Men Without Women

This short story has it all -- genetic genealogy, ultra high net worth physics quant banker, stripper, cop, marriage, family, New Yorker writer. It's fiction, but based on real characters and stories. 

There is an audio version, read by the author, at the link.

Satellites by Rebecca Curtis (The New Yorker July 5, 2021) 

My husband and Tony were anxiety-ridden workaholics who’d focussed, from a young age, on earning cash. Tony wanted enough for a good life; Conor, enough to feel safe. They were fifty-six years old, though Conor looked forty-five and Tony thirty-five. They were meticulous, but owing to oversights they’d each had five kids by four women. They were two nerds from New Hampshire. ... 

His ancestors, he told me, had founded America. He’d started working at age twelve, as a farmhand, and eventually acquired a Ph.D. in quantum physics from Harvard, then served for decades as the “head quant” at a world-renowned investment bank. But he wasn’t smart enough to be skeptical when go-go dancers said, Don’t worry, I’m on the pill. ... 

After high school, Tony turned down a scholarship to the University of New Hampshire. He wanted to work. He did active duty in the Marines for eight years, then served in the Air National Guard for twenty while working as a cop. Now he collected his police pension and, for fun, drove a delivery truck. 

... 

Conor smiled. By the way, he said, had Tony ever done 23andMe or Ancestry.com? 

Tony squinted. Ancestry. Sinead bought them kits for his birthday. Why? 

Conor peered up at Jupiter, approaching Saturn for the great conjunction, and the murky dimmer stars. I studied shuttered restaurants. A few bars had created outdoor dining rooms and were busy; the 7-Eleven was dark, but the ever-glowing “Fortune Teller!” sign on the adjacent cottage was lit. 

No reason, Conor said. Had Tony, he asked, opted into his family DNA tree, to see his matches who’d already done Ancestry? Or elected to receive text alerts whenever some new supposed relative signed on? 

Tony walked swiftly. Nah, he said. He’d done Ancestry to make Sinead happy. He shrugged. She’d made their accounts, he said. She probably opted him in; he wasn’t sure. 

When we got home, Tony’s phone had twenty missed calls. 

...

Men Without Women, Ernest Hemingway 1927. "Hemingway begins to examine the themes that would occupy his later works: the casualties of war, the often uneasy relationship between men and women, ..."

Rebecca Curtis interview

In “Satellites,” your story in the Fiction Issue, a woman and her husband, a retired banker, host the husband’s friend at their Jersey-shore mansion. The woman is a frustrated writer, and, to inspire her, her husband, Conor, asks the friend, Tony, a retired police officer, to tell her cop stories. How would you describe the woman’s views of these two men? 

The narrator is awed by how smart Tony and her husband are, and by how hard they work. She’s impressed that they’ve read so much and educated themselves about so many diverse topics while performing demanding and often unpleasant jobs, and by the fact that they’re two of the most generous, kind people she knows. She appreciates that they’ve maintained lifelong friendships, something that she wishes she’d done herself. She doesn’t agree with all their political ideas. Earlier in her life, she believed that, one, bankers cared about money but not about art, literature, world hunger, etc.; and, two, that anyone who supported Trumpish policies (or who voted for anyone like Trump) must be an ignorant jerk. Meeting her husband (and Tony) punctured those beliefs. 

The narrator views herself as the proverbial grasshopper: someone—possibly frivolous, vapid, and solipsistic—who wants to enjoy her life, sing, dance, make “art,” while working various hip-but-not-very-remunerative jobs to pay rent, never truly planning for winter. Tony and Conor are ants: anxious, alert to the dangers the world can pose, doing difficult (and sneered-upon) jobs diligently so they’ll be protected when scarcity comes. The narrator aspires to be more ant-like while remaining a grasshopper. 

Tony and Conor are, in some ways, obsessed with genetics and lineage—they discuss Ancestry.com and bloodlines—but their own families (they each have five children by four women) are somewhat of a disappointment, or even an afterthought, to them. Can you say a little about that tension? 

Conor and Tony suffer because—in several cases—they don’t have the ability to see their children. In the case of divorce, a time-sharing agreement may be in place, but, if the mother has principal custody and won’t permit the father’s visits, what can the father do? Possession sometimes is nine-tenths of the law. Hiring lawyers and going to court to try to force a mother who won’t honor custody agreements to do so requires copious energy, oodles of spare time, and a small fortune. Conor and Tony care deeply about their children, but they’ve lost control—in some cases, of seeing their kids, and, in others, of influencing them. They may feel powerless.

Vineer Bhansali: Physics, Tail Risk Hedging, and 900% Coronavirus Returns - Manifold Episode #43

Steve and Corey talk with theoretical physicist turned hedge fund investor Vineer Bhansali. Bhansali describes his transition from physics to finance, his firm LongTail Alpha, and his recent outsize returns from the coronavirus financial crisis. Also discussed: derivatives pricing, random walks, helicopter money, and Modern Monetary Theory.

Transcript

LongTail Alpha

LongTail Alpha’s OneTail Hedgehog Fund II had 929% Return (Bloomberg)

A New Anomaly Matching Condition? (1992)
https://arxiv.org/abs/hep-ph/9211299

Added: Background on derivatives history here. AFAIK high energy physicist M.F.M. Osborne was the first to suggest the log-normal random walk model for securities prices, in the 1950s. Bachelier suggested an additive model which does not even make logical sense. See my articles in Physics World: 1 , 2


man·i·fold /ˈmanəˌfōld/ many and various.

In mathematics, a manifold is a topological space that locally resembles Euclidean space near each point.

Steve Hsu and Corey Washington have been friends for almost 30 years, and between them hold PhDs in Neuroscience, Philosophy, and Theoretical Physics. Join them for wide ranging and unfiltered conversations with leading writers, scientists, technologists, academics, entrepreneurs, investors, and more.

Steve Hsu is VP for Research and Professor of Theoretical Physics at Michigan State University. He is also a researcher in computational genomics and founder of several Silicon Valley startups, ranging from information security to biotech. Educated at Caltech and Berkeley, he was a Harvard Junior Fellow and held faculty positions at Yale and the University of Oregon before joining MSU.

Corey Washington is Director of Analytics in the Office of Research and Innovation at Michigan State University. He was educated at Amherst College and MIT before receiving a PhD in Philosophy from Stanford and a PhD in a Neuroscience from Columbia. He held faculty positions at the University Washington and the University of Maryland. Prior to MSU, Corey worked as a biotech consultant and is founder of a medical diagnostics startup.

Who's on the other side of the trade?

A great conversation between Tyler Cowen and fund manager Cliff Asness, who has appeared many times on this blog. See, e.g., this 2004 post on his analysis of the well known Fed Model for equity valuation, also discussed in the interview.

Hedge-fund manager Cliff Asness, one of the most influential—and outspoken—financial thinkers, will join Tyler Cowen for a wide-ranging intellectual dialogue as part of the Conversations with Tyler series.

Asness is a founder, managing principal and chief investment officer at AQR Capital Management. In 2012, he was included in the 50 Most Influential list of Bloomberg Markets magazine. As an entrepreneur in the field of finance, Asness has helped shape the national conversation on financial markets and regulation.

