Posted on 01/24/2010 4:56:02 AM PST by TigerLikesRooster
The Minds Behind the Meltdown
How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street
By SCOTT PATTERSON
On Thursday, President Barack Obama proposed new rules to curb a number of Wall Street's risky—and highly profitable—trading activities. One target: The secretive trading operations within banks that use large doses of leverage, or borrowed money, to make huge bets on the market. Wall Street says the regulations are unnecessary, and since the financial crisis struck, most banks have cut back on these trading outfits. But when the downturn first hit in the summer of 2007, several of them were among the first to suffer, and collectively they lost billions over a matter of days.
A small group of brainy math whizzes are emerging as the unlikely group who nearly brought down the finance industry. As WSJ's Scott Patterson reports, a group called "The Quants" developed complex systems to trade securities such as mortgage derivatives, which were at the heart of the crisis.
In his new book, "The Quants," Wall Street Journal reporter Scott Patterson suggests how this new breed of mathematicians and computer scientists took over much of the financial system—and the damage they inflicted in the 2007 meltdown.
At Morgan Stanley's investing powerhouse Process Driven Trading on Monday, Aug. 6, founder Peter Muller was AWOL, visiting a friend near Boston. Mike Reed and Amy Wong manned the helm, PDT veterans from the days when the group was nothing more than a thought experiment, its traders a small band of young math whizzes tinkering with computers like brainy teenagers in a cluttered garage.
(Excerpt) Read more at online.wsj.com ...
P!
We need a big “show trial” to expose the Quants and put them in prison for many years.
The central issue is the relationship between money and our posterity (remember them?).
Debt can be a pretty fair imitation of real money. And the sophisticated debt money system that has developed since 1965 has fueled enormous consumption, much, much more than would have been possible without it.
However, debt cannot do one thing that real money can do, and that is store wealth.
When John Maynard Keynes made his famous retort, "In the long run, we're all dead", he was saying "Future generations? F*** them". Now, as a non-reproducing unit, that may have been reasonable. For him.
But we now see, all around us, that the debt money system is failing as a store and forward conveyor of wealth. For individuals, this is a problem, but for large enterprises, it is a disaster.
What happens when a company can't borrow any more?
LOL...I don’t buy this for a second. This is window dressing and nothing more.
It’s a good story. But it seems to assume there is something new in equity guys scrambling frantically to sell when the housing market starts to unravel. It may have changed the speed and style of a crash. But the crash was caused by multiple bubbles that had to pop. The quants did not create the bubble. The gvt probably did that.
My favorite one is when idiots proclaim that banks rigged this whole scheme just to "steal the homes" of people. The very LAST thing the bank wants is your home. What they really want is for people to make thier payments according to the terms of the loan. If that included adjusted ARM rates, then again look straight in the mirror. You might as well wear a yellow/black t-shirt that says "Caution: I am too stupid to understand a mortgage!" and on the back "Warning: My signature is no good". I denied myself over and over again the high lifestyle enjoyed by so many I know through those years. Now they are all whining and blaming the banks and the "Quants", while my situation has never been better.
What caused to crash was reality. The reality that house prices can not continue to rise to infinity, the reality that they may actaully fall back to the point where people can afford them, and the reality that loans do have to be paid.
“Quants”?
Simple check kiting on a grander scale.
It was an attempt to spread the risk around. So instead of XYZ bank taking all the risk, it was spread to investors. The idea was that individual investors would take a tiny hit if the loans went bad. It all went terribly wrong because of extremely bad loans in places like the Southwest and Florida.
No, but they changed the nature of bubble. They create a new illusion of diminished risk via complicated modeling. The analytical model did not really find the way to manage risk better, but it managed to give impression that it did. Hence, very risky dealings get the green line, leverages which cannot be attempted in the past were employed, sanctioned by quant model which backed up by credibility 'awe-inspiring' mathematical models confer on.
Until recently, people resort to deceptive complicated argument to confuse and fool others, persuading them to do things common sense would not permit.
In the new age, math and science are drafted to perform that role. Financial modeling and climate science are two prominent examples of the day.
All that computer servers churning data and crunching numbers are basically pulling wool over people, in a sense.
Besides,Internet and real-time computerized trading enabled this kind of scheme to spread far and wide at light speed, pulling people all over the world into it, on a scale never imagined before.
This is all that really matters. The US government, FED created housing bubble popped. It is a shame that no one will be held responsible for the bubble and resulting carnage.
Wall Street computer models bad, climate computer models good.
actually this reminds me of the role of programs trades in the 1987 crash.
” No, but they changed the nature of bubble. They create a new illusion of diminished risk via complicated modeling. The analytical model did not really find the way to manage risk better, but it managed to give impression that it did. Hence, very risky dealings get the green line, leverages which cannot be attempted in the past were employed, sanctioned by quant model which backed up by credibility ‘awe-inspiring’ mathematical models confer on.”
I think that’s fair. But my main point is unchanged. We have had a multiclass bubble popping since 2000. The bubble was mostly created by government policy in real estate and securities. The bubbles have been trying to pop ever since and have been prevented from popping by government policies.
The economy needs a significant deflation of asset values and reduction in debt before it can get back on track. Each time we prevent that from happening, we make the ultimate reckoning worse. We can’t live on 0% loans to banks and China purchasing treasuries forever.
So I guess my basic point is: the US gvt is to blame for where we are. It’s policies created the bubble and sustained it every time the economy tried to reset. The quants changed the details of the bubbles and the rate at which they tried to pop. Massive asset and debt bubbles have existed as long as we have tracked economies and fast popping has also. But one common theme to all bubbles is the perception that it can’t go wrong. The quants probably changed the rationale for “it can’t go wrong.”
” No, but they changed the nature of bubble. They create a new illusion of diminished risk via complicated modeling. The analytical model did not really find the way to manage risk better, but it managed to give impression that it did. Hence, very risky dealings get the green line, leverages which cannot be attempted in the past were employed, sanctioned by quant model which backed up by credibility ‘awe-inspiring’ mathematical models confer on.”
I think that’s fair. But my main point is unchanged. We have had a multiclass bubble popping since 2000. The bubble was mostly created by government policy in real estate and securities. The bubbles have been trying to pop ever since and have been prevented from popping by government policies relating to debt that encouraged and enabled ever expanding debt to inflate asset values back to bubble levels.
The economy needs a significant deflation of asset values and a concomitant reduction in debt before it can get back on track. Each time we prevent that from happening, we make the ultimate reckoning worse. We can’t live on 0% loans to banks and China purchasing treasuries forever.
So I guess my basic point is: the US gvt (and the Chinese gvt—pegging of currencies) are to blame for where we are. Their policies created the bubble and sustained it every time the economy tried to reset.
Massive asset and debt bubbles have existed as long as we have tracked economies and fast popping has also. But one common theme to all bubbles is the perception that it can’t go wrong. The quants changed the rationale for “it can’t go wrong.”
Government subsidies for housing. Unfunded government growth promoted by a Republican. Central bank created inverted yield curves around the world for several months before the collapse. Smoke and mirrors economic growth fueled by government growth, a weak currency and skyrocketing commodity prices.
Sure, let's blame the Quants.
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