January 6, 2013

Posted by orrinj at 9:08 AM


Eunuchs of the Universe (Tom Wolfe, Jan 4, 2013, Daily Beast)

Naturally, being so manly, so fast-acting, so... well... so masterful, the Masters of the Universe couldn't help but feel superior to the common people they had to deal with every day. They tried not to show it... but when the warriors were among themselves, out on the trading floor, let's say, how could they help but poke a little fun at all the simple souls they ran into in the course of their work? It was like the way New York City police officers called the clueless citizens they ran into "hooples."

The Masters of the Universe had the same sort of terminology for referring to clueless citizens in their world--but who were they? According to Michael Lewis, a onetime salesman for Salomon Brothers, there was a running joke at Salomon that went:

"What's the second-lowest form of human being?"

"I don't know, what?"

"An equities dealer in Dallas." This was the sub-punchline. At the time, the 1980s, the action, the big money, was not in equities, i.e., stocks, but in the bond market and certainly not in Texas.

"So what's the lowest form of human being?"

"A customer."

That was Salomon Brothers. At Goldman Sachs they called customers "muppets." Other investment banks called their customers "guppies," "suckers," "marks," "sheep," "chumps," "lambs," "baby seals"... Words like suckers, marks, and lambs had considerably more bite than hooples. After all, where do lambs go? To the slaughter.

The Masters of the Universe had always thought of their customers as people who should never have been let out of the house with money in their pockets. But here they were and somebody was going to take advantage of them. To turn your palms up and shrug and just watch them walk by, you'd have to be as lame as they were. They were lame; they weren't stupid. They had money and IQs above 98. So you had to ask yourself, Why would they ever invest in an investment bank? In a hedge fund you at least had a fighting chance. The manager was investing his own money the same way you were. Well... let's be fair. Not every investment bank would lead its customers to the slaughter. On the other hand what was wrong with shearing the fleece every so often?

Our manly Masters, still gorged with so much testosterone and dopamine, just didn't get it in 2009 even when the most unlikely thing in the world happened: a bunch of weaklings, a bunch of nerds known as quants, shut the golden door flat in their faces.

Nerds... the nerd has never been precisely defined, thanks to the psychological complexity of the creature. The word has connotations of some level of intelligence. The typical nerd is a male with intelligence but no sense of giving it a manly face. He doesn't play sports, doesn't automatically crack up over jokes about slutty girls, doesn't shore up his masculinity with frequent drops of the f-bomb, doesn't realize how bad it looks when he shoots his arm into the air and flaps his hand like a flag in his eagerness for the teacher to call on him first to answer the question, doesn't retaliate against insults from his fellow males in the schoolyard--oh, the schoolyard... the schoolyard... It is there that he learns he is not a Master of the Universe and never will be... not in his whole lifetime... and so he develops interests that are neither male nor not male--just obsessive, such as capturing bugs at night and pinning them up on a push-pin board, studiously arranging them by genus, species, and subspecies. There's nothing wrong with it... it's just a little weird and brainy--in short, nerdy. If a nerd was a little weird and not brainy at all, he was known as a dork. There was no connotation of deviant sexual behavior. The Master of the Universe assumed all varieties of nerds--quants, dorks, and plain nerds--were asexual.

Quant was what a nerd could move up in rank to, if he turned out to be a mathematical genius. It was the manly traders' and salesmen's condescending contraction of the actual term, quantitative analyst. Quants started showing up on trading floors in the late 1980s to set up computers that could retrieve information and sort it out faster than a trader, thereby freeing the Master of the Universe from a lot of tedious clerk work. At the outset, the traders looked down upon the quants as nerds who didn't have, in real-manly MasterSpeak, "the balls" it took to go out on the floor and take the big risks required if you wanted to make real money. It was in the early 1990s that the Masters actually coined the word quant, possibly because that was what it sounded like when you squashed a blood-ballooned tick with your thumb. They had no suspicion, none at all, of what these ball-less, sofa-bottomed weaklings were up to.

In 1942, Joseph Schumpeter wrote that stocks and bonds are "evaporated property." Everybody thought of that as such a witty aphorism, but Schumpeter meant it as a lament. "Substituting a mere parcel of shares for the walls and the machines in a factory," he said, "takes the life out of the idea of property." The new owners, i.e., the stockholders, lose the entrepreneur's, the founder's, will "to fight, economically, physically, politically, for, 'his' factory and his control over it and to die if necessary on its steps." Instead, at the first whiff of a problem the shareholders bail out and sell their share of the ownership to whoever will buy it on the stock market... and couldn't care less who it is.

