about cash. Believe it or not, it is about love, or lack thereof to be more precise. One day, perhaps these neophytes will understand that.

What issues/knowledge your next book “Elements of Structured Finance” brings to the readers of the first book?
First of all, the first book “The Analysis of Structured Securities” was merely our manifesto of how structured finance could be, and incidentally how it has been at R&amp;R Consulting for the past ten years. Ann and I wrote it hastily in the aftermath of 9/11 because no deals were getting done for 6 months thereafter. On the contrary, “Elements of Structured Finance” has been nurtured for five years and is a <em>bona fide</em> textbook with problem sets, exercises and questions for discussion, not to mention that it benefits from the significant lessons we have all learned from the sub-prime credit crisis. It is aimed squarely at MBA and financial engineering curricula across the USA and elsewhere in the English-speaking world.
It is difficult for anyone to learn structured finance from the first book, but this is not true of “Elements”. The book is divided in two Parts, each of which representing a compendium of class notes from one of the two classes I teach under Dan Stefanica in the Baruch MFE and that Ann and I also teach in other venues, such as Hong Kong University of Science and Technology and University of California at Irvine.
However, that’s not all. The second book also lays out in excruciating detail the valuation method we only hinted at in the first one. The Intermediate Part contains one-of-a-kind sections of law and accounting, sections that you will not be able to find anywhere else in the financial literature, and goes through an actual, grounded deal-valuation example in all its moving parts. In other words, “Elements” contains the secret sauce that was left out of “Analysis”. It presents the first and only self-consistent and credible approach to the valuation of structured securities based on the 1922 Banach fixed point theorem, something my Baruch MFE students know only too well. The Advanced Part also discusses arcane and obscure topics that must be mostly skipped in the classroom, things like hedge-fund rebalancing using Laplace-transform techniques or the consistent valuation of floating-rate structured securities, not to mention an entire chapter on revolving periods. It contains a reformulation of duration and convexity as transcendental quantities in yield space via re-normalization group theory. Basically, “Elements” is a recasting of structured finance as cybernetics, which is the only way it can ever make any sense at all.

You have been a proponent of “doing deals” for quite some time. In fact, we know that many graduates of the Baruch MFE program (where you teach a course in SF) have got their first job in structured finance with your help. The last few years haven’t been the busiest time for doing deals, to say the very least. With the latest news of SEC charging Goldman Sachs for misleading its investors in one of the CDO deals and the fed tightening the leash on Wall Street, what do you have to say about the future of SF?
Thanks for the plug Andy! Given my significant involvement in litigation matters, I can only comment in general. Needless to say, structured finance has been widely misunderstood. On the other hand, to “misunderstand” something, you first have to understand it. Unfortunately, finance has yet to be understood, let alone misunderstood. Because it is a good idea that has been abused so much, structured finance needs to make a strong comeback, and it will, trust me. What we are seeing now is only the first salvo in the beginning of the resolution, the “end of the beginning” so to speak. There will be more to come, but the Republic will stand and life will go on in the quiet countryside, as opposed to the not-so-quiet Countrywide.

