Thursday, January 01, 2009

Not Exactly Brain Surgery

During 2008, a misperception that seemed to become accepted as fact is "the smartest guys in the room" meme: the idea that Manhattan's canyons are brimming with PhDs and assorted geniuses who, via sheer brain power, should have managed risk better. The idealization of Wall Street's grey matter is nothing new, of course. Much of it is propagated by starry-eyed journalists who dream of getting hired on the Street one day or have accepted too many lunch invitations from high-priced publicists.

Post B-school, I was a market maker and position trader for one of the top firms on Wall Street -- one that's often portrayed by the media as white-shoe, prestigious, and full of smart people. Our desk was seen as "big swinging d*cks" by our competitors, a compliment that meant we pretty much determined the market in whatever we traded and we could tap a lot of our firm's almost unlimited capital. Frankly, I was amazed by how dumb some of my colleagues were. During my first week, one of the senior traders on the desk asked me a question that the average customer of any online discount brokerage would be able to answer. Several of the most senior guys on the desk never went to college or barely made it through some party school -- not that a college degree or one from a top school denotes intelligence, but this is a firm that likes to cultivate a perception of rigorous hiring standards. The point is that once they got in, often as runners, clerks, or ticket-punchers, these guys succeeded for reasons other than conventional book smarts. The culture rewards speed, opportunism, and quite often recklessness. It does not reward what most people consider "intelligence" -- advanced mathematics ability, or knowing or caring about the difference between Shia and Sunni.

Two qualifications. First, Wall Street is not monolithic. Different types of firms -- private equity, investment banks, hedge funds, boutique research shops -- attract different types of people. Second, the firms themselves aren't necessarily monolithic. The culture inside the larger ones can vary. While traders toss around one-liners from Caddyshack, one floor up in wealth management they're quoting passages from The Shawshank Redemption. But the bottom line is this: in the parts of these firms that took on crippling and in some cases fatal positions, Thucydides's "frantic energy was the true quality of a man" describes the underlying ethos. It's not introspection, perspective, or caution. That's for the saps in Compliance.

It didn't surprise me in October when Alan Greenspan confessed to Congress that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works." Having never worked in the part of Wall Street that really matters, and calmly pondering the world during his famous pre-dawn bathtub sessions, he was clueless about the real nature of the system he purportedly oversaw. Avoiding a similar meltdown in the future will require debunking the myth of Wall Street genius, and understanding why effective risk management and jokes about gopher-infested golf courses might be mutually exclusive.

25 Comments:

Anonymous Thomas Daulton said...

Wasn't it J.K. Galbraith who described the stock market thusly:

"People assume, because titanic amounts of money are involved, that some sort of intelligence must be at work; but this is seldom ever the case"

1/01/2009 10:33 PM  
Blogger Harold Shaw said...

Just because a person has a degree from a "prestigious" institution and works for a large financial firm - does not guarantee intelligence, common sense or honesty.

In the culture that was there during the last 8 years and is still there (no major players have left have they) it seems that greed, hubris and a great deal of arrogance still remain in abundance. Until leadership is changed and there is a new focus on the what is right, the "bad" culture will remain and the Bush years will be looked back on with envy as the "old timers" talk about the money that they made.

It isn't about intelligence, but it is about ethics and honesty. I don't mind people making money or making lots of it, but do it ethically and honestly, not on the backs of Main St.

It is time for change - but I don't really see any change coming on Wall St.

1/02/2009 12:39 PM  
Blogger Mrs Panstreppon said...

"Smartest guys in the room"? How about "Biggest crooks in US history"?

When Henry Paulson gets done looting the Treasury, maybe someone will realize that moving the financial markets out of NYC would be a step in the right direction.

Too many NYers for too long have counted on the big bucks rolling in and, as a result, Wall Street no longer even makes a pretense of policing itself.

Henry Paulson is one of the biggest crooks on Wall Street and you should have been writing about that every single day.

One of my favorits daydreams is the one in which a teenager hacker breaks into the Goldman Sachs vault where they keep the top secret memos and then posts them all online.

We can then read for ourselves about how GS viewed the impact of social security privatization on the stock markets. Then there's the one about how long the revenue stream from CDOs would last before the market collapsed.

The memo about the advantages and disadvantages to GS of Henry Paulson becoming treasury secretary is guaranteed to be a fascinating read.

2008: The Year the Mob on Wall Street Looted the US Treasury While Helpless Americans Watched in Horror

When was the last time an independent physical inventory of US gold reserves was conducted?

President Obama might want to put that on the top of his to-do list.

1/02/2009 1:13 PM  
Anonymous Anonymous said...

I was told, "Cream doesn't always rise to the top.".

I think President Bush proved that you don't have to be intelligent to rise. There are many factors.

