Quants: The Alchemists of Wall Street - VPRO Documentary

  Quants: The Alchemists of Wall Street - VPRO Documentary

"When you're close to money ... As an oyster farmer ... I eat 100 oysters a week. How many people are doing this? Me, because they are there. When you are in the sector that earns money and circulates it ... and it's trillions, so of course, we're going to make more money. You become isolated from the reality of the average worker ... who does not have this ability ... and who has trouble keeping his job, paying his mortgage ... feed and educate her children.

This is the best part of my job. A white shell. No sickness. Making a lot of money is like taking drugs. We feel great from head to toe. It is like a drug. When you get a check for $ 1 million or $ 5 million ... we want more. "5 million now, then 50 million tomorrow ... because I am a genius. "There is no doubt of his own genius ... and that the rest of the world is ... We are so much better than the others.

A bottle of beer costs 1 pound. But we're having a party, so we need a hundred bottles. How much is a hundred bottles of beer if one bottle costs 1 pound? 100 pounds? No no no. Paul Wilmott, often described as the smartest of all quants. Mathematician and author of numerous textbooks. A quant guru who for years warns against the risk ... of a market collapse triggered by mathematicians.

If we buy a hundred bottles in a store, we might get a discount. So a bottle costs 1 pound. A hundred bottles don't cost 100 but maybe 80 pounds. This is an example of non-linearity. You don't just multiply 1 by 100. It may also be that the store where you buy beer ... it's late at night, it's the only one open ... they know you need a hundred, and they say: sorry ... we are only allowed to sell one bottle. But for 200 pounds ... we sell you a hundred. So it may be 80, and maybe 200. But not 100. And that is reality. But 99.9 percent of financial models don't take it into account.

A quant uses quantitative techniques, mathematics ... statistics, and IT to do ... valuation models for financial securities ... and to structure them, and cover the risks. Emanuel Derman, described as the Einstein of Wall Street. A former pioneer in ... who went to work for Goldman Sachs as a theoretical physicist. Now he is training new quants at Columbia University in New York.

I started in 1985, when there were few quants. There were few rules. We were all amateurs. Now, you can be a professional quant, but at the time ... it was a disparaging term. Like "geek," a crazy computer in slang. A computer geek. We respect quants much more these days. Ten years ago... they were considered "geeks" who did not understand the industry. Now they are the sector.

Manhattan, New York. A splendid and powerful place ... where I have a lot of experience and roots. But also a city where money marks everyday life. Now more than ever. I was a programmer for one of the main protagonists on Wall Street ... who is no longer with us. For obvious reasons. I created the plumbing of finance. I wasn't writing the models themselves, but the infrastructure around them. I could do it with my eyes closed.

Some colleagues ... were content with themselves, smug, and lazy. Sometimes I worked on the trading floor. It was energizing. Most of my career I have been in a landscaped office. But I was located near the quants ... those who structured CDOs and other similar products, traders ... I saw what they were doing and it appealed to me. They seemed to solve thorny problems ... and work at the center of the action. It is as if I followed them through a window, but without being part of it. It made me want to do this job, and it's well paid.

Each employer has a different view of these things and of the market. I don't want an agreement or disagreement like this ... influences my job search. This is why I have decided to remain off-camera and anonymous. One of the first equations I derived in finance ... remains one of my favorites. The ideal is to have a good level of complexity, but not too much. The main thing here is that it looks simple ... but that there is a modulus, an absolute value, which makes it non-linear. And that is beautiful in itself. One of the problems right now in finance ... is that almost all equations are linear. It is... boring and unrealistic.

Financial models mainly ask for data, such as: "What will the future interest rates be?" "What about rate instability?" "What about prepayment rates?" Then the model gives the present or future value of a thing. Models demand a vision of the future, which they translate into a price. They can't predict absolutely ... but only on the basis of your own vision. People call it forecasts, but they are the ones entering the data. So "forecast" is not the right word. -I do not think so.

