My Life as a Quant (30 page)

Once a week we had lunch with Ramine Rouhani, who had been working with Fischer on the theory of portfolio insurance, the trading strategy that later played a part in the 1987 stock market crash. We would eat cheap lunches at the long-since-shut Italian Alps on William Street, where I slowly became slightly depressed and even more corrupted by listening to the two of them feverishly and incessantly talking about their dissatisfaction with their role. Ramine and Bill were intent on becoming a part of “the business,” and were always planning routes of escape to parts of Goldman that were closer to “the business.”

“I've got to get out of here,” Bill would say repeatedly, shaking his head slowly from side to side and wiping his brow with the back of his right hand. Over the years, Bill and I would continue to commiserate, and on occasional bad days I, too, would repeat the mantra “I've got to get out of here.” Whenever I did, Bill would say to me scornfully, “You'll never have the guts to leave!”

Ramine left Goldman within a year and now runs fixed income trading at the New York branch of the French bank CDC IXIS. Bill soldiered on at Goldman; he became a true expert at the legal, regulatory, and financial-engineering aspects of structured equity derivative products, and coedited a book on the subject. Finally, no doubt after many additional lunches similar to the ones we shared back then, he joined Ramine at CDC in 1999.

Part of me, of course, liked being a dissident. Recently I experienced a burst of recognition while reading the autobiography of Erwin Chargaff, the Vienna-born discoverer of the eponymous base-pairing Chargaff rules that led to Watson and Crick's discovery of the double helical structure of DNA. Chargaff, who disliked the imaginative, shot-in-the-dark, theoretical-physics-like style that characterized Watson and Crick's approach to model building, grew bitter at being asked why he had not made the discovery implied by his rules. In his autobiography he wrote: “Most people are wise and applaud the inevitable; but I, inexplicably, love to be on the losing side.”

By this route I came to the point where, in 1988, I began to interview for positions at other investment banks. It wasn't hard to get out of Goldman's office unobserved during the day. I had been advised that if you left your jacket at your desk no one would even realize you were gone, and it was true. Soon a headhunter introduced me to the fixed income group at J. P. Morgan (now J. P. Morgan Chase) just a block or two away, and I periodically walked over there for a series of protracted interviews with banking people who were waiting for the end of the Glass-Steagall era so they could enter the investment banking business whole-heartedly. It was somewhat disheartening: Most of my interviewers were more interested in asking me what it was like to work at Goldman than they were in assessing my credentials, and nothing came of it in the end.

Another headhunter sent me to Shearson, where I was offered a position in charge of a small group supporting bond futures trading under Stan Jonas. At that time Goldman still had a simple hierarchy of titles consisting of Analyst, Associate, Vice President, and Partner. I found it almost impossible to comprehend the seniority that went with the VP title offered me by Shearson; their bureaucracy seemed to be deeper and closer to that of Bell Labs. A friend there explained to me that there were divisional VPs and firmwide VPs, and that it was better to be a firmwide VP than a divisional one.
2
I liked Stan a great deal and was impressed with his grasp of theory and practice, but I was still not quite ready to leave Goldman.

Then, early in 1988, David Garbasz, by now in charge of RMS, introduced me to Tom Klaffky, the head of the BPA group at Salomon Brothers. Although Salomon had a fearsome reputation as a place with a coarse and brutal culture, they were without a doubt the best fixed-income trading firm in the world, and BPA was the premier quant group on the Street. I was definitely interested in working there.

At David's suggestion, I sent Klaffky my résumé. Then, a few days later, I walked the 100 yards from 85 Broad Street to One New York Plaza to meet him. His claim to fame at Salomon was his participation in the creation of zero-coupon Treasury Strips out of Treasury bonds. Now in charge of BPA under Marty Liebowitz, Tom's empire consisted of several subgroups. Among these was Bob Kopprasch's former options research group, now run by Janet Showers, and Mike Waldmann's mortgage research group.

