The Quants Killed Wall Street

Great article by Felix Salmon in Wired–Recipe for Disaster: The Formula That Killed Wall Street

I remember back in my DeepGreen Bank days structuring and pitching home equity portfolios for sale and securitization. It is amazing up in the ivory towers of Wall Street it got very abstract, while on the front-end of getting into the palaces (Wall Street firms, rating agencies, and mortgage insurers) it was good old fashion salesmanship.

This article is a great walk-through of quants, the art of model building, and how the bond market hums on esoteric assessments of debt risk.

Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation.

This is a true statement. Any these models took us to a different level–you could now sell everything at an attractive price and what you couldn’t get your handle for you traunched off, insured/wrapped it, and then sold it. Using these quant approaches you could now price almost any risk.

I love the closing line from Salmon: “As Li himself said of his own model: “The most dangerous part is when people believe everything coming out of it.”

This is a must read for anyone that is trying to understand this crisis or participated in its evolving.

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