The Quants 29 March, 2010

Over the past week, I've been working my way through the book Too Big to Fail written by Andrew Sorkin. It's a very detailed look at the collapse of the financial industry, giving biographic information about the key players and companies, while trying to contextualize the situation. I'm not too familiar with the world of finance, but Sorkin writes openly and explains a great deal for all the non-finance readers. The books posits, and many of the conversations illustrate quoted illustrate, that the CEOs, Managers, and business side people really had no idea how to value their assets, and that they really only know that they were making money and not how. Sorkin writing about former Federal Reserve Chairman Alan Greenspan's, 

Greenspan would later admit that even he hadn't comprehended exactly what was happening. "I've got some fairly heavy background in mathematics," he stated two years after he stepped own from the Fed. "But some of the complexities of the instruments that were going into CDOs bewilders me. I didn't understand what they were doing or how the actually got the types of returns out of the mezzanines and the various trnched of the CDO that thye did. And I figure if I didn't understand it and I had access to a couple hundred PhDs, how the rest of the world is going to understand it sort of bewildered me."

Math has never been my strong suit, but I always appreciate people who are good at it, but there is always a sneaky suspicion that they are just playing a game of three card monty with you. "Follow the x, follow the x." Yes, you should make, as a business, be able to make profits, but not through shear craftiness with numbers.

This unabated ledgerdemain makes a strong case for regulations, not total, but we need some sort of control over these complex trading practices. Derivatives are more speculative, and are what led to the collapse of Wall Street and led to a "Great Recession." While this trading practice was highly profitable, for a time, for the firms, we see in the long run they are ultimately detrimental to the consumer. If the people who are suppose to understand it, don't, shouldn't that throw up a HUGE red flag?

Next on my reading list is "The Quants."

Saw this beaitiful video earlier today today and it kind of vizualized the complexity of these deals on Wall Street and other financial institutions. The video is about a minute and a half long.
(Sorry couldn't embed) 
http://www.onesize.nl/projects/vpro-quants-the-alchemists-of-wallstreet