He is an active researcher and has authored articles on a variety of financial topics for many publications, including The Journal of Portfolio Management, Financial Analysts Journal, and The Journal of Finance. Prior to cofounding AQR Capital Management, he was a managing director and director of quantitative research for the Asset Management Division of Goldman, Sachs & Co. He is on the editorial board of The Journal of Portfolio Management, the governing board of the Courant Institute of Mathematical Finance at NYU, the board of directors of the Q-Group and the board of the International Rescue Committee.

Post-Crash

Podcast interview with Kevin Roose, author of Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits.

See also Miserable Bankers.

Miserable bankers

Note most of the research for the book from which this article originates took place during the post-credit crisis bust for financiers. Still the best risk-adjusted path to $5-10 M net worth.

See also Creators and Rulers and From physics to Goldman to Y-Combinator.

Atlantic: ... Jeremy, for instance, had arrived at Goldman thinking that his specific job—trading commodities derivatives—could make the world a teensy bit better by allowing large companies to hedge their costs, and pass savings along to customers. But one day, his boss pulled him aside and told him that, in effect, he’d been naïve.

“We’re not here to save the world,” the boss said. “We exist to make money.”

The British economist Roger Bootle has written about the difference between “creative” and “distributive” work. Creative work, Bootle says, is work that brings something new into the world that adds to the total available to everyone (a doctor treating patients, an artist making sculptures). Distributive work, on the other hand, only carries the possibility of beating out competitors and winning a bigger share of a fixed-size market. Bootle explains that although many jobs in modern society consist of distributive work, there is something intrinsically happier about a society that skews in favor of the creative.

“There are some people who may derive active delight from the knowledge that their working life is devoted to making sure that someone else loses, but most people do not function that way,” he writes. “They like to have a sense of worth, and that sense usually comes from the belief that they are contributing to society.”

During my interviews with young bankers, I heard a lot of them express this exact sentiment. They wanted to do something, make something, add something to the world, instead of simply serving as well-paid financial intermediaries at giant investment banks. It doesn’t hurt that creative jobs—including, but not limited to, jobs with Silicon Valley tech companies—are now considered sexier and more socially acceptable than Wall Street jobs, which still carry the stigma of the financial crisis. At one point, during the Occupy Wall Street protests, Jeremy told me that he had begun camouflaging his Goldman affiliation in public. ...

Goldman v. Aleynikov

Michael Lewis on the Aleynikov-Goldman HFT matter. The article mentions that Goldman trailed other players like Citadel when Aleynikov was hired. The head of HFT at Citadel was (I believe) a contemporary of mine in grad school at Berkeley, who did his dissertation in string theory. Malyshev, the guy who hired Aleynikov from Goldman, had his own legal problems when he left Citadel.

Vanity Fair: ... Serge knew nothing about Wall Street. The headhunter sent him a bunch of books about writing software on Wall Street, plus a primer on how to make it through a Wall Street job interview, and told him he could make a lot more than the $220,000 a year he was making at the telecom. Serge felt flattered, and liked the headhunter, but he read the books and decided Wall Street wasn’t for him. He enjoyed the technical challenges at the giant telecom and didn’t really feel the need to earn more money. A year later the headhunter called him again. By 2007, IDT was in financial trouble. His wife, Elina, was carrying their third child, and they would need to buy a bigger house. Serge agreed to interview with the Wall Street firm that especially wanted to meet him: Goldman Sachs.

... And then Wall Street called. Goldman Sachs put Serge through a series of telephone interviews, then brought him in for a long day of face-to-face interviews. These he found extremely tense, even a bit weird. “I was not used to seeing people put so much energy into evaluating other people,” he said. One after another, a dozen Goldman employees tried to stump him with brainteasers, computer puzzles, math problems, and even some light physics. It must have become clear to Goldman (as it was to Serge) that he knew more about most of the things he was being asked than did his interviewers. At the end of the first day, Goldman invited him back for a second day. He went home and thought it over: he wasn’t all that sure he wanted to work at Goldman Sachs. “But the next morning I had a competitive feeling,” he says. “I should conclude it and try to pass it because it’s a big challenge.”

... He returned for another round of Goldman’s grilling, which ended in the office of one of the high-frequency traders, another Russian, named Alexander Davidovich. A managing director, he had just two final questions for Serge, both designed to test his ability to solve problems.

The first: Is 3,599 a prime number?

Serge quickly saw there was something strange about 3,599: it was very close to 3,600. He jotted down the following equations: 3599 = (3600 – 1) = (602 – 12) = (60 – 1) (60 + 1) = 59 times 61. Not a prime number.

The problem wasn’t that difficult, but, as he put it, “it was harder to solve the problem when you are anticipated to solve it quickly.” It might have taken him as long as two minutes to finish. The second question the Goldman managing director asked him was more involved—and involving. He described for Serge a room, a rectangular box, and gave him its three dimensions. “He says there is a spider on the floor and gives me its coordinates. There is also a fly on the ceiling, and he gives me its coordinates as well. Then he asked the question: Calculate the shortest distance the spider can take to reach the fly.” The spider can’t fly or swing; it can only walk on surfaces. The shortest path between two points was a straight line, and so, Serge figured, it was a matter of unfolding the box, turning a three-dimensional object into a one-dimensional surface, then using the Pythagorean theorem to calculate the distances. It took him several minutes to work it all out; when he was done, Davidovich offered him a job at Goldman Sachs. His starting salary plus bonus came to $270,000.

... One small example of the kind of problems Serge found: Goldman’s trading on the NASDAQ exchange. Goldman owned the lone (unmarked) building directly across the street from NASDAQ in Carteret, New Jersey. The building housed Goldman’s dark pool. When Serge arrived, 40,000 messages per second were flying back and forth between computers inside the two buildings. Proximity, he assumed, must offer Goldman Sachs some advantage—after all, why else buy the only building anywhere near the exchange? But when he looked into it he found that, to cross the street from Goldman to NASDAQ, a signal took five milliseconds, or nearly as much time as it took a signal to travel on the fastest network from Chicago to New York. “The theoretical limit [of sending a signal] from Chicago to New York is something like seven milliseconds,” says Serge. “Everything more than that is the friction caused by man.” The friction could be caused by physical distance—say, if the signal moving across the street in Carteret, New Jersey, traveled in something less direct than a straight line. It could be caused by computer hardware. (The top high-frequency-trading firms chuck out their old gear and buy new stuff every few months.) But it could also be caused by slow, clunky software—and that was Goldman’s problem. Their high-frequency-trading platform was designed, in typical Goldman style, as a centralized hub-and-spoke system. Every signal sent was required to pass through the mother ship in Manhattan before it went back out into the marketplace. “But the latency [the five milliseconds] wasn’t mainly due to the physical distance,” says Serge. “It was because the traffic was going through layers and layers of corporate switching equipment.” ...

In this last paragraph Aleynikov sounds more like Sakharov than a millionaire quant ;-)

“If the incarceration experience doesn’t break your spirit, it changes you in a way that you lose many fears. You begin to realize that your life is not ruled by your ego and ambition and that it can end any day at any time. So why worry? You learn that, just like on the street, there is life in prison, and random people get there based on the jeopardy of the system. The prisons are filled with people who crossed the law, as well as by those who were incidentally and circumstantially picked and crushed by somebody else’s agenda. On the other hand, as a vivid benefit, you become very much independent of material property and learn to appreciate very simple pleasures in life such as the sunlight and morning breeze.”

The City and The Street

Michael Lewis writes in the NY Review of Books.

