My Life as a Quant (28 page)

In his speech on being named the Financial Engineer of the Year by the International Association of Financial Engineers (IAFE) in 1994, Fischer said that he had always preferred applied research to academic. University professors, he claimed, should be paid and hired for their teaching, not their research; he believed that their desire to teach well would then lead them to do good research.

When he became terminally ill, he neither hid it nor announced it, but informed the necessary people, and spoke about it in a detached, objective way that I found admirable. I never heard him complain.

He had a massive operation, and was full of genuine praise for the surgeon, who he said was “a genius”; it made me briefly envious of people who help others rather than work on theories. After the operation, he had a temporary recovery, and worked again, assiduously. For a while we sometimes spoke on the telephone about building models of options valuation that included jumps in the underlying index.

He was always frank if you asked about his health, but never volunteered any information if you didn't. Later, when one could sense from occasional remarks and rumors that his condition had worsened, I summoned the courage to ask how he was doing. He said simply that things looked “pretty iffy right now.”

When he finally stopped coming to work, he communicated with anyone who wrote to him via email. I liked to keep in contact, and would send him comments or short bits of news from work. If my emails were insubstantial, consisting of small talk or complaints, then, true to his style, he seldom replied. But if you wrote to him about some genuine issue in finance, you received a prompt answer. I asked him once if these email questions were bothering him, and he immediately replied to say no, and then stressed in a postscript that he liked to receive these questions.

At his memorial service in Cambridge, I heard a moving speech by Jack Treynor, former editor of the
Financial Analysts Journal
and, in many respects, Fischer's mentor, who concluded by saying that as regards death, “Fischer wasn't afraid at all.” This is the way I saw it, too. He rarely seemed to delude himself about the way the world really worked.

Whenever I think of Fischer I think of him as a consummately unsentimental realist. Once, when I was about to travel to Vienna to speak at a conference at which Robert Merton would be present, I called Fischer (already ill but more than a year before his death) and left him a voicemail asking the appropriate way to refer to “the model”—should I call it “Black-Scholes” or “Black-Scholes-Merton?” Fischer replied with a message saying it was OK to call it the Black-Scholes-Merton model, because it was Merton who had come up with the replication argument for valuing an option. Then he added, quite imperturbably, that “that's the part that many people think is the most important.”

On a professional and personal level, Fischer always seemed more free of artifice than anyone I knew, though this sometimes made him difficult to deal with. He didn't soft-pedal in giving you his opinion of work you had done or actions you had taken, but just told you what he thought. He had a strong sense of what was important, and he always took the long view, in corporate politics as well as in research. For that reason, he was the perfect person to call when you needed a clear view about an issue. In the midst of corporate politics, he told you to concentrate on quality even if people around you sometimes didn't appreciate it. He kept your eye on the goal, which was to help the business in the best way you could, to try to keep breaking new ground. He didn't sympathize with holding on to turf; instead, he always encouraged the search for new opportunities.

Fischer's last paper, written but not fully completed while he was dying, was submitted to the
Financial Analysts Journal
. He called the paper
Interest Rates as Options
, and cleverly pointed out that short-term interest rates themselves resemble call options, a consequence on which he then elaborated.

In a footnote to the article, the managing editor of the journal explained the circumstances behind the paper's publication:

Fischer Black submitted this paper on May 1, 1995. His submission letter stated: “I would like to publish this, though I may not be around to make any changes the referee may suggest. If I'm not, and if it seems roughly acceptable, could you publish it as is with a note explaining the circumstances?” Fischer received a revise and resubmit letter on May 22 with a detailed referee's report. He worked on the paper during the summer and started to think about how to address the comments of the referee. He died on August 31 without completing the revision.

Manners and mores on Wall Street

The further adventures of some acquaintances

Volatility is infectious

No one stays happy on Wall Street for long. The people who work there don't usually think of it as an avocation, like physics or medicine. Instead, most investment bankers want to get rich as fast as they can and then retire. And so, as Heraclitus wrote, all things happen because of strife and necessity.

At Goldman, in the pre-IPO days, the route to getting really rich was to become a partner and acquire a stake in the profits of the firm. Those who succeeded in gaining a partnership tended to last another decade or so and then retire, some voluntarily, some forcibly. Many partners were gone by their late thirties.

To join the partnership, or even to be considered for it, you had to have made a clear contribution to the profits of the firm. As a result, the vast majority of partners came out of sales, trading, and investment banking, where the money you made for the firm could be unambiguously counted. Almost no partners came from information technology or research, whose contributions, while substantial, did not carry a clear dollar value. Even Fischer, though he appeared to be an exception to this rule, had reportedly made millions of dollars for the firm by taking careful account of a mathematical subtlety in the definition of certain futures contracts of which most traders were unaware.

In troubled FSG, everyone seemed to know that whoever ran us properly might get the ultimate Goldman reward, a partnership and all that it guaranteed. The self-assured young kid in the cube next to me was certain that Mutt or Jeff would make it. “There are about 7,000 people at Goldman,” he intoned. “And there are 70 partners. That's one partner per 100 people. There are over 100 people in FSG, and they're in charge. Therefore, one of them will be a partner.”

It didn't work out that way. Instead there followed a succession of new FSG rulers and corulers who entered and exited like lovers in a French farce. It would take more than a few tries to fix it, but Goldman eventually got it right.