People like to say that this great global financial crisis ... results from bad models, but I don't think so. The crisis was caused by many things ... but the models are not at all the most important. Rather the incentives. Rather the whole system than a foolish person ... Finally, some have foolishly relied on the models. But no one can predict the number of prepayments ... or companies that cannot meet their obligations. A financial model is always based on a particular vision. My models ... I wrote software where we enter mortgage loans ... and expectations of default or prepayment. If we reach this fabulous moment, where everything works ... where the numbers fit ... and where it is easy for people to use ... well, yes, it's a beautiful time. We see them all using the software. We are perhaps the only ones to measure the effort provided, but it works. We were able to sell it to all the major investment banks. Including ABN Amro. He was one of our clients. And to all banks in Europe, Asia, and the United States.

Mike Osinski worked on Wall Street for 20 years. He was programming software ... that sliced ​​subprime, high-risk loans into attractive products. Banks were putting billions into software ... and there were billions coming out of it. Initially it was so-called prime loans ... granted to people who were working. They were sure. People were paying. Then it became a huge business. Maybe already at the end of Clinton's term. I left in 2000. After that it was madness. They have given a lot of subprime loans. It was government policy. Both Clinton and Bush have ... forced banks to issue more subprime loans. The banks agreed, of course, because a subprime affair ... produced a hundred times more profit than a prime deal. They were happy to issue this type of debt.

Did the buyers and customers of these titles really know ... what they were buying? Random CDOs are actually great instruments ... which consolidate mortgage loans and cut them into installments ... so that everyone can take the risk they want. It really is a find. To sell them you need a large profit margin. Because it is as much a profit

20% of my oysters die each year. I don't know why. But I don't change the rules in the middle of the season. There are always losses. It's not the same with software. You know, to create the computer in your head ... it's a lot of work, and a lot of fun. The dream of the quant: to work in the city, at the trading floor ... but surrounded by formulae, like some kind of theoretical wizard. It is a nice image, but it is not how it happens. This is not how it happens. A recent study from JPMorgan Chase ... shows that most of their trading volume is automatic. -I understand. -It is impressive. They have already told us that the analysis ... was not very useful. You know, it's a bit scary to see ... to what extent our mathematical models, our formulas, ... dominate our decisions. And they don't even know ... where it comes from, who wrote it. It's probably come from some quant ... or perhaps an outsourced quant. And you wonder: "Where did they go to school?" "What do they really know about our world ... and what are they trying to optimize?" I don't want to be cynical, but I do wonder. "Are you sure the models work?" But you know the answer. -Yes, I know. We want to believe. I'm sure of that. We want to believe, and there is always a little bit ... of the human element, especially in managing large sums of money. You know, there are really interesting things ... in our world. And one thing that I don't think we have understood ... is what is going on in people's heads. It's not even that we don't understand, it's that we are not even looking. We just prefer to believe ... that the little formulas are right. And that we don't need ... to talk to people. -Very true. I think it's a mistake. Not everyone thinks like that. But... ... It's difficult. -It's difficult. I think it's not only a mistake, but it's also ... sometimes a bit tragic. I think we need to listen to the people in our society. I am no longer with my American employer ... because he relocated to India to save money. I was in the process of writing software for him. The software was there, it was practically finished, but he wanted to pay 15 people ... with my salary. When I came back from India, my wife was dying. But I am lucky because I found a contract ... in a small investment bank in London. I wasn't looking for it. I didn't want to go. It was just not the right time for me. It's tough. I was away a lot. I left early in the morning, 6 or 7 am, ... and I was back around 8 or 9 pm. Sometimes it was even later. We had no family here. I saw my children grow up, but ... in the evening and on weekends. I had almost no connection with them. It is very difficult to see how the money you earn has an impact. I had to bring money to my family. But I could have been dead, it wouldn't have changed anything. We were still able to pay for everything. The money went from me to the school, to pay the mortgage ... to electricity, water and so on. You know ... if you don't make enough money to pay ... it's terrible. We live in a world of infinite resources. But this is not our model. We still act as if we were living in a world ... with limited resources. But we have to change this model. It's absolutely necessary. I don't think we can always rely on others to change the world. We have to do it ourselves, each in his own way. And that's what I'm doing. I am trying to change the world.