Early 1990s, hanging out in Manhattan with some friends in the derivatives business, one of them an Oxbridge guy who had been at graduate school at Harvard: when I used the then new term "financial engineering" in conversation he burst out laughing. "Is that what they're going to call it?" he asked, incredulous. "It's just bollocks."

See also The illusion of skill.

NYBooks: ... If you had to pick a city on earth where the American investment banker did not belong, London would have been on any shortlist. In London, circa 1980, the American investment banker had going against him not just widespread commercial lassitude but the locals’ near-constant state of irony. Wherever it traveled, American high finance required an irony-free zone, in which otherwise intelligent people might take seriously inherently absurd events: young people with no experience in finance being paid fortunes to give financial advice, bankers who had never run a business orchestrating takeovers of entire industries, and so on. It was hard to see how the English, with their instinct to not take anything very seriously, could make possible such a space.

Yet they did. And a brand-new social type was born: the highly educated middle-class Brit who was more crassly American than any American. In the early years this new hybrid was so obviously not an indigenous species that he had a certain charm about him, like, say, kudzu in the American South at the end of the nineteenth century, or a pet Burmese python near the Florida Everglades at the end of the twentieth. But then he completely overran the place. Within a decade half the graduates of Oxford and Cambridge were trying to forget whatever they’d been taught about how to live their lives and were remaking themselves in the image of Wall Street. Monty Python was able to survive many things, but Goldman Sachs wasn’t one of them.

The introduction into British life of American ideas of finance, and success, may seem trivial alongside everything else that was happening in Great Britain at the time (Mrs. Thatcher, globalization, the growing weariness with things not working properly, an actually useful collapse of antimarket snobbery), but I don’t think it was. The new American way of financial life arrived in England and created a new set of assumptions and expectations for British elites—who, as it turned out, were dying to get their hands on a new set of assumptions and expectations. The British situation was more dramatic than the American one, because the difference between what you could make on Wall Street versus doing something useful in America, great though it was, was still a lot less than the difference between what you could make for yourself in the City of London versus doing something useful in Great Britain.

In neither place were the windfall gains to the people in finance widely understood for what they were: the upside to big risk-taking, the costs of which would be socialized, if they ever went wrong. For a long time they looked simply like fair compensation for being clever and working hard. But that’s not what they really were; and the net effect of Wall Street’s arrival in London, combined with the other things that were going on, was to get rid of the dole for the poor and replace it with a far more generous, and far more subtle, dole for the rich. The magic of the scheme was that various forms of financial manipulation appeared to the manipulators, and even to the wider public, as a form of achievement. All these kids from Oxford and Cambridge who flooded into Morgan Stanley and Goldman Sachs weren’t just handed huge piles of money. They were handed new identities: the winners of this new marketplace. They still lived in England but, because of the magnitude of their success, they were now detached from it. ...

Revenge of the muppets?

No. This guy will probably regret writing a bitter resignation op-ed.

NYTimes: ... It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

Already, the vampire squid is on the counterattack:

WSJ: ... Mr. Smith described himself as an executive director and head of Goldman’s U.S. equity derivatives business in Europe, the Middle East and Africa.

A person familiar with the matter said Mr. Smith’s role is actually vice president, a relatively junior position held by thousands of Goldman employees around the world. And Mr. Smith is the only employee in the derivatives business that he heads, this person said.

More fun at the Times Dealbook blog:

Former Goldman trader, quit last year

This guy might as well have had a microphone in the room with me during my exit interview…took the words right out of my mouth. To add to one thing he said, I had never heard the term “rip someone’s face off” until I started working at Goldman Sachs. Unfortunately, that phrase was all too often used in the context of client transactions.

Matt Levine, former Goldman employee, now an editor at Dealbreaker:

Maybe if he’d gotten the Rhodes, or won a gold medal for regular tennis at the goyish Olympics, he’d have made MD and would still have a job.

Volcker: time is growing short

There's more about trade and fiscal balances, etc., but I thought the following was particularly good.

NY Review of Books: ... I think it is fair to say that for some time the dominant approach of economic theorizing, increasingly reflected in public policy, has been that free and open financial markets, supported by advances in electronic technology and by sophisticated financial engineering, would most effectively support both market efficiency and stability. Without heavily intrusive regulation, investable funds would flow to the most profitable and productive uses. The inherent risks of making loans and extending credits would be diffused and reallocated among those best able and willing to bear them.

It is an attractive thesis, attractive not only in concept but for those participating in its seeming ability to generate enormous financial rewards. Our best business schools developed and taught ever more complicated models. A large share of the nation’s best young talent was attracted to finance. However, even when developments seemed most benign, there were warning signs.

Has the contribution of the modern world of finance to economic growth become so critical as to support remuneration to its participants beyond any earlier experience and expectations? Does the past profitability of and the value added by the financial industry really now justify profits amounting to as much as 35 to 40 percent of all profits by all US corporations? Can the truly enormous rise in the use of derivatives, complicated options, and highly structured financial instruments really have made a parallel contribution to economic efficiency? If so, does analysis of economic growth and productivity over the past decade or so indicate visible acceleration of growth or benefits flowing down to the average American worker who even before the crisis had enjoyed no increase in real income?

There was one great growth industry. Private debt relative to GDP nearly tripled in thirty years. Credit default swaps, invented little more than a decade ago, soared at their peak to a $60 trillion market, exceeding by a large multiple the amount of the underlying credits potentially hedged against default. Add to those specifics the opacity that accompanied the enormous complexity of such transactions.

The nature and depth of the financial crisis is forcing us to reconsider some of the basic tenets of financial theory. To my way of thinking, that is both necessary and promising in pointing toward useful reform.

One basic flaw running through much of the recent financial innovation is that thinking embedded in mathematics and physics could be directly adapted to markets. A search for repetitive patterns of behavior and computations of normal distribution curves are a big part of the physical sciences. However, financial markets are not driven by changes in natural forces but by human phenomena, with all their implications for herd behavior, for wide swings in emotion, and for political intervention and uncertainties. ...

An anthropologist on Wall Street

FT's Gillian Tett reviews Liquidated: An Ethnography of Wall Street, by anthropologist Karen Ho (see also this Time interview). Ho did three years of "field research" as an employee of Bankers Trust during the mid to late 90s, taking time off from graduate school at Princeton. Tett, trained in anthropology herself, did an excellent job covering the credit crisis. She writes insightfully below.

For an anthropologist's take on high energy physics, see here. The ideas of Bourdieu are just as relevant; see, for instance, the power to consecrate :-)

Financial Times: When I first started covering finance for the FT, I used to get embarrassed when asked about my academic past. Before I became a journalist, I did a PhD in social anthropology, a branch of social science that endeavours to understand the cultural dynamics of societies based on grass-roots analysis.

Back in the pre-credit crisis days, bankers tended to consider degrees in anthropology to be rather “hippy”. As one banker told me; the only qualifications that really commanded status were those linked to economics, maths, physics and other “hard” sciences – or, at a pinch, an MBA.

Not anymore. As the financial disasters of the past two years have unfolded, it has become painfully clear that bankers placed far too much faith on their quasi-scientific models. It has also been evident that a grasp of cultural dynamics is critical in understanding how modern finance works – or doesn’t. Consequently, the idea of using the social sciences to understand money is becoming fashionable in some quarters.

