With the immediacy of today’s NASDAQ close and the timeless power of a Greek tragedy, “The Quants” is at once a masterpiece of explanatory journalism, a gripping tale of ambition and hubris…and an ominous warning about Wall Street’s future. Words: 624

In further edited excerpts from the original book review* Michael Leon (www.veteranstoday.com) goes on to say:

In March of 2006, the world’s richest men sipped champagne in an opulent New York hotel. They were preparing to compete in a poker tournament with million-dollar stakes, but those numbers meant nothing to them. They were accustomed to risking billions.

At the card table that night was Peter Muller, an eccentric, whip-smart whiz kid who’d studied theoretical mathematics at Princeton and now managed a fabulously successful hedge fund called PDT…when he wasn’t playing his keyboard for morning commuters on the New York subway. With him was Ken Griffin, who as an undergraduate trading convertible bonds out of his Harvard dorm room had outsmarted the Wall Street pros and made money in one of the worst bear markets of all time. Now he was the tough-as-nails head of Citadel Investment Group, one of the most powerful money machines on earth. There too were Cliff Asness, the sharp-tongued, mercurial founder of the hedge fund AQR, a man as famous for his computer-smashing rages as for his brilliance, and Boaz Weinstein, chess life-master and king of the credit default swap, who while juggling $30 billion worth of positions for Deutsche Bank found time for frequent visits to Las Vegas with the famed MIT card-counting team.

On that night in 2006, these four men and their cohorts were the new kings of Wall Street. Muller, Griffin, Asness, and Weinstein were among the best and brightest of a new breed, the quants. Over the prior twenty years, this species of math whiz –technocrats who make billions not with gut calls or fundamental analysis but with formulas and high-speed computers– had usurped the testosterone-fueled, kill-or-be-killed risk-takers who’d long been the alpha males the world’s largest casino. The quants believed that a dizzying, indecipherable-to-mere-mortals cocktail of differential calculus, quantum physics, and advanced geometry held the key to reaping riches from the financial markets. And they helped create a digitized money-trading machine that could shift billions around the globe with the click of a mouse.

Few realized that night, though, that in creating this unprecedented machine, men like Muller, Griffin, Asness and Weinstein had sowed the seeds for history’s greatest financial disaster.

Drawing on unprecedented access to these four number-crunching titans, The Quants tells the inside story of what they thought and felt in the days and weeks when they helplessly watched much of their net worth vaporize – and wondered just how their mind-bending formulas and genius-level IQ’s had led them so wrong, so fast. Had their years of success been dumb luck, fool’s gold, a good run that could come to an end on any given day? What if The Truth they sought — the secret of the markets — wasn’t knowable? Worse, what if there wasn’t any Truth?

In “The Quants”, Scott Patterson tells the story not just of these men, but of Jim Simons, the reclusive founder of the most successful hedge fund in history; Aaron Brown, the quant who used his math skills to humiliate Wall Street’s old guard at their trademark game of Liar’s Poker, and years later found himself with a front-row seat to the rapid emergence of mortgage-backed securities; and gadflies and dissenters such as Paul Wilmott, Nassim Taleb, and Benoit Mandelbrot.

Warren Buffett [was so right when he said], “Beware of geeks bearing formulas.”

*http://www.veteranstoday.com/2010/03/09/the-quants-a-new-breed-of-math-whizzes-nearly-destroyed-wall-street/

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
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A defining and vivid look at policymakers’ unprecedented response to the crisis. Wessel’s disconcerting conclusion: Out of necessity Bernanke is playing most of this by ear, loosely interpreting and appropriating arcane laws and creating new powers just to keep the system on its hinges. In Fed We Trust is persuasively told and richly reported. It is an absorbing read and will win awards and inspire copycats. Words: 665

In further edited excerpts from the original review* Roben Farzad (www.BusinessWeek.com) goes on to say:

The irony of there now being a halo above Ben Bernanke’s head is hardly lost on Wessel. The introverted academic was not the odds-on favorite to succeed Alan Greenspan. Yes, he parlayed his near-perfect SAT scores into economics degrees from Harvard and MIT, but to finance that pedigree he waited tables at a kitschy Mexican-themed truck stop in South Carolina. Bernanke made himself an expert on the Great Depression and in 1996 became chair of economics at Princeton, where he recruited Paul Krugman. In 2002, Bush & Co. tapped the soft-spoken scholar to work for the central bank; four years later he had replaced Fed Chairman Greenspan, often referred to as the world’s most powerful man. But Bernanke, writes Wessel, “didn’t think a Fed chairman should be a rock star. He wanted to avoid the cult that had attached to Greenspan, the perception that the chairman is the Fed. An economy shouldn’t rely so much on the instincts of a single man, he thought….”

But that’s the lopsided situation Bernanke inherited—and would have to perpetuate. As Wessel shows, Bernanke’s predecessor vastly underestimated the effects of keeping interest rates as low as he did for as long as he did (from 6.5% in 2001 to a 45-year low of 1% as late as June 2004). That easy money, we now know, fueled an epic housing and credit bubble whose bursting took down the global economy within two years of Bernanke’s ascension. In 2008, Bernanke had to log a string of all-nighters—and devote record sums—to contain the rolling meltdowns at Bear Stearns, AIG (AIG), Merrill Lynch (BAC), and beyond.

Between 2006 and the end of 2008, notes Wessel, the Bernanke Fed went from having $860 billion in supersafe loans and securities on its books to $2.2 trillion, much of it far riskier fare. By March 2009, the Fed was ready to commit an additional $1 trillion to its mop-up efforts. By then Greenspan, who got an $8.5 million advance for his book The Age of Turbulence, was well into his revisionism tour, asserting that it wasn’t his role to preemptively deflate asset bubbles. Wessel duly dubs one of his key chapters “Age of Delusion: What Greenspan Wrought.”

So much for overreliance on the instincts of a single man. Indeed, as Bernanke learned in the dark days of September 2008, a strong, central economic figure was exactly what the system needed. Wessel lays out why the failure of Lehman Brothers—perhaps the defining blunder of the crisis—was hardly preordained.

For starters, eight investment banks were willing to tag-team with the Fed to rescue the firm. Bernanke, writes Wessel, thought that letting Lehman die was “idiocy.” Even so, he wouldn’t go to bat for a bailout without the support of Treasury Secretary Hank Paulson, the former Goldman Sachs (GS) boss who “never thought much of Lehman.” So, responsibility set adrift, they let the bank go under, and the aftermath has cost multiples of the amount needed to save it.

In other words, Wessel illustrates how Bernanke might have used the superpowers he had acquired—however reluctantly—a little sooner.

*http://www.businessweek.com/magazine/content/09_33/b4143062874291.htm

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.