Volcker's crusade: 'Down with quants!'
Financial engineers — they're the x-axis (and y-axis) of evil
Paul Volcker is blistering the hide off of Wall Street's so-called financial engineers, and if he doesn't stop, these "quants" are destined to become much more widely known.
Volcker: ""If you think that you're a financial engineer, you're not a very good financial analyst."
Think of quants as the x-axis (and y-axis) of evil for Barack Obama's nascent administration.
You may be hearing the Q-word with increasing frequency, and what you'll hear won't be very nice. Before the meltdown, quants were golden. Now we know that that was just on paper.
They're the people engaged in computational finance. Loosely speaking, they focus on the math of the markets, figuring out such things as the complex derivatives and schemes that appear to have taken us down. (For more on the derivatives schemes themselves, see James Lieber's "What Cooked the World's Economy?")
As the brains behind the bankers' schemes, quants aren't necessarily business people; they could be mathematicians or physicists or the like — although the "profession" is becoming more popular and has its own trade organization, the New York-based International Association of Financial Engineers. (This is elementary background for many of you, but not for us commoners.)
The 81-year-old Volcker, chairman of Obama's hopefully named Economic Recovery Advisory Board, prefers to call quants "financial engineers." And in his February 20 speech at Columbia's Center on Capitalism and Society — where there are a whole bunch of people hoping to join the already large number of financial engineers — he preferred to sneer at what they do:
People far less well-known (like Julian Delasantellis in a recent Asia Times article) have had some choice words on the topic:
But have you ever had an 6-foot-7, 81-year-old economist like Paul Volcker sneer at you? It must hurt. Especially when veteran Volcker is likely to become such a familiar face on TV as the Obama administration's public face about the economy.
In a recent speech in Canada, he even used an anecdote about his grandson to deride quants.
Here's how Volcker explained the meltdown to the Canadians:
And this is where what the story gets personal for Volcker:
"A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, 'Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses.' The only thing I could do was send him back an email, 'I will not accept the Nuremberg excuse.'"
You can keep on blaming investment bankers, if you like, but quants (in Volcker's view, but not his words) are the people doing the bankers' alchemy that transmogrified Wall Street's pavement from gold into shit. Here are his words:
Reality isn't necessarily the quants' thing — that's what Volcker keeps saying. And some quants apparently do think they're making up their own laws of the universe.
Take, for instance, Ronald Kahn, a San Francisco-based quant "in charge of developing new active equity strategies, for the London office of Barclays Global Investors, the Financial Times reported in a rather puffy interview with the guy last month.
The FT piece noted Kahn's pride in his work, despite his recognition of some collateral damage:
The reputation of quant managers has suffered since the credit crisis hit, with varied strategies being affected in the same way at the same time by market conditions. Mr Kahn says BGI is not in that position. "We've done OK — better than lots of others." But the experience of the credit crisis has renewed the group's interest in being different.
They're different, for sure, and Kahn sees a bright future for quants, though others might think that what he says is just plain nuts:
Mr Kahn is a physicist by academic training, specialising in cosmology. Wall Street has good reason to hire physicists, he says. They are trained in quantitative problem solving, and to identify and focus on what is really important, ignoring the rest.
In the book How I Became a Quant, by Barry Schachter and Richard R. Lindsey, Mr Kahn, who merits a chapter, says: "That skill is...even more important where there are typically no underlying laws of nature, and problems are mainly about reasonably approximating reality."
And that could be why the financial crisis seems so surreal.
