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Topic: Math, Physics and the Wall Street Bust
Replies: 17   Last Post: Oct 16, 2008 7:42 PM

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Matthew Lybanon

Posts: 20
Registered: 12/13/04
Re: Math, Physics and the Wall Street Bust
Posted: Sep 29, 2008 10:14 AM
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In article
Dom <> wrote:

> The following exchange is from the 28 Sept 2008 broadcast of "60
> Minutes." The complete transcript is at:
> Several years ago, I read that many math and physics majors/PhDs were
> abandoning academia for big Wall Street salaries. Does anyone know
> what type of "black box" computer programs these wizards wrote?
> ====================
> Altman says one of the biggest problems is uncertainty about how much
> bad debt Wall Street has hidden away.
> "You know I have heard that some of these financial institutions were
> hiring mathematicians and physicists to write the mathematical
> formulas that underlied some of these investments, and pretty soon
> nobody understood what was going on any more," Pelley said.
> "Well yes, a level of financial exotica ensued, which boggled the mind
> and which almost everyone involved didn't understand," Altman
> replied.
> Federal agencies that regulate Wall Street didn't understand, and
> neither did the companies that rate the quality of investments.
> "You're telling me that the credit rating agencies didn't understand
> these investments?" Pelley asked Altman.
> "We had the first instance, at least in my memory, where AAA rated
> instruments, the highest rating, actually defaulted while rated AAA.
> Now there's something wrong with that," he replied.

"Nobody understood what was going on" is a colorful statement, but not
accurate. Some people understood, probably plenty of them.

Misuse of analytical tools was not a major cause of the current
financial crisis. Taking on too much risk was. Thanks in large part to
large investments coming in from overseas, the financial institutions
had plenty of money to invest. Banks issued far too many questionable
loans, and their assumptions about the default rate on these bad
mortgages and the market value of the properties they got stuck with
were faulty--to put it in the kindest way. Packaging these mortgages
into "mortgage backed securities" amplified the problem. Surprisingly
(for those financial institutions), putting large numbers of pieces of
garbage together didn't turn the garbage into gold.

And now, "greed is good" is another of those slogans that you don't hear
too much anymore. We have been watching "the genius of the marketplace"
work for several years, and it got us where we are today. And it is
amusing to watch our elected representatives (some of them, anyway) go
against their stated principles and try to solve a problem by "throwing
money at it." Talk is still cheap, just like the stock prices of Lehman
Brothers et al.

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