Before Wall Street decided quants were cool, NSA was one of their major employers. It should have been a huge warning sign that one of the things these guys were absolutely essential for was hiding things, i.e. encryption. Why they would dream that these people, who were intellectually gifted in making things obtuse, were going to develop a product that anyone, beyond the individual who wrote it, would understand, defies reason. Add to that the reality that theoretical mathematicians don’t usually take the “easy courses”, like macro economics or accounting, means that whatever they come up with will be created with none of the foundation principles of the real world markets in mind.

These guys are dealing with fractional penny price moves that become huge chunks of money because of the speed at which they take place, and the number of items changing hands. It is a great way to make a lot of money when things are going up, but it works exactly the same way on the down side, and I don’t think any of these clowns programmed for a reversal of fortune. They knew how to sell short, but they didn’t have anything in place to deal with a total meltdown, especially when trading gets halted.

The worst thing any of the people in charge had seen was the collapse of the tech bubble. They had no concept of how bad things could become, or the fact that all of the safety devices, regulations, had been taken off the machinery.

They couldn’t find the problem because they obscured all of the potential ways to identify the problem and there is no way to quantify panic. They were gambling, and didn’t understand that basic fact.

I loved the bit about nobody knew how Muller made money – nobody knew how Bernie Madoff made money, until they discovered that he didn’t. They are all variations on the Ponzi scheme. If you don’t make an actual product, you are dealing with nothing but promises. The stock markets are casinos, not centers of investment.

Holly: I’ve got to admit it — I’ve flamingoed up.
Rimmer: You what?
Holly: It’s like a cock-up, only much, much bigger!
Red Dwarf, Parallel Universe

This one’s a bit sort of… metaphorical, like… But, it has my namesake! 😆

Kryten: Question which occurs: if this ocean is supposed to be teeming with new lifeforms, where are they all?
Lister: What are you implying?
Kryten: No implication intended, sir.
Lister: Yes, there is. You’re saying there’s some huge damn fish out there, aren’t yer? Some kinda gigantic weird pre-historic leviathan who’s porked his way through this entire ocean.
Kryten: That’s one option.
Lister: Any alternatives?
Kryten: None that occur.
Red Dwarf – Back to Reality

Oooh! That reminds me of another… (and, I like 3’s) Anyway… K42 likes metaphors! 😉

Kryten: Suggest we maintain course. That asteroid does not exist.
Rimmer: Suppose you’re wrong?
Kryten: Sir, I’ll stake my reputation on it.
Rimmer: Kryten, you haven’t got a reputation.
Kryten: No, sir, but I’m hoping to acquire one from this escapade.
Red Dwarf – Psirens
(Personally, i think that last one sums up Quants, and economists generally.) 😉 😛

Ehhh… What the heck… one for the road! 😛

Holly: I know what I did wrong last time. It’s a mistake any deranged, half-witted computer could have made.
Red Dwarf – DNA

😆

“It comes down to hubris. All these “Kings of the World” convinced themselves and each other that they were too smart, too talented, and too clever to fail. There was always another algorithm, another strategy, even another sucker they could use to keep the money train rolling.”

It appears that Morgan Stanley were the biggest bunch of fools playing the Quants game (Russian Roulette with 3 of 6 chambers loaded). They created a Quantitative methods company called Process Driven Trading (PDT) which by 2007 had over $6billion in assets and offices around the World and was stacked to the ceiling with Mathematicians and Physicists and computer systems that would have made the NSA drool, and nary an Economist to be seen. And Goldman Sachs Global Alpha and spin-off Applied Quantitative Research (AQR) And in truth, in the end, I believe it was mainly due to criminal negligence on the part of the US Gov. They were the enablers that allowed this to happen. It’s easy to blame the wealthy, or the greedy Wall St Companies, or even the Quants, but in the end, without the Gov allowing them to get away with what they did, time and time again, the meltdown wouldn’t have happened. And if you read the book, you’ll realise it’s actually far worse than it appears, even today. It’s not over yet.

Authorities, meanwhile, had little idea about the massive losses taking place across Wall Street. That Tuesday afternoon, the Federal Reserve said it had decided to leave short-term interest rates alone at 5.25%.Investors on Main Street had little idea that a historic blowup was occurring on Wall Street. AQR risk-management guru Aaron Brown had to laugh watching commentators on CNBC discuss in bewilderment the strange moves stocks were making, with no idea about what was behind the volatility. Truth was, Mr. Brown realized, the quants themselves were still trying to figure it out.

Mr. Brown, who had joined AQR earlier that year, had been trying to get up to speed on the fund’s systems to help manage its risk. He’d decided to stay in the office that Tuesday night and sleep on a small couch near his desk. He wasn’t the only one. Near midnight, he stepped out of his office, eyes bloodshot from peering at numbers on a computer screen for the past 20 hours. The office was buzzing with activity, dozens of haggard quants chugging coffee, iPods plugged into their ears as they punched frantically on keyboards, unwinding the fund’s positions in markets around the globe. It was a strange sight. The office was nearly as busy as it was during the day, but it was pitch black outside.

The carnage revealed a dangerous lack of transparency in the market. No one knew which fund was behind the meltdown. Nervous managers traded rumors by email and phone in a frantic hunt for patient zero, the sickly hedge fund that had triggered the contagion. Many were fingering Goldman Sachs’s Global Alpha, the quant fund founded by Mr. Asness in the 1990s that had grown to massive proportions. But no one knew for sure.
…
As conditions spun out of control, Mr. Muller was updating Morgan’s top brass. He wanted to know how much damage was acceptable. But his chiefs wouldn’t give him a number. They didn’t understand all of the nuts and bolts of how PDT worked. Mr. Muller had kept its positions and strategy so secret over the years that few people in the firm had any inkling about how PDT made money. They knew it was profitable almost all the time. That was all that mattered.

That meant it was Mr. Muller’s call. By Wednesday morning, he’d already decided. It was time to sell.

And that was the beginning of the end.

BTW, for a succinct account in the inimitable Jon Stewart style, he interviews Scott Patterson and put’s it in proper perspective. 😉

The Daily Show – March 4, 2010 – Scott Patterson
(as usual, the interview is about half way though. But the first bit on the latest Internet craze, Chatroulette, I thought was hilarious! 😆

Ya know… My grandfather was a damned good Engineer… and he once complained to me that Scientists knew nothing at all about money or the cost of things. Seems he was dead right… he usually was. They thought they were playing with numbers on a screen, but in reality, they were playing with peoples lives.

How do you engage with people who believe that supply can create demand and all problems can be solved with marketing? They don’t have a clue how the real world works.

In an uncharacteristic piece of actual reporting, NPR responded to the new “jobs” bill by talking to two small business owners, and discovered that they weren’t going to hire anyone because of tax credits. One has been considering hiring someone for months because of a mild upturn in their business [tangentially related to the campaign season, as the company does signs and banners] and the tax credits will be nice, but they wouldn’t be the reason for hiring. The other business owner was straight-forward and said he didn’t have any work for an extra employee, so he wouldn’t hire if the government paid the entire cost.

You don’t value what you don’t earn.

So it goes, in the United States of Delusional Thinking…

– Badtux the Reality-based Penguin