First came Bob Kopprasch from the Salomon Brothers Bond Portfolio Analysis (BPA) group, where he had run the options research team in which my friend Mark Koenigsberg now worked. Kopprasch's team had written reports containing some of the best research on fixed-income derivatives in the 1980s, high quality, well-written pieces that straddled and almost dissolved the border between academia and practice. It was their publications you turned to if you wanted to understand how to value swaps and swaptions before the necessary methodology appeared in textbooks. John Meriwether's arb group at Salomon cherry-picked some of their best people from Kopprasch's team, men like Victor Haghani and Greg Hawkins, who later moved with Meriwether to Long Term Capital Management (LTCM). When I ran Goldman's Quantitative Strategies a few years later, I always regarded the work done by Kopprasch's group as a model for what I tried to achieve. Nowadays, quantitative groups on the Street devote much less effort to these kinds of publications.

For a while, Kopprasch tried to manage us in an uneasy triumvirate with Mutt and Jeff. It must have been difficult. Soon Mutt made a graceful exit to the less quantitative world of asset management. Then Jeff left for a large Savings & Loan that, like many others, had benefited from the FSLIC guarantee on their deposits to become a speculative investor in securitized pools of home-owner mortgages. Then, only a few months into his reign, Kopprasch seemed to tire of the politics and went upstairs to work with the futures salespeople. Eventually he left Goldman to join an investment firm started by Lew Ranieri, former head of mortgages at Salomon Brothers and one of the creators of the market for mortgage-backed securities.

Then things turned around. In 1987 Bob Rubin appointed Ed Markiewicz to manage FSG. Ed was a down-to-earth, longtime Goldman accountant, about forty years old, who was said to be Bob's
consigliere
, his troubleshooter in difficult situations. Ed knew little about models, software, or options trading, but he could distinguish flim from flam, a skill in short supply. He spent his first few months as boss of FSG questioning everyone. “What do you think of so-and-so?” he would say to you behind closed doors. Slowly he figured out who had useful skills and who was merely along for the ride. A semblance of order returned; the overpaid consultants left; the professional administrators were trimmed. Presuming that I was one of the good guys, Ed moved me from a cube into an office and put me in charge of creating a fixed-income software group. Our mission was to replace our antiquated FORTRAN financial library with something we eventually called GS-ONE, an object-oriented unified framework for constructing Goldman Sachs fixed-income trading systems.

By early 1988 Ed had restored order. It was reassuring to see that excess had its limits, and impressive that he accomplished the turnaround so efficiently, because in truth he understood so little about what people in FSG really did. But he did understand instinctively when people were feeding him a line. Temporarily triumphant, he seemed to us to have a good chance of becoming the partner who would now reign over FSG. Over the next year he seemed to bloom; he became more confident, working out at the Health and Racquet Club some lunch times and spending time on the trading floor with Jacob Goldfield, whose influence kept growing.

New partners were picked every second November at Goldman, and people who were in the running had some idea of their odds. After the final deliberations, on the morning when their names were about to be made public, the head of the firm called up each new partner to congratulate him. Candidates in the running hovered around their desk from early that morning, waiting for the call or its absence. I was no longer working at Goldman the day they announced the partners of 1988, but friends told me that when the call didn't come, Ed left the office for the remainder of the day. A few months later he left FSG, and went on to troubleshoot other problem areas of the firm.

David Garbasz, who took me under his wing when I first came to Goldman, had his share of subsequent strife, too.

Trained as a scientist but now a Goldman trader, he was always willing to debate options markets and their theory. It was stimulating to walk upstairs to the bond options desk and hang out with the aggressively humorous traders around him. One day a group of us were chatting on the trading floor, kidding around about the rash of teenage suicides who had apparently hung themselves in toilets or attics. According to the newspapers, these boys were the victims of autoerotic asphyxia, a search for the extreme pleasure that purportedly accompanies a reduction in oxygen supply to the brain at the time of orgasm. When someone in the group questioned the authenticity of the phenomenon, David pointed casually over towards one of the tallest new recruits on the desk and said “Of course it's true. Why do you think he's so tall?”

Like many people on the Street, David wanted faster advancement and more control. Once every few weeks, he would reportedly talk to Rubin. Less than a year after I came to Goldman, he resigned and went to work as a senior options trader at O'Connor, the renowned and very savvy options trading firm in Chicago.

David was ambitious and volatile, though not, by Wall Street standards, extraordinarily so. A year or so after joining O'Connor, he departed together with two software engineers he had met there to start a company to produce fixed-income risk management software. They based themselves in Chicago and called their firm RMS, an evocative name that I greatly admired.
1

David's plan to build a commercial fixed-income risk management system was an inspired one, several years ahead of its time. Although many trading firms and investment banks, including Goldman, wrote their own risk-management software, at that time no one had yet marketed that type of product commercially. Stan Diller at Bear Stearns was pushing in that direction; as head of FAST, their fixed-income research group, he was building a system called AutoBond, which was intended to first be used by the trading desks and then, once polished and debugged, to be sold to clients. He was pursuing every quant's dream: to convert his work for the desk into something that would generate measurable dollars and cents for the firm, thereby eliminating the gap between the
luftmensch
PhDs and the revenue-generating “real” businesspeople.

David and his partners hired programmers in Chicago, where rents and salaries were low compared to New York. There they embarked on the creation of an elegant bond-and-options-risk system, object-oriented and written in C++ to run on Sun UNIX workstations. Most investment banks' financial software had always been behind the times, but RMS was strikingly modern: It had an up-to-date graphical user interface with drag-and-drop features, graphs, and icons. Several years would pass before other small companies, among them Renaissance, CATS, Infinity, and Algorithmics, began to build similarly stylish systems. Consolidation has been swift in this business, too, and only Algorithmics now survives as an independent company.

Then things accelerated. David returned to New York and took a position as a trader at E. F. Hutton, where, I heard, he had negotiated a golden parachute in the event of a change of ownership. I think he intended to use RMS as the provider of his trading software at Hutton. It was the perfect confluence; he would be paid for trading, and RMS would have immediate users to test and improve their software.