Only In America

Was recently in Boston, invited keynote speaker on derivatives at the annual meeting of the Association for Financial Professionals (6000 attendees).

The event was not only a blast but it served to (further) reinforze the exceptional exceptionalism of America. Some things are just only possible in the land of opportunity, and I am more convinced everyday that hatred towards America by many out there is mainly explained precisely because of its grandness. In other words, if America was mediocre and ugly, not brilliant and beautiful, it would be held in a higher standard by the global masses (after all, when was the last time that you heard an anti-American in London, Paris, or Madrid bash North Korea, or similar bastions of excellence and plentifulness?).

Let me walk you through a few of the things that I was able to witness in just four days. First of all, a marvellously organized conference at a superb location (several football fields in size), with dozens and dozens of modern lecture rooms and a giant main exhibition hall buzzing with energy. You felt alive and excited. The AFP had prepared hundreds of different seminars, on every topic imaginable, a delicious menu for the information-hungry practitioner.

Then came the entertainment. A nightly reception at the Boston Public Library and a classical concert. A chance to experience cultural advancement and refinement at its best. Enlightenment reigning supreme.

In between conference activities I was able to visit Harvard and MIT. Academic and architectural greatness at its peak, a triumphant symbol of human intelligence and inventiveness let loose.

I was also able to browse books at the local Borders, simply the best bookstore chain (with Barnes&Noble) in the world, unmatched anywhere else. Those self-proclaimed intellectuals in Europe would kill to have something like that in their cities.

After all the day´s action, I would rest my bones at a luxurious hotel fully equipped with everything you might need: an spacious room, sensational room service, well-equipped gym, oak-panelled bar, and comprehensive business center.

So, let´s summarize: impolute organizational grandiosity, cultural supremeness, world-leading temples of knowledge, books-aplenty, prosperous comfort. All these attributes can be found together not just in Boston, but all over the US. Who wouldn´t like that?

More to the point, who would hate that?

New York, New York University

Just finished watching "Light Sleeper", the mysterious and wonderful 1991´s film. Willen Dafoe is, as usual, splendid (one of those actors too good to be uber-famous). Dana Delany appears as one of the most breathtakingly beautiful actresses I´ve ever seen. I googled her and, not unexpectedly, I learn that she has quite the pedigree, having been raised in Connecticut and attended elite educational institutions. Her angelical face does fully resemble that of a New England-raised preppy (though she plays an on-and-off drug addict in the movie!).

Anyway, Light Sleeper brought me late-night memories of New York. Specifically, of my time as a student at NYU. You see, just like Dafoe´s character is a non-conventional maverick, I too chose the unconventional, different route when embarking on my graduate studies.

I chose NYU because it alone offered me exactly the type of uniquely tailor-made program that I was aiming for. I wanted badly to go into derivatives so, in my eyes, that ruled out the MBA. But I didn´t want to go the hard-core quant route, so that ruled out math and engineering schools. Salvation came through NYU´s business school, which allowed me to enroll in a non-MBA, non-quant program heavily specialized in financial engineering and derivatives. This refreshingly different Master of Science (offered through the Stats department, and which has in recent years been incorporated into the MBA) was simply perfect for me. So I took a loan, bought a plane ticket, and spent a fantastic year and a half around Washington Square Park.

While I had the guts to go the unconventional graduate education route (doing an MBA would have been much more riskless), I haven´t always displayed the same valor when it came to living with my decision. More than once I have questioned my choice, asking myself why I didn´t do a Harvard or Wharton MBA. Why did I specialize?. It is not as if NYU was a bad experience, on the contrary. Academically and socially it was extraordinary, and I landed a prestiguous and well-paid job as a result. But my program was so uniquely exotic, so indelibly mavericky that I have sometimes wished for a more normal background. The same radical differentness that (rightly) attracted me to NYU in the first place later turned into a psychological semi-curse. I had what it took to go my own intrinsic way, but I haven´t always defended such boldness as eagerly as would have been expected.