That was how stocks and bonds evaporated property. What the quants had in mind was a quantum leap (so to speak) forward to the next stage: evaporating the stocks and bonds... not the property--that was long gone--but the very stocks and bonds themselves and making some real real money.

It was not a new idea, but even among quants few knew where it came from. Back in 1962 a young (30) mathematics professor at MIT, Edward O. Thorp, had published a mathematically foolproof way of winning at blackjack by counting the numbers of the cards already played. He proved it in live action by playing in a series of Nevada casinos... with a professional gambler's money. The book--and Thorp himself--infuriated the gambling industry. Now any clueless hoople could walk into a casino and wipe out the house. The casinos had to change the rules of a grand (and lucrative) old game. Naturally, the public ate it all up, and Beat the Dealer became a bestseller. To most mathematicians it was ingenious--they devoutly wished they had thought it up themselves--but pretty simple stuff, when you got right down to it. Five years later however, in 1967, Thorp caught their unqualified attention with a second book, Beat the Market. It described a foolproof way of winning big on the stock and bond markets. His fellow mathematicians had been spellbound at the time... 45 years ago. This one baffled ordinary citizens, however. It had to do with the mispricing of stocks and bonds as compared to their derivatives--futures, warrants, debentures, forwards, options, swaps, convertibles... and selling the stocks and bonds short and buying the derivatives long, or vice versa. It didn't matter what stocks or bonds, either. Their names, histories, reputations, prospects--irrelevant. All that mattered were the spreads, the lags, and they didn't have to be large. In fact, a difference of 2 cents was--

Hold on! Hold on!... Did you say derivatives?! and debentures or something?! and selling short?! or vice versa?! It made a hoople's head hurt.  [...]

The robo-monster accounted for 10 percent of all trades in 2000. Thereafter, the number rose in a steep, steady climb to a peak of 73 percent in 2009, close to three of every four trades--and nobody in the outside world, not even the press, had ever heard of it! The first mention of it in the press was not until July 23, 2009, in the New York Times.

The majority of men working full-time right here on Wall Street didn't know much more. They were as innocent as the suckers, the guppies, the muppets. They learned in such tiny steps, they didn't get the whole picture until very late in the game. Their first inkling came when the investment banks' trading floors began to calm down... fewer and fewer traders yelling at each other or into the telephone or at Fate. Before long they were sitting at desks behind banks of computer screens and communicating with each other by text message.

The robots cost some old traders and salesmen their jobs but, again, gradually, and intermittently, somebody still had to attend to the muppets and marks who continued to come to Wall Street to invest--to the quants the word seemed so archaic--to "invest" their money. What the Masters didn't realize was that their muppets, marks, guppies, and chumps provided only the liquidity--i.e., ready money... useful mainly to provide the quants' robo-diddlers with numbers to play with, discrepancies the robot battle machinery could game and exploit. The Masters didn't begin to sense that something was up until the heads of the various desks began giving them odd assignments such as taking big customers or potential customers out to lunch. Out to lunch? Assigned to leave the trading floor in the middle of the trading day? No more you... yes, you... if you must have something to eat, wimp, order in from the deli?... What was this? But even then it never became blatant enough to make them realize the new name of the game.

Today the same sort of top Ivy League students who wanted so badly to work on Wall Street even six years ago... now head for the Silicon Valley, because that is now where things are happening. And what is happening there is part of an older, more typical America. A Mark Zuckerberg and his Facebook, and Facebook's industry, IT, for information technology... and, hoodie or no hoodie, are perfectly traditional in the lustrous economic annals of the United States.

Two things showed quite concretely how lowly the traders and salesmen had fallen. For a hot quant prospect, employers would pay up to five times as much as for a Master of the Universe. Or as a New York Post headline put it recently: "Slick 'Wall Street' guys ousted by $1M geeks." And a quant's rogue algorithm for a single stock could bring down the entire market, as in the "flash crash" of 2010 and the 1,000-point nosedive of 2012. The dive cost the Knight Capital Group $440 million. They never recovered.

