January 24, 2010

COMPLEXITY VS TRANSPARENCY:

The Minds Behind the Meltdown: How a swashbuckling breed of mathematicians and computer scientists nearly destroyed Wall Street (SCOTT PATTERSON, 1/24/10, WSJ)

The market moves PDT and other quant funds started to see early that week defied logic. The fine-tuned models, the bell curves and random walks, the calibrated correlations—all the math and science that had propelled the quants to the pinnacle of Wall Street—couldn't capture what was happening.

At the time, few quants realized what was happening, but over the next few days a theory would emerge: The U.S. housing market was unraveling, leading to big losses in the mortgage portfolios of banks and hedge funds. One or more of those hedge funds needed to raise cash quickly to make up for the losses, and needed to sell assets quickly to do so. And the easiest-to-sell assets of all were stocks, those held in portfolios highly similar to quant funds across Wall Street.

The result was a catastrophic domino effect. The rapid selling scrambled the models that quants used to buy and sell stocks, forcing them to unload their own holdings. By early August, the selling had taken on a life of its own, leading to billions in losses.


Free market ideology is premised on transparency. These derivatives required opacity. The undeserving poor are just scapegoats.


Posted by Orrin Judd at January 24, 2010 8:45 AM
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