Given all that, Karen Ho has picked an excellent time to publish her fascinating new study – or “ethnography” – of Wall Street banks. Ho is currently a professor of social anthropology at the University of Minnesota. A decade ago, however, she was an employee of Bankers Trust, formerly a powerful Wall Street banking giant, and carried out research among a number of banks.

As field-sites go, Wall Street is not classic anthropological territory: ethnographers typically work in remote, third-world societies. Ho admits that studying banking tribes was hard: “The very notion of pitching a tent at the Rockefellers’ yard, in the lobby of JP Morgan or on the floor of the New York Stock Exchange is not only implausible but also might be limiting and ill-suited to a study of the ‘power elite’,” she writes.

Ho nevertheless embarked on her study in classic anthropological manner: by blending into the background, listening intently, in a non-judgmental way – and then trying to join up the dots to get a “holistic” picture of how the culture works. That patient ethnographic analysis has produced a fascinating portrait that will be refreshingly novel to most bankers.

Ho’s central argument borrows heavily from the work of Pierre Bourdieu, a sociologist/anthropologist who was part of a school of Gallic thought that emerged in Paris in the 1970s. Bourdieu conducted his fieldwork in classic anthropological style in a north African tribal group, where he developed the concept of the “habitus” – the idea that a society develops a cognitive map to order its world that is usually based on its physical experience, albeit in ways the participants are only dimly aware of.

In the case of Wall Street, Ho argues that the “habitus” is shaped by bankers’ educational experience and employment history. Modern financiers live in a world where jobs are insecure, and where bankers are paid by trading things or cutting deals. They tend to project their experience on to the economy by aspiring to make everything “liquid”, or tradable, including jobs and people. These projections are typically couched in the rhetoric of “shareholder values” or abstract concepts of “free-market capitalism” – presented as absolute “truths”.

Ho argues, however, that many of these “truths” are riddled with contradictions that bankers ignore because they are seduced by their own rhetoric. “Massive corporate restructurings are not caused so much by abstract financial models as by the local, cultural habitus of investment bankers, the mission-driven narratives of shareholder value and the institutional culture of Wall Street,” she writes.

Mainstream readers may find this language off-puttingly academic; it is written primarily for a university crowd. Yet Ho peppers her account with revealing eyewitness stories. She describes how investment banks operate an unspoken caste system that divides the elite “front office”, from the lowlier “middle” and “back” offices. She analyses the quasi “kinship” networks based on university alumni . Most fascinating of all is her account of how Wall Street becomes deluded by its own rhetoric about “market efficiency”.

Some bankers may still dub this “hippy”. But if only a few more had been willing to analyse their sector’s cultural foibles, the financial world might not be quite in the mess it is today. I, for one, would vote that Ho’s account becomes mandatory reading on any MBA (or investment banking course); if nothing else, it might be more entertaining than the other texts that bankers swallow so uncritically.

Fear and loathing of the plutocracy 2

Strangely we haven't heard much recently about impending gigantic Goldman bonuses. Once the issue hits the news radar again, I hope to see some detailed analyses of how, exactly, Goldman made its recent record profits.

At the link below you will find an analysis of Goldman's prop trading numbers for 2008 (not a good year), using the public records of its charitable Goldman Sachs Foundation. Thanks to a reader for sending this. I don't know how reliable this method is -- it all depends on whether GSF's records reflect the firm's overall trading pattern.

Zerohedge: ... Sometimes no capital is allocated to excluded strategies, but usually, and especially for product agnostic funds such as Goldman, each entity will be allowed its pro rata share based on the "fungible" capital that makes up the firm's entire Assets Under Management. Therefore, the GS Foundation ("GSF"), with its $270 million of capital at the beginning of 2008, would likely get its pro rata allocation as a percentage of the total capital backing the Goldman hedge fund (which can come from such places as Goldman Sachs Asset Management, and Goldman Sachs & Co., which in turn gets it funding via such taxpayer conduits as the Fed's repo operations and the Discount Window). So if Goldman for example had access to total capital of $50 billion last year (roughly), each trade, when allocated to GSF, would account for about half a percent (0.5%), absent special treatment, of the total capital invested or disposed. As an example, if Goldman were to trade $100 million notional in 10 year Index Swaps, GSF would thus be allocated about $500,000 of the trade.

Why is all this relevant?

Were one to comb through GSF's tax filings, one would uncover in 2007 over 500 pages worth of single-spaced trades, and over 200 in 2008, across absolutely every single asset class: equities, indices, futures, fixed income, currencies, credit swaps, IR swaps, FX, private equity, hedge fund investment, you name it (oddly absent are CDS trades). And this is in 2007 alone. These are a one-for-one proxy of absolutely every single trade that Goldman executed in its capacity as a prop trader in the last two years. The only question is what is the proration multiple to determine what the appropriate P&L for the entire firm would have been based on any one single trade allocated to GSF, and subsequently, disclosed in the foundation's tax forms.

... Yet what is obvious no matter how the data set is sliced and diced, is that the firm was bleeding money across virtually all prop-traded groups in 2008. Is it any wonder that the firm's only source of revenue is courtesy of i) the near-vertical treasury curve (thank you taxpayers) and ii) the ability to demand usurious margins on Fixed Income and other products from clients trading in bulk who have no other middleman choices.

Calvin Trillin on Wall Street smarts

Calvin Trillin, one of my favorite New Yorker writers and a keen observer of American society, writes in the Times. It's true that the quants built machines (mortgage finance) that were too complex for their masters to operate. Related posts: The new new meme, The best and brightest, The bubble algorithm ...

(This may sound crazy, but does Trillin read this blog?)

NYTimes: Wall Street Smarts

By CALVIN TRILLIN

“IF you really want to know why the financial system nearly collapsed in the fall of 2008, I can tell you in one simple sentence.”

The statement came from a man sitting three or four stools away from me in a sparsely populated Midtown bar, where I was waiting for a friend. “But I have to buy you a drink to hear it?” I asked.

“Absolutely not,” he said. “I can buy my own drinks. My 401(k) is intact. I got out of the market 8 or 10 years ago, when I saw what was happening.”

He did indeed look capable of buying his own drinks — one of which, a dry martini, straight up, was on the bar in front of him. He was a well-preserved, gray-haired man of about retirement age, dressed in the same sort of clothes he must have worn on some Ivy League campus in the late ’50s or early ’60s — a tweed jacket, gray pants, a blue button-down shirt and a club tie that, seen from a distance, seemed adorned with tiny brussels sprouts.

“O.K.,” I said. “Let’s hear it.”

“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” He took a sip of his martini, and stared straight at the row of bottles behind the bar, as if the conversation was now over.

“But weren’t there smart guys on Wall Street in the first place?” I asked.

He looked at me the way a mathematics teacher might look at a child who, despite heroic efforts by the teacher, seemed incapable of learning the most rudimentary principles of long division. “You are either a lot younger than you look or you don’t have much of a memory,” he said. “One of the speakers at my 25th reunion said that, according to a survey he had done of those attending, income was now precisely in inverse proportion to academic standing in the class, and that was partly because everyone in the lower third of the class had become a Wall Street millionaire.”

I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge — earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks.

“That actually sounds more or less accurate,” I said.

“Of course it’s accurate,” he said. “Don’t get me wrong: the guys from the lower third of the class who went to Wall Street had a lot of nice qualities. Most of them were pleasant enough. They made a good impression. And now we realize that by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

“So what happened?”

