Posts Tagged ‘Bonds’
Posted in Miscellaneous, Uncategorized, tagged Bonds, Finance, Formulas, Investments, Mathematics, Mortgages, Quantitative Analysts, Quants, Securities, Wall Street on November 6, 2010 | Leave a Comment »
“You put chicken into the grinder and out comes sirloin.” Leszek Gesiak (A quant at Salomon Brothers in Wall Street)
During the last months, all the media attention has been focused on the midterm elections. There was not a single TV program that was not flooded with visceral political ads attacking the opponent. The political vacancies were fought with tooth and nail and a war chest full of campaign funds. Very little was said about the Wall Street Meltdown of September 15, 2008, and yet, the rough economic situation which angered the American voters was largely caused by Wall Street’s irrepressible greed, complacency, entitlement, and callous stupidity that characterized banks in post-2001 America.
In an effort to understand what really caused the Housing Bubble implosion, pundits and financial experts alike have become modern Sherlock Holmes eager to understand and piece together exactly what sank Wall Street. From these investigations a discovery was made which very few people knew about. I’m talking about the Quants, a.k.a The Alchemists of Wall Street. Quants is a term derived from the words quantitative analysts.
They are the rocket scientists of finance, highly trained mathematicians, scientists, and engineers who delve deep into quantitative analysis. They created highly-complex quantitative models to explain the financial transactions taking place in the real world. These brainy financial engineers cooked up beautiful and elegant formulas that demonstrated which financial instruments had the highest probability of generating the highest return at the lowest risk, and Wall Street rolled with them—though, as we’ve learned, those formulas sometimes work better on paper than they do in real life. The quants’ perspective was somewhat different, they defined their software as a “delicate, intricate web of logic.” We all know it was only air.
Even after the horror of the economic crisis of 2008, quants is a growing ideology even as we speak. This reduced group of financial technologists firmly believe they can beat the market with their elegant non-linearity concepts—”Throw some epsilons and thetas on a paper, hoist a few PhDs behind your name, and now you’re an expert in divining the future.”
Paul Wilmott, often described as the smartest quant guru in the world, is a mathematician and author of a large number of textbooks who has been warning us about the danger of a mathematician-led market meltdown for years. Nobody paid attention, the party was too exciting to turn off the lights, until it was too late.
Another well-known quant is Emanuel Derman, also known as the Einstein of Wall Street. He is a quant pioneer who left the world of theoretical physics for a job at Goldman Sachs. Nowadays, he educates a new generation of quants at Columbia University in New York.
The quants said they could outsmart Wall Street predicting the future with their almost incomprehensible complex formulas. However, as we now know in hindsight—which by its very nature is always 20/20—predicting the future is almost impossible, because human nature is unpredictable. We are not programmed to perform as robots and here lies the uncertain behavior of Wall Street where risks are always hovering above the floor trading rooms. Random is a better description of reality. The financial world and the world of people do not repeat itself exactly the same way a formula does.
Other quants unknown to the outside world and responsible for the creation of esoteric software used by the Wall Street traders to market their toxic assets are:
- Peter Muller, Morgan Stanley PDT.
- Kenneth Griffin, Citadel Investment Group.
- Cliff Asness, AQR Capital Management and Goldman-Global Alpha.
- Boaz Weinstein, Deutsche Bank.
- Michael Osinski, Software Programmer at Salomon Brothers, Shearson Lehman, Kidder, Peabody, Intex, and others.
- David X Li, Creator of the Gaussian Copula Function widely used by Wall Street financial institutions.
- James Simons, Renaissance Technologies.
The quant era began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price and arbitrage Wall Street’s ever more complex investment structures.
After the global economic crisis of 2008, many feel that the quants era is gone. That is not so; quants are resilient creatures and know how to regroup and return to their previous practices within the secluded gardens of Wall Street.
Where will the quants go now? Geniuses will be geniuses—good and evil (and how much power they wield) depends on who’s paying them. And I suspect that despite the global financial crisis and its dire consequences, many quants will stay in Wall Street, searching for profits amid the ruins. Due to the challenging nature of the work, a blend of mathematics, finance and computer skills, quants are in great demand and able to command very high salaries. Are they currently working on the next Wall Street bubble? Good Day.
Below is a comprehensive video which provide insightful information on the role played by the quants during the wreckage of the biggest financial meltdown since the Great Depression.