What would be the area in quant finance that will experience most innovative research idea and product growth in the next few years?
This is a relatively easy question Andy. Clearly, mortgage-backed finance has been “innovated” to death recently and so we will no doubt return to less “creative” times for a while, like 20 years maybe. For obvious reasons, healthcare finance will be a major growth area in the USA for at least a decade. The US market potential is huge, somewhere around $2 Trillion right now, and growing at a fast clip. Many careers will be made, and of course unmade, in that area over the next ten years. Knowing how not get burned is the key though. Two other areas that deserve a special mention, despite their much smaller potential than US healthcare, are microfinance and solar energy systems. R&amp;R Consulting is currently active in both, i.e. doing a deal in each, and I can honestly say that the current economic conjecture is highly favorable to the installation of roof-based solar systems in commercial and residential settings. Conversely, it is regrettable that micro-finance has yet to reach the level of maturity it is bound to reach ten years from now. Nevertheless, viable microfinance deals are being closed at this very moment despite the lack of efficiency that could be reached using true-sale structured finance techniques. All in good time guys! Muhammad Yunus (2006 Nobel Peace prize for microfinance) has recently voiced concerns over the practice of high interest rate charged to borrowers, the majority of them very poor. Should there be a restriction on how much banks can profit from microfinance? After all, isn’t the idea of microfinance is to help the poor people out of poverty, not for banks to make lot of money? You are absolutely correct Andy. However, regulation in finance is always a red herring when it comes to fair market valuation. There is no need to mandate lower rates for the poor, when a self-consistent valuation system can do it automatically. If it is true that micro-borrowers are great credits, then the rates will come down naturally, and if it isn’t, the poor don’t really deserve lower rates. This is not the time to scream “charity” or “social responsibility” when logic and self-consistency will do a far better job on a continuous and sustainable basis. You have been telling your students to “do deals” for years instead of becoming a quant, a developers or any other role. Why do you feel so strongly about “doing deals”? Clint Eastwood once said that there are two kinds of people in the world: those who hold guns and those who dig. Well Andy, in finance there are two kinds of people: those who do deals and those who keep looking for a job. In your articles for Quant Network, you have been very bearish on financial engineering programs. You have gone so far as calling many of these MFE programs cash cows. How did that negative view come about? I love cows Andy. Seriously now, it is regrettable that at this very moment, by and large financial engineering programs worldwide are neither. They do not teach people how to do deals and are significantly out of touch with finance itself. Most graduates are no more equipped to perform on the job than statistics or physics majors, and they have spent a lot more money getting the degree, money they need to repay somehow. FE degrees are just expensive calling cards without any impact on one’s job prospects. Most institutions, unlike Baruch, are not even trying to place their graduates. Their motto seems to be “you’re lucky to be here, buster!” These views came about by watching what happens on Wall Street and inside academia. It’s truly amazing, but enough shop talk! Some people have criticized you as “hypocrite” for condemning the MFE education system but at the same time being paid to happily participate in one. What have you done to be part of the solution, and not part of the problem? I don’t teach structured finance because I can get rich doing it. An entire semester’s Baruch salary amounts to about two days of consulting at R&R. Do you really think I couldn’t work four more days per year to compensate? I do it because I like it, and I hope this is true of everybody else in the department. Besides, I can’t be a hypocrite because then I would be a Managing Director at a NY-based bulge bracket firm, or else Treasury Secretary. In fact, if I were a hypocrite I would not have time to give interviews to Quant Network. However, your suggestion that I have at least the potential to become Treasury Secretary is very flattering Andy. Thanks man! In your article State of Financial Engineering, you said “Graduates of financial engineering programs quickly become aware that it is MBA graduates, and not themselves, who are destined to breathe the rarefied air of boardroom deal-making”. Would it be fair to interpret it as your endorsement of the MBA degree over MFE if one is to be a deal maker? No, I think even worse things of most MBA degrees, “Hah..vard’s” for instance. The fact of the matter is that tradition is on the side of the MBA degree, and that FE graduates are too often dismissed as “geeks”. It doesn’t have to be that way. In the same article, you said “students with degrees in financial engineering are ill-equipped to face the rapidly changing face of finance”. Things change in all fields; what is so special about finance? What is your advice to cope with the changes then? You can’t teach the latest fad and expect people to be ready for a job where the latest fad will be at best yesterday’s fad, i.e. useless on the job. Things do not “change” in the way you put it. Airplanes are designed using laws (of aerodynamics obviously) that are 100 years old. Things have not “changed” in aerospace engineering for a century. That’s what I mean. You need to stick to, and truly teach fundamental concepts that don’t change. The basics of finance have not changed in 1000 years, let alone 100. Many have an unrealistic expectation or idealism of what a quant do, mostly from movies and books like “Wall Street”, “My Life as a Quant”, “Liar’s Poker”. What would you tell them? I would tell them to stop watching TV and quit hanging out in pubs. I would also tell them to put together a deal in their spare time, without expecting a large bonus to come out of it, and witness first hand how difficult it is to do so. Maybe they would have more respect for those who do it under pressure. Right now, nobody teaches how to do deals, only how to solve the BS equation in yet another way. Quants are largely passé right now, and that’s too bad. Many students have viewed MFE programs as a quick pathway to a “get rich quick” job on Wall Street. In fact, the number of universities opening up this type of programs has increased the past decade. This leads to a wide quality disparity among people coming out of these programs. Competition for a job on Wall Street is getting harder. What advice would you give current/prospective students from the so-called bottom programs where the realistic chance of landing a job is nill? I have no advice for graduates of “bottom” programs because I teach in a top program. One’s chances of landing a job are good if you know what you are doing. Of course, that’s a big ‘if’. The lesser known schools can raise themselves by their own bootstraps, as did Baruch’s MFE under Dan Stefanica for instance, via teaching excellence and a solid curriculum, but that takes time, too much time perhaps. Most universities can attract people looking to “get rich quick” solely because they themselves are looking to get rich quick. Birds of a feather flock together. What has the Baruch MFE program done right in your opinion? Baruch is now ranked in the top ten MFE programs nationwide, up from non-existence six or seven years ago. It must have done something right! Baruch MFE is Dan Stefanica, period. Dan has been able to attract practitioners and has broadened his horizons to more than the Black-Scholes world. That’s the first thing he’s done right, and this is all his doing. The Baruch program is the only one in the nation that teaches structured finance, and we have him to thank for that too. Structured finance is at the center of the storm and needs a strong mathematical foundation. Therefore, the voice of reason is what Baruch stands for. That’s a third thing he’s done right. The program attracts a wide body of students from engineering and unusual backgrounds, and greatly benefits from their diverse perspectives. This is yet another feature that distinguishes us from the opposition. Baruch also cares about job placement, and much more so than its brethren, up- and downtown I might add. In a nutshell, Baruch doesn’t have competition, it has opposition. Before one puts down$100K of his parents’ hard-earned money or takes out a loan to join an MFE program, what should he or she look for in a program to have a chance of recuperating that money some day?
My first advice is: don’t do it. You did not Andy, and your chances of success are as good as anyone’s. Education is not a matter of “return on investment” else drug dealers would be the most “educated” people in the world. You do it only because you love it. Whether you get your money back or not is irrelevant, or at least should be. When you ask that question about a degree, it’s obviously not worth it.