Bright or dumb, I just wish WS wouldn't shove their marketing, financial tricks and gimmicks on the world, at the expense of hard working folks who just want to live a carbon-neutral, healthy, family-oriented life.

1/02/2009 7:25 PM  
Blogger Enlightened Layperson said...

During 2008, a misperception that seemed to become accepted as fact is "the smartest guys in the room" meme: the idea that Manhattan's canyons are brimming with PhDs and assorted geniuses who, via sheer brain power, should have managed risk better.

Funny, I got the impression that the guy down the street who can't tie his shoes straight and tends to drool could have managed risk better than Wall Street.

1/02/2009 11:37 PM  
Anonymous Anonymous said...

To the first poster who cited JK Galbraith...The most accurate observation of the market may actually have come from a 1920's columnist elaborating on the words of Mark Twain; an elabortation that I think Jimmy Breslin picked up, and that is "The stock market is the oldest, and longest running crap shoot in this city."

1/03/2009 2:53 AM  
Anonymous Anonymous said...

Think Wang Zhendong!

1/03/2009 9:17 AM  
Blogger Mrs Panstreppon said...

One of my favorite business articles of 2008: 9/23/08 "Warren Buffet Makes It Official: Goldmans Even Sachs is Junk".

Henry Paulson did such a great job ripping off Goldman Sachs shareholders, President Bush put him in charge of ripping off the taxpayers.

A pox on Henry Paulson, his children and his children's children.

BTW, want to see Henry Paulson's idea of a good deed and how he runs charities? Check out "Goldman Sachs Charitable Fund" - EIN#31-2678646 at the 990 Finder.

The "charity" starts out to be a scholarship fund for disadvangated children in 2001. But in 2004, it goes into the Argentinian property business and launders $35 million for some anonymous donors.

An awful lot of money was spent on Latin American lawyers.

1/03/2009 1:47 PM  
Blogger Mrs Panstreppon said...

BTW, Goldman Sachs Charitable Fund supposedly donated the Tierra Del Fuego Argentina property to the Wildlife Conservation Society in 2004. In 2005, H. Merritt Paulson III, i.e. Henry Paulson's son, became a trustee.

The Wildlife Conservation Society shares senior management with a 501(c)(3) named "Tierra Del Fuego". Good luck finding info on that organization.

He can call himself "H. Merritt Paulson III" but he's still the son of one of the biggest thieves in US history.

I guess when you steal a trillion or two, you think your family is entitled to a fancier name.

Gag me.

1/03/2009 2:47 PM  
Anonymous GloomBoom said...

Many of the Wall St. types are just, or were just, jocks who are ruled more by testosterone than by thought. The pyramid that was balanced on its apex could only fall. And the fall continues......

1/03/2009 3:04 PM  
Blogger Mrs Panstreppon said...

Just as I thought - H. Merritt Paulson III is just as corrupt as his father and believes he is entitled to help himself to taxpayer money just like his father, Henry M. Paulson Jr.

The people in Portland Oregon should have been forewarned that Paulson was going to pick their pockets when he first showed up in 2006.

Plus Hank III's wife, Heather Lynn Mahar, tried to cheat by taking a taxi when she was a contestant in the "Amazing Race".

Any day now, Merritt's investment company, Shortstop LLC, will become a bank holding company and Merritt will get bailed out by his daddykins.

The Paulsons are shameless pickpockets and should be forced to live on the median income of a family of four in Nassau County for the rest of their natural lives.

BTW, why is Goldman Sachs quietly dumping shares of a Chicago sewer constructon company? Did the scum at GS set up some famous Windy Cityn pols by offering bribes and now that GS has the goods on said pols, the Obama government can be blackmailed into a step and fetch act for Goldmans Sachs?

1/03/2009 3:18 PM  
Blogger Mrs Panstreppon said...

Henry Paulson is a phony snob. Look at the photo and bio of his son's mother-in-law, Jan B. Mahar here and here.

Notice how she got considerably younger looking since she joined the Penn State faculty?

More importantly, notice how her resume got beefed up and how much money she is pulling in from the DoD Defense Threat Reduction Agency?

Paulson is trying to make his son's mother-in-law appear more accomplished and important than she is by getting her bullshit DoD awards.

I wonder if Jan Mahar got the Penn State job in the first place when Paulson first became aware that his son was seriouos about her daughter.

Paulson also put out the word that his daughter-in-law, Heather Lynn Mahar, graduated #1 in her class at Cornell. But I read that she went to U. of Michigan.

I wonder how effing smart H. Merrill Paulson III really is.

Henry Paulson, bigot.

1/03/2009 10:44 PM  
Anonymous Cheryl said...