Watching Dafoe cowboyishly roaming the streets of New York in the movie has fully reminded me of how privileged I was to be able to attend NYU some years ago. And how smart I was to make that choice. The program that I attended was the best program for my goals. Very different, yes. Abnormal, yes. A huge risk, yes. But 100% right.

Those who do the right thing even when faced by difficulties should never regret their decision one bit. Particularly when the alternative course of action would have been utter cowardice.

Emanuel Derman: The Movie

Browsing through “My Life As A Quant” for the umpteenth time (these days I no longer read books, I randomly browse through them searching for eye-catching passages) I couldn´t help thinking that someone, somewhere, someday should make a movie out of this great tome.

Have I gone insane? A movie about a quant´s life? Do I want to irremediable jeopardize the possibility of a future Hollywood career for myself? Am I really that bad picking cinematic projects?.

Call me crazy, but I think that people would want to see a Derman-inspired flick. I know, I know. You are probably imagining the long line of science PhDs eagerly waiting to see their idol inmortalized on the screen. But I don´t mean just brainy types when I talk about the potential popularity of the movie. I very much mean the general public.

What prompts me to believe in Derman: The Movie? Well, his book (his life) touches upon several experiences that I think can be quite appealing. The lonely young foreign student that lands in crime-infested New York. The PhD seeker at a legendary physics department. The aspiring academic doing the postdoc rounds. The Wall Street success story at the most famous of institutions. The revolutionary quantification of finance.

But even more than this individual biographical bits, the main selling point for the movie would be the presence of a major essencial theme, one that inspires and that would be bound to attract attention from folks. When travelling through Derman´s life it is impossible not to detect a sense of betrayed innocence, a nostalgic yearn for lost love, an indefatigable yet hopeless attempt to satisfy a relentless passion. Derman is a man who loves deeply and who fights very hard to have that love reciprocated, only to be disappointed by unfavourable circumstances. Derman´s love interest is, of course, physics. We see him as a young idealist bent on doing physics all day for the rest of his life. This is a quest for him, an absolute must, life-defining. And he wants to do physics for the purest of reasons: he wants to find truth. In order to achieve that romantic goal he is willing to make the toughest of sacrifices and to incur untold pain. He continues to fight and hope under strain, refusing to give up the dream.

For the reader, it is impossible not to root for the hero. We want Derman to succeed, we desperately wish that by the end of the chapter some university has finally offered him the coveted full-time position. When disappointment comes knocking again one final time, we sink with Derman. Innocence is lost, the dream is gone. The search for universal truth would have to be postponed.

But if we shed some tears at the sight of our hero departing from his beloved physics path, we glowingly smile when he eventually finds happiness, fulfillment, and untold recognition on Wall Street. We feel elated that life has vindicated him. We find his triumph an act of justice. We bow at the altar of the humbleness and modesty that Derman continues to show even after having reached the pinnacle at that most illustrious of institutions, Goldman Sachs. And we surrender to his never-ending intellectual curiosity.

I think that regular people would also side with our hero at movie theatres. I think they too would be moved by the story of this man who came to New York guided by a passion for scientific truth, who became a marvelled inhabitant of a genius den at Columbia, and who struggled relentlessly in the quest for a life of science. I think people would sink too when the hero has to finally confront the inevitable reality that he will not be able to pursue his dream further. It would break their hearts to see Derman leave physics, just like it broke our readers’ hearts. And, just like it happened to us book worms, it would energize and inspire them to see his victory later in life. Patrons would leave the theatre with an open smile (fittingly for a movie about the man who first modelled the volatility smile).