There are so many programs these days that it’s hard to tell a good from a bad one. What signs should a prospective student look for to avoid a scam? Is the number of practitioners in a program proportional with its quality/practicality?
That’s easy Andy. Look at where graduates are ten years down the road. If you do that with Harvard’s MBA program, you will immediately see that it’s not worth it. Yet most people are quite happy to fork out megabucks to attend Harvard despite overwhelming evidence that the administration is milking that franchise until it dies. For what it’s worth, Rice University does not do that.

What would you advise people who want a career as a financial engineer to do?

Where do you see a growth for people with quantitative background?
The front office is the next frontier. To do that however, you need to be polished and to be able to speak to clients without food in your mouth. Please stay away from Gaussian copulas and homo-scedasticity. That kind of talk should be reserved for the back office or the bathroom, or perhaps for your next move on some nubile ingénue.

What would be the essential skill/knowledge every financial engineer should have?
1. Basic statistics (distribution functions, sampling theory, hypothesis testing)
2. Matrix analysis (eigen-values and -vectors, decomposition, inversion)
3. Measure theory (Banach, Radon-Nikodym, normed spaces, Laplace transforms)
4. Numerical analysis (integration and differentiation, polynomial approximation, ortho-normalization)
5. Stability analysis (von Neumann, convergence, Newton’s method)
6. Reading comprehension (prospectuses, legal opinions, PSA)
7. Philosophy and logic (Aristotle, Heidegger)
What other job options should one look at outside of Wall Street where quantitative skills are appreciated?
Quantitative skills are mandatory in all jobs nowadays, but here are some of my favorite areas: cryptography, robotics, insurance underwriting, factory automation, web site design and optimization, counter-terrorism and intelligence, scheduling optimization, communication & networking and ballistics (fascinating by the way).

With the government stepping up its efforts to regulate Wall Street, are the days of “innovative financial products” over, or will we see Wall Street remake itself to adapt to a stricter environment?
There is always a need for true innovation, instead of smoke and mirrors. Regulation is good because it forces people to think of smarter ways to do the same things they have been doing all along, and as the Beatles said “you know that can’t be bad!”

