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Thursday, October 6, 2011

Geeks bearing gifts - to Wall Street (Pablo Triana pt.2)

So, having drank Triana's book to the dregs, and to wrap my previous post's point up, this is the apparent message of Triana ruminations(*):

"Dear Reader.

I represent that crowd of worldly, fascinating, experienced, master-of-the-universe types that run the trading floors and the financial institutions in Wall Street and elsewhere. Given some recent unfortunate events, you may be under the misapprehension that we need to shoulder blame (and pay some amount of retribution) for a number of recent unfortunate events that have led to the worst world economic crisis since 1929.

Not so! Let me explain.

We - the street-wise, non quant-oriented traders - are the good guys (in spite of what that Oliver Stone guy would have you believe). Really. True, some of us may occasionaly exhibit some obnoxious traits as the pink-tied guy that went recently public saying that Goldman-Sachs rules the world, but that's just what we call good natured fun.

So where are the guilty parties? I have thoroughly researched this question, and am now able to unveil the secret.

It was the quants.

Who are the quants, you may be asking. The quants are geeks. Outsiders. Most of them have science diplomas, PhDs even. Being geeks, they are unworldly, weird, given to math, computer programming and other boring, unglitzy and menial occupations. Quants used to be behaved and subservient: stayed in the back rooom, ran the computer systems, mopped the floors and made themselves generally useful to us dealmakers, occasionally basking in (dim) reflected light. The also had low paychecks, as it befits this type of lowlife.

Alas, unbeknown to most of us, two large foundations (FORD and Carnegie) in 1959 gave us money (We may be nice guys, but we cannot resist money. Who can, honestly) to sneak inside all the B-schools around the US some uebergeeks (Black, Merton, Scholes, et. al.). Once they were in, they started churning out all this crazy math and sending it to the trading floors, were the quants got ideas inside their heads, got uppity, and put that same crazy math inside our computers. Then they made it use them (the computers) and they were showing all kind of terrific numbers and returns, and fees and money we could make.

And so we did. But the numbers were fake. The evil uppity quants had taken us for a ride with their Gaussian, copulas, VaRs and schmaRs. So the market crashed, and - by the way it looks now - it may not recover for the rest of our lives.

Why did we believe the quants, you ask. Well, as kids, most of us wanted to grow up a scientist: wear a white coat, say amazingly intelligent things, go to planets with severe looking, pointy ears aliens, and get the girl at the end. Then the movie stories changed, we found out we liked money more than science, became worldly and savy and intuitive and bought a suit - and we were still getting the girl - not to mention the money, and stuff. But deep inside us, we harbored this science yearning, and so the uebergeeks wilily exploited our gentle side with their scientist prestige. How were we to know they were actual dr. Strangleloves, all of them? Plus we were actually asking them to churn out those models and put them on our computers so we could make money, see?

But wait. We may be nice, but we are not stupid. It's not like we believed the models. We knew they were utter poppycock most of the time (though it galled us that many of the geeks were now making the same money we did by using those very same models). Why were we using them, you ask. Why, we were using them as an excuse to gorge on risk, so we could make more money and award ourselves more fees, that should be obvious. What were we doing before 1959 - without models and quants and stuff? Well, obviously we made money, awarded ourselves fees, and crashed the market all the same, we just used other excuses - oh, and crashes were not so quick, because we did not have computers then. But this is really beside the point, a digression, I'd say. So let's not digress.

What do we do now, you want to know? Let me tell you what - I've got it all figured out.

We need to put worldly, fascinating, experienced, pink-tied, master-of-the-universe "deal makers" and "punters" (like me) back in the driving seat. Runaway quants will be disciplined - hanging a few by the neck on the trading floor will be a nice warning for the others. They'll return to the backroom to reboot computers, make us coffee and mop the floor. We'll kick the uebergeeks out of B-school, so we can free up tenured posts for ourselves when we get close to retirement as masters of the Universe.

Meanwhile, we'll put the economy back in shape, just the way it was in 1920s - no, wait, bad date, you want to get around that '29 thing - I meant, the 1950s. Trust us. The system's got nothing to do with all the troubles. It was the quants. The geeks. The Geeks Bearing Gifts. We will know them in the future and we will fear them, and we will not let them in.

Did they have quants in the Netherlands around 1637, you ask. Of course not, that's absurd, they did not even have computers then. So what about tulip mania, you ask? Sorry, but we really don't have time for digressions, around here. By the way, are you a socialist?

And, 'ow about those gov'ment bonds over there, fellas?

(*) I am more or less convinced that Triana is using his "kill the quant" theory as a smoke screen to hide the total systemic failure of the contemporary economic system. I am equally convinced that a lot - possibly all - the econometric models that have been used in quant finance are fragile. And I have a strong suspect that Taleb may be right - no modeling may be possible.

(**) Contains sarcasm.

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