“I told you what happened. Smart guys started going to Wall Street.”

“Why?”

“I thought you’d never ask,” he said, making a practiced gesture with his eyebrows that caused the bartender to get started mixing another martini.

“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”

“But you still haven’t told me how that brought on the financial crisis.”

“Did you ever hear the word ‘derivatives’?” he said. “Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn’t have done the math.”

“Why do I get the feeling that there’s one more step in this scenario?” I said.

“Because there is,” he said. “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness.”

“So having smart guys there almost caused Wall Street to collapse.”

“You got it,” he said. “It took you awhile, but you got it.”

The theory sounded too simple to be true, but right offhand I couldn’t find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. “I think I need a drink,” I said.

He nodded at my glass and made another one of those eyebrow gestures to the bartender. “Please,” he said. “Allow me.”

I highly recommend Trillin's book Remembering Denny, a meditation on life, success, complexity, the unknowability of others, and fate. Also see Amazon reviews.

Calvin Trillin's "Remembering Denny" is a Cheeveresque rumination on the unfulfilled potential of Trillin's Yale classmate, Denny Hansen. While at Yale, Hansen was so highly thought of that he was profiled in LIFE magazine and his classmates used to kid each other about which cabinet position they'd fill once Hansen had been elected President. After Yale, however, Hansen failed to live up to the high expectations everyone--friends, family, teachers, coaches--had for him. Trillin's book is a delicate examination of what that meant, both for Denny and for his constellation of friends and well-wishers.

Denny doesn't come alive as vividly as might be hoped here, but Trillin does an outstanding job of sketching this young man's life in terms of a larger picture about America. In a country where success on every level is much prized, Trillin subtly but thoroughly plumbs the reasons why Denny didn't succeed--at least not to the extent everyone thought he would. This uncharacteristically somber book is absorbing and thought-provoking, even if it doesn't quite reach the goals Trillin seems to have set for himself in the beginning chapters.

Fear and loathing of the plutocracy

Did Paulson and Treasury deliberately overpay for shares in Goldman and eight other banks? What did taxpayers get for their $125 billion, versus what Buffet got for his $5 billion Goldman investment just a few weeks earlier? See Black-Scholes analysis here.

Will banks like Citi pay out bonuses using bailout funds? Citi plans to distribute $26 billion after receiving $25 billion from you and me. Will the public let them get away with it? Given the tremendous value destruction they've caused, on Wall Street and beyond, how can top executives at these companies justify any bonus compensation for themselves?

After leaving the Clinton administration, how did Rahm Emanuel make $16 million in two years (at Wasserstein Perella) with no prior business experience? Did you really think Obama was going to be a radical left president?

Michael Lewis, Bloomberg commentary:

It may still take awhile before Wall Street finally accepts that it won't get paid.

At the moment, as their bony fingers fondle the new taxpayer loot, the firms appear to believe that they might still fool the public into thinking that bonus money isn't taxpayer money.

``We've responded appropriately to the attorney general's request for information about 2008 bonus pools,'' a Citigroup Inc. spokeswoman told Bloomberg News recently, ``and confirmed that we will not use TARP funds for compensation.'' But as the Bloomberg report noted, ``she declined to elaborate.''

As well she might! For if the Citigroup spokeswoman had elaborated she would have needed to say something like this: ``We're still trying to figure out how the $25 billion we've already taken of taxpayers' money has nothing to do with the $26 billion we're planning to hand out to our highly paid employees in 2008 (up 4 percent from 2007!). But it's a tricky problem because, when you think about it, it's all the same money.''

...If you are one of those people currently sitting inside a big Wall Street firm praying for some kind of bonus it may already have dawned on you that you need to rethink your approach. It's no longer any use to hint darkly that they had better fork over serious sticks or you'll bolt for Morgan Stanley. There's no point even in thinking up clever ways to make profits for your firm: who cares how much money you bring into Goldman Sachs if the U.S. Congress doesn't allow Goldman Sachs to pay bonuses?

The moment your firm accepted taxpayer money, you lost control of your money machine. ...

More from Michael Lewis at Portfolio Magazine (via Paul Kedrosky).


Figure from earlier post: Is the finance boom over?

Godel's theorems and Oliver Stone

Two audio suggestions to take your mind off the financial crisis -- at least until Asian markets open on Sunday :-)

An excellent 40 minute discussion of Godel's incompleteness theorems with two mathematicians (one a logician) and a theoretical physicist. If you know a bit about the subject the first 15 minutes or so are quite slow, but the last 20 minutes are well worth listening to. One of the discussants notes that the axioms of Euclidean geometry are not rich enough to be self-referential (unlike those of arithmetic), hence do not suffer from incompleteness. (Geometry is axiomatizable but not adequate to encode the syntax of proofs.)

Leonard Lopate interview (30 min) with Oliver Stone. Stone directed Wall Street, one of my favorite movies. (Too bad he's not doing the sequel Money Never Sleeps.) Few people know he was a classmate of George W. Bush's at Yale. The contrast could not be greater: Stone volunteered for combat duty in Vietnam, was wounded twice and won the Bronze heart and Purple Star. He also wrote the screenplays for Midnight Express (for which he won an Oscar) and Scarface ("say hello to my little friend!" :-). Stone's biopic of Bush, W, was done in collaboration with Stanley Weiser, his co-writer from Wall Street, and will open next week. At one point in the interview Stone comments that he doubts Greenspan, Paulson or any of the other leaders really understands what is happening in this crisis, due to the complexities of derivatives.

Goldman OK?

According to the Times, Goldman unloaded their subprime exposure:

NYTimes: ... Late last year, as the markets roared along, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting in his meticulous 30th-floor office in Lower Manhattan.

At that point, the holdings of Goldman’s mortgage desk were down somewhat, but the notoriously nervous Mr. Viniar was worried about bigger problems. After reviewing the full portfolio with other executives, his message was clear: the bank should reduce its stockpile of mortgages and mortgage-related securities and buy expensive insurance as protection against further losses, a person briefed on the meeting said.

With its mix of swagger and contrary thinking, it was just the kind of bet that has long defined Goldman’s hard-nosed, go-it-alone style.

Most of the firm’s competitors, meanwhile, with the exception of the more specialized Lehman Brothers, appeared to barrel headlong into the mortgage markets. They kept packaging and trading complex securities for high fees without protecting themselves against the positions they were buying.

Even Goldman, which saw the problems coming, continued to package risky mortgages to sell to investors. Some of those investors took losses on those securities, while Goldman’s hedges were profitable.

When the credit markets seized up in late July, Goldman was in the enviable position of having offloaded the toxic products that Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, among others, had kept buying.

“If you look at their profitability through a period of intense credit and mortgage market turmoil,” said Guy Moszkowski, an analyst at Merrill Lynch who covers the investment banks, “you’d have to give them an A-plus.”

This contrast in performance has been hard for competitors to swallow. The bank that seems to have a hand in so many deals and products and regions made more money in the boom and, at least so far, has managed to keep making money through the bust.

In turn, Goldman’s stock has significantly outperformed its peers. At the end of last week it was up about 13 percent for the year, compared with a drop of almost 14 percent for the XBD, the broker-dealer index that includes the leading Wall Street banks. Merrill Lynch, Bear Stearns and Citigroup are down almost 40 percent this year.

