Wall Street Smarts - NY Times article

alain

Older and Wiser
http://www.nytimes.com/2009/10/14/opinion/14trillin.html?em

Wall Street Smarts

By CALVIN TRILLIN
IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend. But I have to buy you a drink to hear it? I asked.

Absolutely not, he said. I can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening.

He did indeed look capable of buying his own drinks one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late 50s or early 60s a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts.

O.K., I said. Lets hear it.

The financial system nearly collapsed, he said, because smart guys had started working on Wall Street. He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over.

But werent there smart guys on Wall Street in the first place? I asked.

He looked at me the way a mathematics teacher might look at a child who, despite heroic efforts by the teacher, seemed incapable of learning the most rudimentary principles of long division. You are either a lot younger than you look or you dont have much of a memory, he said. One of the speakers at my 25th reunion said that, according to a survey he had done of those attending, income was now precisely in inverse proportion to academic standing in the class, and that was partly because everyone in the lower third of the class had become a Wall Street millionaire.

I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks.

That actually sounds more or less accurate, I said.

Of course its accurate, he said. Dont get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they werent really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didnt feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.

So what happened?

I told you what happened. Smart guys started going to Wall Street.

Why?

I thought youd never ask, he said, making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini.

Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years theyd have so much money they could then become professors or legal-services lawyers or whatever theyd wanted to be in the first place. Thats when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. Thats when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.

But you still havent told me how that brought on the financial crisis.

Did you ever hear the word derivatives? he said. Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldnt have done the math.

Why do I get the feeling that theres one more step in this scenario? I said.

Because there is, he said. When the smart guys started this business of securitizing things that didnt even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didnt have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.

So having smart guys there almost caused Wall Street to collapse.

You got it, he said. It took you awhile, but you got it.

The theory sounded too simple to be true, but right offhand I couldnt find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. I think I need a drink, I said.

He nodded at my glass and made another one of those eyebrow gestures to the bartender. Please, he said. Allow me.
 
Anti-intellectual?

This Op-Ed piece reads intoxicated. Junk material.

"Lewis Ranieri, a college dropout, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon's mail room set him on the path to become the father of securitization."
 

doug reich

Some guy
This Op-Ed piece reads intoxicated. Junk material.

"Lewis Ranieri, a college dropout, set out to be an Italian chef until asthma ruled out work in smoky kitchens. A part-time job in Salomon's mail room set him on the path to become the father of securitization."

It's too bad you stopped reading "Liar's Poker" at the third sentence, because right after that Michael Lewis explains how Ranieri's vision is made possible only by hiring people who knew the math, because he didn't by his own admission.
 
I agree. I guess I misunderstood the articles in The Guardian and BusinessWeek. I was merely pointing out that the author's (Calvin Trillin) note regarding the inventor/creator.
 
But hello, smart guys have always been on Wall Street. Ed Thorp was there before people even knew how to price a call option!

But yes, this was the exact problem. You had smart guys doing a bunch of things that the stupid guys upstairs didn't understand, so they didn't know when to blow the whistle.

But when you have a firm employing a hundred smart guys also run by a smart guy, or smart guys (going forward anyway, for both top quant firms), you get a bunch of quants making hilarious amounts of money.
 

DanM

Math Student
But when you have a firm employing a hundred smart guys also run by a smart guy, or smart guys (going forward anyway, for both top quant firms), you get a bunch of quants making hilarious amounts of money.

Unless that firm is run by Myron Scholes and Robert Merton.
 
>LTCM only employed 2 PhDs. And they were both in economics.


Why do you insist on commenting on things that you know nothing about?

LTCM employed more than 2 PhDs, much more.
 
A quick check on wikipedia would show the list of LTCM's partners
Long-Term Capital Management - Wikipedia, the free encyclopedia

John Meriwether Former vice chair and head of bond trading at Salomon Brothers; MBA, University of Chicago
Robert C. Merton Leading scholar in finance; Ph.D., Massachusetts Institute of Technology; Professor at Harvard University
Myron Scholes Author of Black-Scholes model; Ph.D., University of Chicago; Professor at Stanford University
David W. Mullins Jr. Vice chairman of the Federal Reserve; Ph.D. MIT; Professor at Harvard University; was seen as potential successor to Alan Greenspan
Eric Rosenfeld Arbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor
William Krasker Arbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor
Gregory Hawkins Arbitrage group at Salomon; Ph.D. MIT; worked on Bill Clinton's campaign for Arkansas state attorney general
Larry Hilibrand Arbitrage group at Salomon; Ph.D. MIT
James McEntee Bond-trader
Dick Leahy Executive at Salomon
Victor Haghani Arbitrage group at Salomon; Masters in Finance, LSE
 

bob

Faculty (Undercover)
The article accurately teases out the subtext of a lot of the anti-quant talk going around--and somehow actually manages to defend it, which is a trick.

[SUBTEXT]
Finance used to be run by boys like me who had the right parents, went to the right schools, made the right friends, dressed well, and had a nice firm handshake. Now look what happens when we let these middle-class or (shock! horror!) immigrant eggheads into our financial system.

Are you ready to give it back to us now?
[/SUBTEXT]
 
A quick check on wikipedia would show the list of LTCM's partners
Long-Term Capital Management - Wikipedia, the free encyclopedia

John Meriwether Former vice chair and head of bond trading at Salomon Brothers; MBA, University of Chicago
Robert C. Merton Leading scholar in finance; Ph.D., Massachusetts Institute of Technology; Professor at Harvard University
Myron Scholes Author of Black-Scholes model; Ph.D., University of Chicago; Professor at Stanford University
David W. Mullins Jr. Vice chairman of the Federal Reserve; Ph.D. MIT; Professor at Harvard University; was seen as potential successor to Alan Greenspan
Eric Rosenfeld Arbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor
William Krasker Arbitrage group at Salomon; Ph.D. MIT; former Harvard Business School professor
Gregory Hawkins Arbitrage group at Salomon; Ph.D. MIT; worked on Bill Clinton's campaign for Arkansas state attorney general
Larry Hilibrand Arbitrage group at Salomon; Ph.D. MIT
James McEntee Bond-trader
Dick Leahy Executive at Salomon
Victor Haghani Arbitrage group at Salomon; Masters in Finance, LSE

you know there's a new LTCM, not sure if you've heard about it. A quant fund dimensional funds advisors that boasts academics such as merton and scholes, fama, etc...even arnold schwarznegger has a 5% stake in the company..:)

http://www.dfaus.com/dimensional/academics/
 
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