Did the scum at GS set up some famous Windy City pols by offering bribes and now that GS has the goods on said pols, the Obama government can be blackmailed into a step and fetch act for Goldmans Sachs?

Doubtful. He may have set up Daley's nephew, or even Blagojevich, but Obama is not one of guys. I don't think Daley much likes him, and I know Blago thinks *he* should be the guy with the funny name from Illinois who is heading to DC today.

1/04/2009 5:28 PM  
Blogger broylon said...

Speeking of the gold...I wonder how much is really left?

http://www.worldnetdaily.com/index.php?pageId=45782

1/04/2009 5:37 PM  
Anonymous nil said...

Liar's Poker's Michael Lewis has interesting pieces on The End of the Financial World as We Know It and
How to Repair a Broken Financial World.

Maybe the Cunning Realist could comment on the Wall Street description and proposed fixes?

1/05/2009 8:43 AM  
Anonymous Anonymous said...

A bigger view of the same thing:

Free Market Myth

An environment was created that allowed them to do what they did (intelligence or lack of, aside), and favored it over alternative environments, at the expense of Middle America.

"Wall Street is not monolithic"' - nothing is. Most "things" aren't black and white like the Republican ideology promotes.

1/05/2009 12:25 PM  
Anonymous Ted666 said...

Doesn't seem that there is enough gold to go around according to James Turk gold has gone into backwardation.

1/05/2009 1:38 PM  
Blogger GoldenScrooge said...

http://articles.moneycentral.msn.com/Investing/CompanyFocus/the-10-worst-bailout-boondoggles-slides.aspx

1/05/2009 4:50 PM  
Blogger GoldenScrooge said...

And a week later half of that money was instead spent on a massive bailout of Wall Street through the injection of perpetual preferred stock, saving every single nickel of executive stock and options. No dilution of existing shareholders, nor any haircut for their bondholders, thereby preventing the capital structure of the firms from absorbing the losses as is intended and required under the law.

In other words, you, The Taxpayer, have been intentionally looted by the puppet-masters at Treasury (Hank Paulson) and The Fed (Bernanke, Geithner, et.al) to the tune of $250 billion dollars, while these folks in the so-called "private sector" keep each and every nickel of the money they stole from you while peddling their fraudulently-sold and packaged subprime and Option ARM mortgages.


http://market-ticker.denninger.net/archives/608-America-Has-Died-To-Thunderous-Applause.html

1/06/2009 1:05 AM  
Anonymous Anonymous said...

This BSD sorta thing happens everywhere. My BIL is a Marketing exec with one of the big pharma firms. He barely made it through a midwestern party school because his ma wrote his papers for him. He's a nice guy, but has become a douchebag frat boy, and has that self-possessed, "I alone know how the world works" arrogance that comes with a decent paycheck and a group of coworkers who never call each other on their bullshit.

Back when pharma reps could hand envelopes of money to doctors out in the open, and classify skydiving adventures and lap-dances as educational expenses, he was a successful field rep. So they brought him to the Mother Ship. He barely knows fuck-all about anything, but because he's reached a certain level, they throw money at him and do everything they can to justify their gamble.

He's frequently on-set at the shoots of their hideously expensive TV ads. A former tennis pro--the tempestuous nemesis of Borg and Connors--is getting 1.5 million to tout some prostate drug. My mother-in-law asked if she could get an autograph. He said, "sure," because for "what we're paying him, he HAS to kiss my ass."

No training. No medical expertise. No marketing knowledge (at Christmas he admitted that he did not know the difference between publicity and promotion), and as intellectually incurious as the sun is hot. Yet in charge of tens of millions of dollars in budgets, and helping to steer the course of health care in this country. He and his kind are a microcosm of how and why our economy has gone off the rails.

1/06/2009 9:45 AM  
Blogger Rajiv Satyal said...

my friend casey is a frequent reader of your blog and he fwded this post to me b/c of the rant i did in december: http://www.youtube.com/watch?v=JVcvyqamh8E

many more views on facebook, btw. = )

sounds like you and i are on the same page, my friend!

1/10/2009 10:29 PM  
Blogger Mrs Panstreppon said...

Fair is fair. I just found a website that explains a lot about the Chilean/Argentinian land that Henry Paulson and Goldman Sachs donated to the Goldman Sachs Charitable Foundation.

I, however, have raised some other questions about the deal at TPM.

1/11/2009 1:34 PM  
Anonymous Anonymous said...

Another problem is entitlement. These people feel entitled to the ridiculous bonues they took home. Look at John Thain - he felt he deserved $10M overseeing a dying business. (in addition the $70 M he got for signing on earlier that year.) I always sneer when I read we have to pay the talent these salaries or rlese they will go somewhere else. Fine. Let them prove how smart they are on their own.

1/12/2009 9:47 AM  
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