Sunday, March 28, 2010


I’ve been jumping up and down, having a fit about the Wall Street folks who created those diabolical instruments which caused the global recession and the collapse of  banks, brokerages and other companies.   But nobody else seems outraged, Why is this?
Knowing that I can be wrong when it comes to numbers or anything at all related to them, I decided to do more research.  I'm not wrong about this, even if I did cast aspersions on mathematicians and physicists in a recent blog post and some articles I’ve subsequently read suggest they can’t be blamed for everything.  Economists were asleep at the wheel and many bankers and traders didn’t understand the risk they were taking.  But surely the devisers  of these instruments did?  If you’re a mathematical physicist who is paid to devise a WMD for your boss, who then uses it to cause mass destruction, does that exonerate you from blame?  Why would it?  Just because you’re smart?  Bof.
    It seems that Wall Street is bristling with mathematicians and physicists, even mathematical physicists.  Not only are they not in disgrace, they are in great demand.  These are the people who devised the sub-prime mortgage securities, as well as secretive trading operations within banks.  Known as QUANTS (far too dignified a term, I’d spell it differently), these folks, along with computer scientists, used super computers and mathematical formulae, to provide complex instruments in pseudo-scientific language for their banker bosses to finagle the market.      Finagle, you say, is that a banking term?  No, but since you and me and millions of other people have been affected by the actions of these quants--homes, pensions, as well as more than a trillion dollars lost and banks, brokerages and other companies bankrupted and credit tightened globally--we can politely say finagle.  To state the obvious, finance is not the area of expertise of mathematicians and physicists, so what are they doing on Wall Street besides wreaking havoc and making money?*  Has a Ph.D on Wall Street become a license to steal?
    If Michael Burry, a one-eyed man with Asperger’s syndrome, could see that the unregulated Wall Street bond market was “losing its mind” and invent Credit Default Swaps to take advantage of this, why did economists, the SEC and other regulatory bodies not notice what was going on?  CDSs were, in essence, bets that the bond market would collapse, which it duly did and Michael Burry made a lot of money for his perspicacity.  Here’s a discussion about the subject with the author of the book THE BIG SHORT, Michael Lewis, who seems to know what he’s talking about.  Here he is again on 60 MINUTES Lewis suggests that it’s too easy to conclude that the people who caused the near collapse of capitalism are criminals, he feels that it’s a case of “mass delusion”.
    That may be true, but the widespread suffering caused by these people is quite real.  Many highly intelligent, educated, people, even Nobel prize-winners, did something wrong to cause this suffering.  It seems the main reason these clever, amoral people have not been held accountable is that they’re the only ones who can unravel the mess they’ve made and are now demanding a whole lot of money to do it and immunity from possible prosecution.
    As Bill Mahr says, “I’m outraged that you’re not outraged.” Let’s not be intimidated by amoral smarts, let’s call a crook a crook even if he or she is deluded.  Let's demand banking reform.  Let's demand that the government stop subsidising banks and financing obscene bankster bonuses.
    Learn  more about BLACK BOXES, HIGH FREQUENCY TRADING/ ALGORITHMIC TRADING and QUANTS by watching this excellent and informative VIDEO.   As Emanuel Derman, a theoretical physicist and early QUANT says: “If people don’t complain now, it serves them right when the next financial crisis happens.”   

* Quants are apparently essential to modern banking because the latest thing is algorithmic trading/High Frequency Trading, which require maths skills. But do we need HFT and algorithmic trading?  Do we really need quants?  Do computers  and algorithms make it easier to be a crook?


Rebecca Sutherland said...

They can excuse and pass the buck all they like - I call it greed. No GRRRRRRREEEEEEEEEED.

Nora Lumiere said...

At least in the UK there is some effort to to name and shame, in the US, it's business as usual.

jo said...

Nora, the article rocks.

I am far from a math whiz but I am intuitive and could see years ago that the way people were living in debt was a lie that someone was going to have to pay for. It drove me crazy. Who would pay was up for debate as people have no connection to their debt. If they own a house and have stuff, they think they are rich - even if they are filled with debt. It has been epidemic for a long while. Who pays for the stuff you can't afford, but buy anyway? Well now we know - the taxpayer.

It was obvious to a non-investing, math-phobic person like myself that this was a house of cards a long time ago.

When Alan Greenspan acted surprised by the fall of the market by stating he thought the industry would 'self-regulate' in their own self interest, I found that to be seriously deluded. Did he not see that people were prone to greed? That everyone would want their piece of the rewards? That, if given the opportunity to press their advantage on the short term, they would, at a cost to the long term? This has been human nature for a long time.

Being in Canada, and largely protected by our strict regulations, Canada has come out of this unscathed. The governments of the world have a responsibility to the citizens to protect them from those who would essentially steal, mislead, and obfuscate.

Bank officials and regulators particularly had a responsibility to make sure that that what they offered was genuine. These offerings were so convoluted that that in itself should have raised red flags. Instead, it just made them see their take in it. Their personal self-interest overrode the Financial system's self interest which can't exactly exist (can it Alan), as the System doesn't have a soul and I have my doubts about the Bankers.

Since nothing has changed vis-a-vis regulations to prevent this happening again, and Obama has put in place Tim Geitner, in charge of it, who was one of the architects of the debacle, ego and greed will continue to rule the financial markets and the taxpayer and average investor will foot the bill.

It was incredibly wrong, even immoral, to have bailed the banks out. That was like getting robbed, then paying the robbers for having robbed you. WTF?! And boy did they celebrate that con.
Thanks Nora, for letting me vent. May add more later :-)

Nora Lumiere said...

Thanks for venting! About time someone did. I'm amazed that nobody has had anything to say about these clever crooks whose actions have affected all of us.
I hope some of banking's underhand practices come out in the Kerviel trial.
To think that banks have the gall to charge us fees for using our money!
We must stand up to them and demand reform.