In sum, I would recommend the Hollywood honchos to do this movie for several reasons. One is that it contains lots of interesting sub-plots. The youthful pursuit of scientific accomplishment at a genius-filled top university could be appealingly presented (did you like “Proof”?). The hardships associated with finding an academic job could also be made attention-grabbing. The use of esoteric quantitative techniques to make money and manage risks on Wall Street is definitely a winning theme. And Derman has certainly met his share of intriguing eye-catching characters (all of whom should be portrayed in the film).

But again, the biggest selling point would be the portrayal of an idealistic likeable man who sacrificed so much for the pure love of science, who had to brusquely and tragically abandon his life-defining quest, but who eventually found extraordinary worldly success without betraying his basic traits and his never-ending passion for intellectual achievement.

Wouldn´t it be nice if the final scene were that of Derman satisfactorily returning (as financial engineering professor) to his beloved Columbia after so many years, to the place where he dreamt of endless days of physics, the place where innocence still ruled supreme.

Boston-Less Swiss

Slightly over a year ago, the logo “First Boston” ceased to symbolize the operations of an investment banking conglomerate. The death sentence was handed from Zurich, of all places. The honchos at Credit Suisse decided that terminating a brand associated with almost 75 years of tradition was the right thing to do in order to increase the overall group´s profitability. After all, if Citigroup can terminate Salomon Brothers, surely CS is entitled to its own round of legend-killing.

As a former CSFB employee I feel sadenned by all this. While I don´t doubt that the strategy might work for the parent giant, I can´t help shedding a tear or two. You see, back when I was a graduate student looking for a derivatives job no other brand seemed more enticing than CSFB. Yes, it looks cool to say that you work for Goldman Sachs or Morgan Stanley. Yes, JP Morgan has a lot of panache. Yes, Deutsche Bank was aggresively up-and-coming. But, honestly, for someone aiming at derivatives glory CSFB had to be the main catch. The place had inherited the legend of CS Financial Products, which in turn had purchased the glory of Bankers Trust. The culture was definitely cowboysh, an essencial attribute of a derivatives fraternity (or so I thought). High-stakes propietary trading and the development of super funky products ruled the trading floor. Bonuses were rumoured to be way higher than at other places, with performers being paid exactly what they deserved. And, by God, the top boss himself was a derivatives guy (a pioneer no less).

CSFB, in short, sounded exciting, entrepreneurial, and cutting-edge. A place where brainiac mavericks could flourish. A den of innovation and inventiveness. The place to be in for those (like me) impatient with stringent bureaucratic practices. Yes, the New York building presented some weird architecture, and the London headquarters were a long ride from the irresistibly attractive historical City domains, but they both projected an unmistakable sensation of grandiose ambitions.

After reading these lines it should come as no surprise that I was quite elated when CSFB offered me a summer internship (first) and then a full time job in their London offices. All the legendary names were still around, though plenty would depart in the next few months (including the top dog, as it is well known). The whole ex-Bankers Trust regiment (among the inventors of OTC derivatives) seemed to be there. Some of the valuation models that I used had been the first of their kind ever developed, with a few dating back to the very early 1990s. I met people who had done the first ever long-dated swap in country A, the first ever barrier option in country B. I also met people who had been directly involved in some of the most famous (infamous?) derivatives episodes, those that are detailed in every book and mentioned in every class.

When I left CSFB (in order to inmerse myself in an unavoidable life-defining experience) the bank had not lost its bulge-bracket status, though it had gone through a lot of problems in a very short period of time. It was very strong in M&A and underwriting and the famed derivatives expertise was certainly not gone.

So, why did the Swiss drop First Boston? Journalists say that this act of brute force shows that things were not going well. M&A (a huge bread-winner) certainly looked awry, with CSFB barely making the top ten in 2005 (having been a consolidated top-five in previous years). But did the slide really tarnished the brand so much that Zurich began to fear being associated with it? Going from CSFB to plain CS evokes a picture of embarrasment at the investment bank´s performance, as if errasing the troubled brand would liquidate a dismal past and bring about a sunnier tomorrow.