I proceeded to meet with Tom on several occasions in the middle of 1988, and each time he displayed a burst of fitful interest in having me join Salomon, but then nothing much would happen. Whenever things slowed down, David Garbasz would encourage me to push forward, and I would write Tom another letter outlining my thoughts about how I could contribute to Salomon Brothers. Then I would surreptitiously walk across the street to drop my letter off at One New York Plaza.

The physical delivery was tricky. My friend Mark Koenigsberg worked for Janet Showers, and I was always wary of bumping into him in the lobby of One New York. I didn't want him to know I was interviewing there. One lunchtime, walking over to deliver a note to Klaffky on the Forty-Third floor of One New York, I met Mark coming out of the ground-floor elevator I was about to enter. Flustered, I told him I was there to get a haircut at the barber in the basement, and he promptly escorted me down there to show me where it was. I had to improvise quite fast to avoid getting an unwanted trim.

Against my nature, I was slowly becoming a little more daring in dealing with this unfamiliar, nonacademic and money-centered world. I told Tom (in writing, not in conversation—that would have required a greater quantity of
chutzpah
than I possessed) what level of pay it would take to make me move firms. That I was able to do so impresses me, for inside I still heard my mother's unarticulated but clearly communicated sentiment that one worked for love and interest, and that it was crass to talk about pay.

When Klaffky asked me how much money I was making at Goldman, I exaggerated a little. As a result, I approximately doubled my annual pay when I moved to Salomon a few months later. In those days, I'm afraid, it was common to lie about your salary and bonus. In some sense, we regarded a question about past pay as an invasion of privacy that didn't deserve an honest answer. Many of the people I knew in fact interpreted it as equivalent to a question about how much money you'd
like
to earn at your next job. Nowadays, firms hire companies to conduct background checks on new employees before they begin work, and you cannot hire anyone whose résumé differs in the smallest way from the ascertainable facts.

Klaffky seemed uncertain where to place me inside Salomon, and eventually arranged for me to have lunch with John Meriwether's team, the famed arb group that later became the core of Long Term Capital Management. It must have been my collaboration with Fischer that made them agree to see me, and I worried that I knew a lot less than they thought. Garbasz, like many traders a fluent bluffer, tried briefly to coach me about pari-mutuel betting, a topic he claimed was of interest to members of the arb group. I shudder a little when I think of the day I finally went over to have lunch with them in one of the catered dining rooms high up in One New York Plaza.

I don't remember exactly who was at the lunch. I recall about eight men, some subset of Larry Hilibrand, John Meriwether, Victor Haghani, Bill Krasker, Greg Hawkins, and a few of their more junior team members. I was a comparative novice;
in toto
, I had had just over two years of experience on the Street. The work I had done with Fischer and Bill Toy was inventive and useful, and was later to become a market standard. Nevertheless, most of my knowledge was theoretical. In contrast, the members of Meriwether's group were more savvy than anyone I had ever seen. They understood both theory and practice.

My lunchtime interviewers were unfailingly polite. I recall their asking me some general questions about my work with Fischer; sensibly, they tried to determine to what extent I had truly been his intellectual collaborator. It was hard to answer; no one I've known in finance has displayed Fischer's determination to approach any problem without preconceptions and to think it through for himself. They posed me a technical question about the relative value of an Asian option and a European option, and I gave what I later learned was the wrong answer. They nodded at my reply but didn't correct me. A few days later Klaffky told me that they didn't want to hire me for their group, but thought that I would be a reasonable hire for someone else.

One morning in 1999, more than a decade later, I participated in a conference call with some of the same people. I was at Goldman Sachs and they were at the now collapsed LTCM, being overseen by the consortium of investment banks who bailed them out. Together with my colleagues Kresimir Demeterfi, Mike Kamal, and Joe Zou in the Quantitative Strategies group at Goldman, I had written an expository paper on volatility swaps, a new over-the-counter instrument that allowed retail clients to trade volatility itself as an asset. LTCM was interested in buying volatility swaps in order to offset the volatility risk in some of the still open positions that had contributed to its demise.