Much has been said about “quant” in the media the past two years. Where do you think these financial engineers played a role in the credit crisis? What lessons can we learn going forward?
Financial engineers are really not responsible, save those who worked at a rating agency. Many would like to claim responsibility because they somehow find it cute to have caused destruction, pretending that they were doing it consciously. In most cases, they didn’t have a freaking clue. Most of them were doing the same thing they had been doing for years before the crisis. They did not understand finance then, and they still don’t understand it. One day perhaps.
The lessons are clear, but for the record, let’s just say that financial intuition was totally lacking. Grabbing an equation is the easiest thing in the world. I have grabbed a few myself, in my younger and oh so foolish days. Gentlemen, a chicken is not a bird and a molecule is not a loan.

What are your favorite books? Movies? TV shows? Music?
• Books: Sein und Zeit, Heidegger’s Gesamtausgabe: Band 26, Band 18, and the entire Marburg period
• Movies: The Usual Suspects, Gladiator, Point Break, Mephisto
• TV Shows: Hawaii 5-0 (no more), Kung Fu (no more), Inspector Morse (no more)
• Music: Alexis Weissenberg playing Bach, Emil Gilels playing Tchaikovsky, Charles Aznavour, Edith Piaf
What are your top 5 most visited websites?
1. NY Times
2. Credit Spectrum (our own site)
3. French Oldies (malhanga)
4. Zillow (looking for good real estate deals)
What is something about you that most people don’t know?
That I am not the monster they believe I am.

What other projects are you involved in?
I can’t discuss most of them, but we have been involved in an independent film financing platform for quite some time. I am also currently helping my old Princeton Ph.D. advisor, Professor Sin-I Cheng, to publish his theory of turbulence in book form. It has direct applications to finance by the way.

What would you imagine yourself doing 10 years from now?
Nursing a beer in Bormes-les-Mimosas (located in the Var (no kidding) region in the South of France) and watching ABSTRAK become the way deals are monitored in the secondary structured markets. Both of them will happen, but maybe not in ten years.

Years from now, how would you like people to remember Sylvain Raynes? What would you like your legacy to be?
News of my death are greatly exaggerated Andy! I know that many Wall Streeters want me out of the way right now, but I don’t think it will happen so soon, at least not through natural causes. Please ask me this question again in 20 years; I’m not done just yet.

Thank you for your time, Dr. Raynes.
You’re more than welcome, Andy

#### dstefan

##### Baruch MFE Director
Sylvain, thank you for the kind words you had for me!

I am happy to correct the record: the Baruch MFE Program is its alumni and students, full-time faculty and industry faculty, as well as other friends who touch upon the lives of our students and help them succeed.

A major part of our success is due to the strong and unrelenting support our program receives from the administration of Baruch College, and of CUNY. Without their support, and without the level of support they provide, we could not have been nearly as successful, not could we have attracted distinguished industry instructors such as Sylvain.

The success of our program is a team and community effort. I am happy to be the person most associated with the administration of the program, and its success

#### Joy Pathak

##### Swaptionz
Nice interview, very informative. I liked the focus on financial engineering education. Although, the comment made about "structured finance" as part of the curriculums of MFE programs was not right. Other universities teach structured finance in their MFE curriculum. Structured Finance is taught rigorously in a 'financial products' course at IIT which is part of one of the concentrations. There is also a "structure fixed income portfolios" that has quite a bit of focus on structured finance as part of it.

#### Andy Nguyen

Structured Finance is a buzz word that you see in curriculum of few programs but I doubt they cover to the extent that Sylvain does at Baruch. It's a set of a year long 2 courses where the second course involves doing a deal. If the deal "converges", you pass, else you fail. I didn't take the second one btw.

MTH 9848 Elements of Structured Finance
The course objective is to allow students to analyze the basic credit quality of securitizations backed by commodity asset types (mortgages, auto loans, credit cards, CDOs). Mastery of the material in this course will let the student model and evaluate the credit impact of collateral or structural alternatives. Hands-on work is both extensive and preparatory to the advanced level.

MTH 9849 Deal Theory and Structured Analysis
After taking this class, successful candidates will be able to model a transaction a priori based on the prospectus and issuer databases using the techniques described in class. In addition, the student will be in a position to accurately value asset-backed securities in arbitrary non-revolving transactions in most asset classes, i.e. to assign them assign credit ratings and interest rates. It is also an objective to enable students to discuss intelligently the drivers of credit, liquidity and other risks with a view towards optimal liability structuring.

#### Joy Pathak

##### Swaptionz
Alright. Yeah, I don't think I have seen the topics of the second course you posted in any of the curriculum's I looked at.

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