This is a pity, particularly from a derivatives perspective. CSFB carried with it one of the most glorious financial engineering traditions. The brand emanated derivatives history and pedigree. Such hallowness did not deserve such a rude end. If for white-shoe bankers in the late 1980s the sight of the aristocratic First Boston franchise being taken over by a bunch of Europeans must have been an emotional shock, for today´s derivatives people the death of CSFB has to make us misty-eyed.

Why I Became Attracted To Derivatives

I studied undergraduate theoretical economics at a public university in Spain, which basically means that I graduated without knowing what a bond (let alone an option) was. Lots of microeconomics, econometrics, topology, and game theory stuff but nothing on real-world financial markets.

Back then, that was perfectly fine with me, as I had never had any interest in finance anyway. As a semi-intellectual brought up in an upper middle class environment populated by poetry-reading, opera-going, Einstein-admiring characters I grew up developing a certain disdain for anthything financial (no, I wasn´t a crazed anti-globalization activist). I read The Economist, but usually skipped the markets section and concentrated on African politics (exactly the opposite as what I do now). I read tons of books from the Business aisles but they were by Krugman, Friedman, and Dornbusch and thus dealt exclusively with economic policy and international economics. The last thing on my mind by the time I was in my early 20s was to work for an investment bank or an asset manager (mostly because I didn´t know that such things existed).

All this changed when I (luckily) travelled to the US to pursue graduate studies at the economics department of American University in Washington DC. At AU (or “Club Med”, as the place was also dubbed due to its easy-going ambiance, its pristine little campus, and the attractive and wealthy international student body) I enrolled in the “development banking” track as a way to get a job at, you guessed it, one of the development banks in town. After having spent a fruitful and deliciously eventful summer at the InterAmerican Development Bank, my goal in life had become to set up shop permanently in either the IDB or the World Bank, ideally doing some international economics stuff.

These carefully-crafted plans were shockingly derailed by my attending an AU class titled “International Capital Markets Workshop” imparted by (irony or ironies) a top finance professional at the IDB. Through this course I was introduced, for the first time in my life, to things such as options, swaps, forward curves, and risk management. This indoctrination period coincided with The Economist releasing a couple of special reports on mathematical finance and corporate hedging, which I duly devoured thus discovering the Procter&Gamble scandal and rocket scientists, among lots of other intriguing stuff. The period also witnessed the birth of several financial engineering programs at top universities, with their cutting-edge curriculums and impossibly selective admissions policies.

I became instantly and irremediably hooked by the derivatives world. I began to use my spare cash (this was before I started tutoring other students, eventually making more than $2000 a month) on buying any book with the word “derivatives” on it. I had always been a frequent visitor to bookstores, but now I was suffering from an addiction. As with any addiction, my infatuation with derivatives required its daily fix and I obliged by religiously partying with the $50-60 that each one of these specialized books demanded (it is a safe bet that I eventually ended up reading just half of these expensive tomes).

Why the infatuation? Why the sudden and unabated love affair? I mean, my attraction towards the derivatives world made Glenn Close´s obsession with Michael Douglas in “Fatal Attraction” seem like a pleasant picnic.

In one word: sophistication. Everything about derivatives seemed so cutting-edge, so new, so out-of-this-world that I couldn´t help succumbing. Derivatives products seemed far more interesting and complex than anything else out there. Derivatives pros seemed much smarter and richer than anybody else. Derivatives university courses seemed much more select and demanding than the alternatives. Here was a field were mysterious genius individuals seemed to be making millions by operating with funky financial products which handling required super sophisticated techniques such as stochastic calculus and C++ (I remember naively considering doing a masters in computer science as a way to become a derivatives superstar). The fact that several prominent companies and financial institutions had been inmersed in headline-grabbing derivatives-related scandals only enhanced the field´s attractiveness. To the complexity factor we could now also add the high drama factor.

Derivatives, in sum, were super sexy. And I desperately wanted to be sexy.