Posted by orrinj at 8:56 AM


Let your security blanket slip (Oliver Burkeman, 1/04/12, The Guardian)

This coming August, Richard Reid turns 40. Astonishingly, it's now more than 12 years since Reid, presently an inmate of the "supermax" prison in Colorado, tried to detonate a shoe bomb on a flight from Paris to Miami, ushering in the era of compulsory footwear checks at all American airports. For the youngest air travellers, these edgy anti-terror rules (see also, most obviously, the ban on large containers of liquids in hand luggage) are how flying has always been. Yet it's increasingly commonplace to hear specialists arguing that the crackdown hasn't made us any safer. More people have almost certainly died in car crashes since 9/11, as a result of being put off flying by the attacks of that day, than died on 9/11 itself. "We have made air travel an unending nightmare, [creating] a security system that is brittle where it needs to be supple," wrote a regretful Kip Hawley, former head of the much-despised US Transportation Security Administration, a few months ago. Each new ban on a given item, he pointed out, merely "gives terrorists a complete list of what not to use in their next attack".

There are all sorts of political reasons for this mess. But the deeper explanation, the security expert Bruce Schneier argues, is that we confuse the feeling of security with the reality of reducing risk. The "security theatre" of modern airports makes us feel better, without making us more secure. Indeed, it arguably makes us less secure, swallowing up resources that might otherwise be spent on more effective measures, and making airport staff, focused on finding oversized bottles of shower gel, less alert to genuinely suspicious behaviour. "Security is both a feeling and a reality," as Schneier has put it, "and they're not the same."

...it's not even intended to be useful, just to create the impression that something is being done.

Posted by orrinj at 8:50 AM


Good news about real estate: Home equity is growing again (Kenneth R. Harney, January 6, 2013, LA Times)

With all the nail biting over fiscal policy and the economy in the closing weeks of 2012, you might have missed some of the positive trends under way for real estate.

Start with home equity. It's growing again significantly after five years of declines and stagnation. This is a huge piece of good news that hasn't received much attention. After hitting a low of $6.45 trillion in the final three months of 2011, Americans' combined home equity jumped nearly $1.3 trillion during the next nine months to $7.71 trillion -- a 20% gain -- according to the "flow of funds" quarterly estimate released in December by the Federal Reserve. [...]

[T]he $1.3-trillion turnaround during the first nine months of 2012 was a big deal. It reflected the first sustained rebound in home prices in a long time in many -- though not all -- local real estate markets. In a study released just before Christmas, researchers at Zillow.com found that of 177 major metropolitan markets, 135 had experienced net increases in cumulative home values during 2012.

Posted by orrinj at 8:36 AM


Big Green vs. Gridiron Gods (Don Mahler, 1/06/12, Valley News)

In a way, Dartmouth was a victim of its own success.

With a team loaded with older, more mature military-student players -- known as "V-12" athletes -- the Big Green was coming off a 6-1 record in 1943 -- losing only to Penn by a 7-6 count.

Flushed with that success, Dartmouth went out and booked a home-and-away series for the next two years to upgrade its schedule with a high-profile, premier college program -- the Fighting Irish of Notre Dame.

It was quite a step up ... especially with Notre Dame coming off a national championship season and after the majority of V-12 players left Dartmouth to continue their military careers, leaving the Big Green a little short on both experience and talent.

In those days, colleges,and their partnering football teams had a different look. With World War II raging, the bulk of the college-age males were obviously called to the war effort. Thus, institutions of higher learning were struggling financially to keep their doors open due to a shortage of students, which consequently also meant a shortage of college-educated commissioned officers for the military.

To help solve both problems, the Navy devised the V-12 program, in which a college education was combined with military training. According to an article by Jennifer Seaton for Dartmouth Engineer magazine, the college became host to the largest of the Navy's V-12 programs, enrolling some 2,000 enlisted men.

Incoming freshman Ray Truncellito remembers his football indoctrination at one of his first Dartmouth practices in 1944. "I was lined up next to a guy who said, 'How old are you, kid?'

"I was almost 17, but admitted I was still only 16. He looked at me and said, 'I'm getting too old for this game.' He was 26.

"It was a different college experience then," Truncellito, 84, said in a phone interview last week. "These guys were coming back from the war and all they went through. Now they were being asked to make all these other sacrifices in time and effort. Many of them just didn't want to go through with it."

With head coach Tuss McLaughry serving in the military, the 1944 team was coached by E.M. Brown. Missing so many top players, the Big Green struggled that year to a 2-5-1 record, scoring just 57 points. And playing the Fighting Irish didn't help.

Notre Dame outdid the Big Green's season output in one afternoon, routing Dartmouth, 64-0 in front of a crowd of 40,000 at Fenway Park, which stood as the home field for Dartmouth that day.