...At Goldman, the controller’s office — the group responsible for valuing the firm’s huge positions — has 1,100 people, including 20 Ph.D.’s. If there is a dispute, the controller is always deemed right unless the trading desk can make a convincing case for an alternate valuation. The bank says risk managers swap jobs with traders and bankers over a career and can be paid the same multimillion-dollar salaries as investment bankers.

“The risk controllers are taken very seriously,” Mr. Moszkowski said. “They have a level of authority and power that is, on balance, equivalent to the people running the cash registers. It’s not as clear that that happens everywhere.” ...

Yikes!

From the comments on the previous post More mark to model:

It’s worse than you think. Even the top brass at the big C (our nations largest) don’t know how much toxic waste sub prime CDOs they’ve got on book, and off book in siv s. C is not nearly alone. Your idea about GS...it’s is very unlikely to be a safe haven and the list goes on and on and on. The problem takes on new proportions of fugly when you realize that the monolines (bond insurers) are way in over their heads. Counter party trust is in bad shape. This mess cascades into a true shit avalanche by summer 09 during the next round of mortgage re-sets. The Dollar is being deserted like lifeboats leaving the Titanic. (Look what the dollar did at 9pm on the forex market this evening... a brief period of free fall during a long down trend.) Make no mistake about it this doesn't end pretty. The fed has a grim choice...save the dollar and plunge the country into depression or support the economy...as it appears to be doing with lower interest rates... and generate hyperinflation and a dollar crash. Suggested reading, Nouriel Roubini blog and Calculated Risk.

Funny story: my brother was at an event in Minneapolis about 10 days ago where Rob Rubin was the keynote speaker. During Q&A my brother asked him about subprime, SIVs, etc. and Rubin replied rather categorically that they weren't a problem for Citi. The local paper covered the story but not the national media.

StarTribune: Citigroup and other giant U.S. banks are not imperiled by subprime debt, despite the fact that they own tens of billions of dollars in debt linked to the deteriorating mortgage markets, former U.S. Treasury Secretary Robert Rubin said in Minneapolis on Wednesday.

Rubin, who was a Goldman Sachs executive before serving as President Bill Clinton's Treasury secretary, said the U.S. economy has bigger worries than subprime debt, ranging from the fear of consumer spending hitting a wall to the sagging international value of the dollar.

At a conference sponsored by the Dorsey & Whitney law firm, Rubin found himself answering questions about the growing troubles of the U.S. financial system stemming from the lax lending standards that prevailed during the housing boom.

The Bush administration has pushed the money-center banks to create a fund to avert a panic sell-off of subprime mortgages -- and the securities backed by those loans, often referred to as structured investment vehicles, or SIVs.

The efforts to create that $100 billion fund should not be seen as an effort by Citigroup and other major banks to protect themselves by propping up the subprime market, said Rubin, who is now a Citigroup director and chairman of its executive committee.

More than 95 percent of Citigroup's investments in SIVs are fully financed through the rest of 2007 and the bank has the money to cover losses if the value of subprime loans continues to fall next year, he said.

"I think the problem with this SIV issue is that it's been substantially misunderstood in the press," said Rubin, who has a considerable personal stake in the fate of Citigroup. The banking firm paid him $17.3 million last year.

"The banks appear to be in fine shape," he said. "That's not a problem."

The SIV issue isn't critical for the economy, he insisted.

"It's massively less important that it's been presented," Rubin said. "It's been presented as a sort of centerpiece of what's going on. I just don't think that's right."

Masters of the Universe

The Times reports on a recent dinner hosted by Institutional Investor.

NYTimes: Not since Michael Milken’s Predators’ Ball in the 1980’s have so many of Wall Street’s bold-faced names dared to mingle together. Until last night.

Institutional Investor, the first trade magazine to cover Wall Street, celebrated its 40th birthday Monday by throwing itself a party at the American Museum of Natural History in Manhattan. Masters of the Universe from around the nation and the world flew in for the event. There was Henry Kravis, seated next to Jean-Claude Trichet, president of the European Central Bank. Across the way was Mr. Milken himself, whom Mr. Kravis praised in a brief speech for helping to create the modern private equity industry.

Mr. Milken didn’t make a speech to the crowd, but he circulated among them and seemed to take pleasure at being surrounded by so many of what he referred to DealBook as his “disciples.”

Also on hand was James D. Wolfensohn, former president of the World Bank. John C. Bogle, the founder of the Vanguard Group, mingled during the cocktail hour with other luminaries such as John Whitehead, the former chairman of Goldman Sachs, credited with creating the securities firm’s vaunted culture.

John Thornton, the former president of Goldman Sachs, who now splits his time between New York and Beijing, also attended, as did Joseph L. Rice III, co-founder of the private equity firm Clayton, Dubilier & Rice.

James Simons, founder of Renaissance Technologies, one of the most successful “quant” hedge funds in history, mixed with younger hedge fund managers such as William Ackman, the activist investor, and David Einhorn of Greenlight Capital.

Perhaps the highlight of the evening was when Mr. Kravis jokingly apologized to his peers in the audience for charging his investors 20 percent of profits in 1976, which became a benchmark for private equity and hedge funds. He said that, at the time, there was no going rate, so he and his partners decided 20 percent was fair. In retrospect, he said with a laugh, “You could have gotten 25 percent.”

The room burst out laughing.

Then Mr. Simons of Renaissance took the stage. He famously takes more than 40 percent of all profits from his fund investors. “We blissfully ignored” the benchmark Mr. Kravis created, he said.

Mr. Simons also explained how the summer’s credit crunch caused his fund briefly to lose 8.7 percent in only a few days ––”a remarkable amount of money,” he said nonchalantly — though it later rebounded. At the time, he wrote a note to his investors about the losses, observing with a laugh that it took a couple of “gin and tonics to get that letter out.”

He went on to jokingly taunt Mr. Kravis into buying his firm. “If he wants to buy my company for $30 billion, I’m going to make it damn easy for him,” Mr. Simons said.

From the comments:

This convention was made up of people who sacrificed their personal lives to use their extreme intellects and incredible work ethics to strive to be the best in their fields. This is exactly what America was built on and should be what keeps us going forward. We as a country should reward winners, but instead we encourage mediocrity with the whole “everyone is a winner, everyone is great” mentality. Congratulations to those invited to this great event and if you really don’t like it then work harder to change the system, but that does mean actually working which you may not be inclined to do.
— Posted by Eric


Why are people assuming these people make money by plundering society? Jim Simons makes money as fairly and squarely as anyone in the world. Anyone can do what he does…if they come up with the magic formula. There’s nothing unfair about that, and it does society a world of good. The huge creation of wealth around the world is largely due to capital being deployed to its most productive use. What are masters of the universe but the “central planners” of the free market — the better the job they do, the more money they make, and the richer we all become.
— Posted by James

Mark to market

The almost collapse of two Bear Stearns hedge funds investing in mortgage-backed securities is sending a tremor through Wall St. A last minute bailout by creditor Merrill means that $800 million in CDOs is about to be marked to market. In other words, some complex, illiquid securities are about to have a meaningful price, as opposed to the theoretical value on the books. Insert words about Long Term Capital Management and "systemic risks" here.

``Nobody wants to look at the truth right now because the truth is pretty ugly,'' Castillo said. ``Where people are willing to bid and where people have them marked are two different places.''

