October 14, 2009
Op-Ed Contributor
Wall Street Smarts
By CALVIN TRILLIN
"IF you really want to know why the financial system nearly collapsed in the
fall of 2008, I can tell you in one simple sentence."
The statement came from a man sitting three or four stools away from me in a
sparsely populated Midtown bar, where I was waiting for a friend. "But I
have to buy you a drink to hear it?" I asked.
"Absolutely not," he said. "I can buy my own drinks. My 401(k) is intact. I
got out of the market 8 or 10 years ago, when I saw what was happening."
He did indeed look capable of buying his own drinks - one of which, a dry
martini, straight up, was on the bar in front of him. He was a
well-preserved, gray-haired man of about retirement age, dressed in the same
sort of clothes he must have worn on some Ivy League campus in the late '50s
or early '60s - a tweed jacket, gray pants, a blue button-down shirt and a
club tie that, seen from a distance, seemed adorned with tiny brussels
sprouts.
"O.K.," I said. "Let's hear it."
"The financial system nearly collapsed," he said, "because smart guys had
started working on Wall Street." He took a sip of his martini, and stared
straight at the row of bottles behind the bar, as if the conversation was
now over.
"But weren't there smart guys on Wall Street in the first place?" I asked.
He looked at me the way a mathematics teacher might look at a child who,
despite heroic efforts by the teacher, seemed incapable of learning the most
rudimentary principles of long division. "You are either a lot younger than
you look or you don't have much of a memory," he said. "One of the speakers
at my 25th reunion said that, according to a survey he had done of those
attending, income was now precisely in inverse proportion to academic
standing in the class, and that was partly because everyone in the lower
third of the class had become a Wall Street millionaire."
I reflected on my own college class, of roughly the same era. The top
student had been appointed a federal appeals court judge - earning, by Wall
Street standards, tip money. A lot of the people with similarly impressive
academic records became professors. I could picture the future titans of
Wall Street dozing in the back rows of some gut course like Geology 101,
popularly known as Rocks for Jocks.
"That actually sounds more or less accurate," I said.
"Of course it's accurate," he said. "Don't get me wrong: the guys from the
lower third of the class who went to Wall Street had a lot of nice
qualities. Most of them were pleasant enough. They made a good impression.
And now we realize that by the standards that came later, they weren't
really greedy. They just wanted a nice house in Greenwich and maybe a
sailboat. A lot of them were from families that had always been on Wall
Street, so they were accustomed to nice houses in Greenwich. They didn't
feel the need to leverage the entire business so they could make the sort of
money that easily supports the second oceangoing yacht."
"So what happened?"
"I told you what happened. Smart guys started going to Wall Street."
"Why?"
"I thought you'd never ask," he said, making a practiced gesture with his
eyebrows that caused the bartender to get started mixing another martini.
"Two things happened. One is that the amount of money that could be made on
Wall Street with hedge fund and private equity operations became just
mind-blowing. At the same time, college was getting so expensive that people
from reasonably prosperous families were graduating with huge debts. So even
the smart guys went to Wall Street, maybe telling themselves that in a few
years they'd have so much money they could then become professors or
legal-services lawyers or whatever they'd wanted to be in the first place.
That's when you started reading stories about the percentage of the
graduating class of Harvard College who planned to go into the financial
industry or go to business school so they could then go into the financial
industry. That's when you started reading about these geniuses from M.I.T.
and Caltech who instead of going to graduate school in physics went to Wall
Street to calculate arbitrage odds."
"But you still haven't told me how that brought on the financial crisis."
"Did you ever hear the word 'derivatives'?" he said. "Do you think our guys
could have invented, say, credit default swaps? Give me a break! They
couldn't have done the math."
"Why do I get the feeling that there's one more step in this scenario?" I
said.
"Because there is," he said. "When the smart guys started this business of
securitizing things that didn't even exist in the first place, who was
running the firms they worked for? Our guys! The lower third of the class!
Guys who didn't have the foggiest notion of what a credit default swap was.
All our guys knew was that they were getting disgustingly rich, and they had
gotten to like that. All of that easy money had eaten away at their sense of
enoughness."
"So having smart guys there almost caused Wall Street to collapse."
"You got it," he said. "It took you awhile, but you got it."
The theory sounded too simple to be true, but right offhand I couldn't find
any flaws in it. I found myself contemplating the sort of havoc a horde of
smart guys could wreak in other industries. I saw those industries falling
one by one, done in by superior intelligence. "I think I need a drink," I
said.
He nodded at my glass and made another one of those eyebrow gestures to the
bartender. "Please," he said. "Allow me."
Calvin Trillin is the author, most recently, of "Deciding the Next Decider:
The 2008 Presidential Race in Rhyme." This piece appeared in the NY Times.
Michael Lissack http://lissack.com
jtm
John Maloney
Prediction Market Clusters
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