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.