I've written several posts about CDOs here. This and this are getting a lot of traffic right now. Word is that Gaussian copula models are **way** off from real market prices :-)

June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.

A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds.

``More than a Bear Stearns issue, it's an industry issue,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. ``How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up?''

Shares Fall

Shares of Bear Stearns, the fifth-biggest U.S. securities firm by market value, and Merrill, the third-largest, led a decline in financial company stocks yesterday, and the perceived risk of owning their bonds jumped on concerns losses related to subprime home loans may be bigger than initially thought. Both companies are based in New York.

The perceived risk of owning corporate bonds jumped to the highest in nine months today. Contracts based on $10 million of debt in the CDX North America Crossover Index rose as much as $10,000 in early trading today to $178,500, according to Deutsche Bank AG. They retraced to $171,500 at 8:28 a.m. in New York.

U.S. Securities and Exchange Commission Chairman Christopher Cox said yesterday that the agency's division of market regulation is tracking the turmoil at the Bear Stearns fund. ``Our concerns are with any potential systemic fallout,'' Cox said in an interview.

Bankers and money managers bundle securities into a CDO, dividing it into pieces with credit ratings as high as AAA. The riskiest parts have no rating because they are first in line for any losses. Investors in this so-called equity portion expect to generate returns of more than 10 percent.

Fivefold Increase

CDOs were created in 1987 by bankers at now-defunct Drexel Burnham Lambert Inc., the home of one-time junk-bond king Michael Milken. Sales reached $503 billion in 2006, a fivefold increase in three years. More than half of those issued last year contained mortgages made to people with poor credit, little loan history, or high debt, according to Moody's Investors Service.

New York-based Cohen & Co. was the biggest issuer of CDOs last year. It has formed 36 CDOs since 2001, including 15 worth a total of $14 billion in 2006, according to newsletter Asset-Backed Alert.

Not since 1994 have mortgages with past due payments been so high, according to first-quarter data compiled by the Federal Deposit Insurance Corp., the agency that insures deposits at
8,650 U.S. banks. Lehman analysts estimated in April that the collateral backing CDOs had fallen by $25 billion.

``The big question is whether these forced liquidations represent a tipping point in the market,'' said Carl Bell, who helps manage $63 billion in fixed-income assets as head of the
structured-credit team at Boston-based Putnam Investments. It ``may put pressure on other hedge funds pursuing similar strategies'' as the Bear Stearns funds, he said.

Biggest Names

The Bear Stearns funds are run by senior managing director Ralph Cioffi. One of the funds, the 10-month old High-Grade Structured Credit Strategies Enhanced Leverage Fund, lost 20 percent this year, the New York Post reported. Officials at Bear Stearns and Merrill declined to disclose the losses.

The funds had borrowed at least $6 billion from the biggest names on Wall Street. Aside from Merrill, other creditors included Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase
& Co. and Bank of America Corp. All of the firms are based in New York, except Bank of America, which is based in Charlotte, North Carolina.

As the funds faltered, Merrill sought to protect itself by seizing the assets that were used as collateral for its loans. JPMorgan planned to sell assets linked to its credit lines before
reaching agreement with Bear Stearns to unwind the loan, people with knowledge of the negotiations said yesterday.

Bear Stearns was still in talks late yesterday with creditors to the funds to rescue the funds, said the people, who declined to be identified because the negotiations are private.

Russell Sherman, a Bear Stearns spokesman, and Jessica Oppenheim, a spokeswoman for Merrill, declined to comment.

`Pretty Ugly'

Merrill's decision yesterday to accept bids on $800 million of bonds it took as collateral for its loans further stifled trading in CDO securities, said David Castillo, who trades asset-backed, commercial-mortgage and CDO bonds in San Francisco at Further Lane Securities.

``Nobody wants to look at the truth right now because the truth is pretty ugly,'' Castillo said. ``Where people are willing to bid and where people have them marked are two different places.''

The perceived risk of holding Bear Stearns bonds jumped to a three-month high, according to traders betting on the creditworthiness of companies in the credit-default swaps market.

Contracts based on $10 million of its bonds rose $5,800 to $45,500, according to composite prices from London-based CMA Datavision. An increase in the five-year contracts suggests
deterioration in the perception of credit quality. Contracts on Merrill jumped $4,700 to $33,000, CMA prices show.

Long-Term Capital

Shares of Bear Stearns fell for a fourth day, declining 19 cents to $143.01 at 9:32 a.m. in New York Stock Exchange composite trading. The stock was down 12 percent this year before
today, compared with the 0.4 percent advance of the Standard & Poor's 500 Financials Index. Merrill dropped 20 cents to $87.48 and Citigroup fell 13 cents to $53.31.

The reaction to the Bear Stearns situation is reminiscent of Long-Term Capital Management LP, which lost $4.6 billion in 1998.

Lenders including Merrill and Bear Stearns met and agreed to take a stake in the Greenwich, Connecticut-based fund and slowly sold the assets to limit the impact of its collapse.

``We're not surprised to find the principal circle of players is pretty interconnected,'' said Roy Smith, professor of finance at New York University Stern School of Business and
former head of Goldman's London office. ``What we're looking for is whether the interconnection creates a negative domino effect: Whether Hedge Fund A creates a problem for other hedge funds,
which in turn creates a problem for the prime brokers that are lending to them.''

Call your buddy

New research shows that mutual fund managers get a higher return from investments in companies where one of the top execs is someone they went to school with. The effect is most pronounced with Harvard Business School alumni. Having worked with a lot of HBS guys, I am not surprised :-)

This kind of study can only be done with mutual funds and public companies, where all the records are available. Whatever is going on here is probably going on even more in private equity and hedge funds, but isn't easy to quantify. Clearly, social networks like school ties give access to information that average investors don't have. As they say in poker, if you don't know who the sucker is at the table, it's probably you...

PS I see a trading strategy here. Set up your own real-time database of fund pm and C-exec educational bios, and mirror all trades where school ties are indicated. Perhaps you can capture the 20% return indicated in the study!

Mutual fund managers invest more money in companies that are run by people with whom they went to college or graduate school than in companies where they have no such connections, the study found. The investments involving school ties, on average, also do significantly better than other investments.

...“Something about these social networks is allowing portfolio managers to better predict the future returns of companies within the network,” said Lauren Cohen of Yale, another author.

The study looked only at mutual funds, which are required to report their holdings and performance regularly. It did not examine hedge funds, which are investment pools for wealthy individuals and institutions; hedge funds do not have to disclose their holdings publicly.

...Their study, titled “The Small World of Investing,” examined 85 percent of the total assets under management from 1990 to 2006 and looked at different levels of university connections.

In the weakest kind of connection, a fund manager and one of a company’s top three executives shared nothing more than an alma mater. They could have attended different schools within the university and have been on the campus decades apart.

In the strongest connection, a fund manager and one of the top three executives attended the same school at the same university, and their time on campus overlapped. The most common shared school in the study, by far, was Harvard Business School.

On average, investments in companies where there was no connection returned 11.7 percent a year before fees, according to the economists’ estimates. Investments in companies with the closest level of connection — when a fund manager attended school with an executive — returned 20.1 percent a year.

As might be expected, investments with weaker connections had returns that fell somewhere in between, with returns of more than 11.7 percent and less than 20.1 percent.

The most benign explanation for the pattern is simply that fund managers who attended school with executives have an easier time learning about the companies where those executives work. They are more likely to travel in similar social circles and may even remember their old classmate’s strengths and weaknesses.

“The results are much more consistent with the story that you went to college with Person X and know they’re really smart,” said Steven N. Kaplan, a finance professor at the University of Chicago. “My guess is that the whispering is going on, too, but the question is the relative amounts.”

Supporting Mr. Kaplan’s view, the paper does not offer clear evidence that the investments by the fund managers did unusually well in the weeks and months immediately after a stock was purchased.

On the other hand, investing based on school ties seems to have become less popular recently, which could suggest that financial regulations passed after the demise of Enron cut down on the exchange of inside information.

Last year, 7.1 percent of fund managers invested in at least one company that had a top executive with whom they had gone to school, down from 15 percent in 2002. The average during the 1990s was 11 percent.

Pricing a Wall Street Marriage

Ha, ha. One of the funniest things I've read in a while. Thanks to a quant correspondent for this.

I think it's clear ML only vaguely understands the calculation. But I suppose his point is really to expose the thought process ;-)

New terminology and statistic: BT = "Big Time" = career earnings of $25M, with 4% chance of getting there. Anyone care to refine these numbers?

(BT/25 x MPR) -- Pricing a Wall Street Marriage: Michael Lewis
2007-05-08 00:08 (New York)

     May 8 (Bloomberg) -- A few months ago, Bloomberg News reporter Caroline Byrne chronicled a British divorce court's chilling new open-handedness with the ex-wives of rich businessmen.

     A hedge-fund manager named Alan Miller was forced to shell out $10 million for a childless marriage that lasted less than three years; advertising executive Martin Sorrell paid roughly $60 million for losing the affections of his wife. The most recent House of Lords decision had gone so far as to imply that the women were entitled to half of all of the man's future earnings, in perpetuity.

     This news riveted Wall Street Man -- at any rate, it was the most read of any story that week by Bloomberg terminal users. And no wonder: A handful of British judges, far removed from the markets, were orchestrating a financial catastrophe, the losses from which threatened to dwarf those suffered in the Crash of '87, or any three giant hedge-fund collapses combined.

     No longer was it merely the house and the children at stake; it was the BONUS. You could almost hear the thud of 100 British investment bankers shelving their plans to alienate their wives even further.

     Then, a few weeks ago, came a second story by Ms. Byrne -- also the most read by Bloomberg users on that day: A London High Court had ruled that a banker who was ordered to give his ex- wife half of his accumulated wealth ($53 million) was allowed to keep all of his future bonuses. But, as the story explained, only a fool would find mercy in this one decision. British law remains messy: There is still no clear rule, just a bunch of contradictory precedents that, taken together, suggest there's never been a better time to divorce a London hedge-fund manager.

                        `Don't Get Married'

     The situation for rich men has grown so dire that a U.K. divorce lawyer named Jeremy Levison now tells his clients: ``Don't get married. If you must, make sure your other half is as rich as you.''

     British law has now put a fine point on a question that has been hovering over Wall Street for a long time now, and grown more interesting with each tic upward in hedge-fund pay: Why does Wall Street Man get married at all? He cares a great deal about money, obviously, as he spends so much of his life getting it. His chosen career makes him more likely than most to amass a fantastic fortune. The long-running miracle in the financial markets now puts him in line to make not just millions but hundreds of millions.

     And if he does get rich it is because, in theory, he has a special gift for shrewdly assessing the odds of financial transactions. Yet at some point he -- and it's typically ``he'' though on very rare occasions it's a ``she'' -- blithely ignores the odds of this potentially disastrous deal: Why?

                         Through the Roof

     Put another way: The expected benefits of marriage to a young Wall Street male haven't obviously improved but the expected costs to him are going through the roof. Worse, the very act of making a fortune on Wall Street probably only increases the chances of losing a wife.

     Pay an investment banker who seriously dislikes his wife half a million dollars and he may be a bit more tempted than usual to put his marriage at risk, but he'll still think a few times before leaving it. Pay a hedge-fund manager who has even the first doubts about his wife $100 million and he'll set a land-speed record heading for the exit, only to find that he's been driving on a toll road and the lady at the booth plans to charge him half of his net worth, and take away his Maybach in the bargain. Why doesn't he just take the freeway?

                            Call Option

     Of course, it's possible that Wall Street Man isn't nearly as shrewd and calculating in his private life as he is in his professional one. It's possible that, just like ordinary folk, he forgets his narrow financial interests when he falls in love, and only later, when he falls out, appreciates the value of what he has sold: a call option on half of whatever financial fortune he's made. (Obtaining in the bargain, a put option on his soft, aging, hairy body.)

     But I was curious if there might not be a more plausible explanation why so many young men who set out so single-mindedly to become rich on Wall Street ignore the British divorce lawyer's sage advice. To find it I called a man who now runs a very successful hedge fund, and who, before he set off on his own, had a very successful career pricing complex securities for big Wall Street firms. He was a quant with horse sense -- just the sort of person the market would turn to if they wanted to put a price on something that seemed unpriceable.

                            $25 Million

     I asked this man to value a new security: a call option on half the expected earnings of a Wall Street trader or investment banker. Not of a banker or trader who already has made huge sums of money, but a banker or trader who is just launching his career, with dollar signs in his eyes. What, in effect, would a smart hedge-fund manager pay to marry a first-year associate at Goldman Sachs Group Inc.?

     Because this hedge-fund manager knew especially well the fancy end of Wall Street, his assumptions were as interesting as his analysis. He began with a back-of-the-envelope calculation of the present value of the expected future earnings of a banker who made it Big Time, or BT: $25 million was about the right number, he guessed.

     He then further assumed -- again, drawing on his experience of many years watching young men trying to get really, really rich -- that about one in 25 who start out in Wall Street jobs actually make the BT. He then calculated something he called the Market Price of Risk, or MPR, which he described as ``an adjustment that makes risky propositions just as attractive as other investments in the world.''

                        Formula for Truth

     He felt reasonably sure -- here he drew some analogy to pricing of options on catastrophe bonds -- that in this case the MPR should range from 0.5 to 0.75.

     He conceded that he'd fudged quite a bit. He completely ignored the value of the intermediate cases -- the guys who didn't make the BT but still amassed several million dollars. His goal was not smart-bomb accuracy but to land in the general vicinity of truth.

     When he was finished he had a formula: (BT/25 x MPR). And when you plugged into it all his assumptions about risk, likelihood of making the Big Time, etc., that formula yielded a number. But that number had to be divided by two, as the divorcing wife/ex-wife would be given at most a half share. ``In a reasonably competitive market for marriages to junior bankers,'' he concluded, ``you might expect to see $187,500 to $375,000 being invested toward getting a junior banker to the altar.'' And then he realized: ``I didn't even take taxes into account.''

                         Who Got Stiffed?

     People will quibble with his calculation. Valuation models will no doubt improve, if this market ever gets going. But the hedge-fund quant's number does raise an interesting possibility: that all these newly rich hedge-fund managers who now find themselves paying tens of millions of dollars to their ex-wives had a pretty clear idea, when they got married, of the value of what they were selling. And it wasn't that high.    

 It's not the Wall Street traders who failed to run the numbers and, as a result, got stiffed in the deal. It's the women who married them.