That morning its overseer from Goldman had a few of the LTCM partners telephone us to discuss the subtleties of swap valuation. The questions they asked us in that brief conversation showed an immediate understanding of theoretical subtleties that was far more insightful and sophisticated than any questions we had been asked by the Goldman traders we knew. It was a shock to realize that people whose great experience and knowledge straddled both the quantitative and the trading worlds had, despite their sophistication, brought themselves into such a catastrophic state.

With no position available for me in the arb group, Klaffky turned to his own area, BPA, and introduced me to his head of mortgage research, Mike Waldman, who needed someone to lead a new Adjustable Rate Mortgage (ARM) group he was forming. Within a few weeks I had an offer to work for Mike.

I had one brief moment of foreboding when I met with Klaffky to discuss my offer and he asked if he could answer any questions for me.

“I've heard that people at Salomon are much tougher and more hard-nosed than people at Goldman,” I said. “Is that true?”

“That's not quite right,” he said to me. “I think Salomon's a bit like a shark, in a way. You know, sharks have to keep swimming, keep moving all the time, or else they die. That's more or less what Salomon's like.”

I thought it merely odd that he would try to allay my fears by comparing his firm to a shark. I ignored the analogy as well as the advice of many acquaintances, headhunters, and former Salomon employees, who warned me that Mike could be a difficult boss. When I was being courted he was congenial. Always cautious, I agonized through the summer of 1988 and then decided to take the job.

Early in the fall I told Ed Markiewicz I was going to leave Goldman for Salomon. He spoke with Fischer and Jacob, and, when I told him how much money I was being guaranteed, did not come back with a counter-offer. Though I was happy about my soon-to-increase pay, I was just a little disappointed that they didn't try to lure me back.

On my last day at Goldman, when I had completed my exit interview and given up my ID card so that my next exit from the front door of 85 Broad would be my last, I received a call from Scott Pinkus, Goldman's head of Mortgage Research. Scott tried to persuade me stay on at the firm and work on applying the BDT model to asset-liability management. But he played up the software side of the work, and I felt that he, too, viewed me more as a physicist-turned-programmer than a financial modeler. In any event, it was too late for me to reverse my course. I took a short vacation in the Caribbean, and a few weeks later started work at Salomon Brothers.

1
RMS is a common mnemonic for both Risk Management System and Root Mean Square. Volatility—a crucial measure of risk that is defined as the square root of the mean of the squares of the stock's daily returns, or “root mean square” in common statistical parlance. Root mean square is also suggestive of Brownian motion, the process by which a randomly moving stock price diffuses from its initial value in such a way that the average price change is proportional to the square root of the elapsed time.

2
A few years later a lady who cut my hair asked for my title at work. When I said I was a Vice President at Goldman Sachs, she congratulated me on having only one person above me. She didn't understand that I was one of probably 3,000 VPs.

A troubled year at Salomon Brothers

Modeling mortgages

Salomon's skill at quantitative marketing

Mercifully laid off

Throughout the next year I was falling in the dark. Each day I could sense the ground rushing up to meet me, like a bad plane-crash dream that ends in a startled awakening. That year at Salomon, from October 1988 to Thanksgiving 1989, was the worst I ever experienced, and much of what happened to me was as much my fault as theirs. Most of the time I simply felt incompetent. I kept thinking that perhaps I would eventually adjust. I didn't, though I learned a lot.

Mike Waldman, my new boss in Mortgage Research, had quit graduate school to move to Wall Street in the 1970s, very early in the quant game. I soon found out that though he had a quick sharp businesslike mind, he had a brusque manner and some strange habits to go with it. Early every Monday, right after I dropped Sonya at her nursery school, I would rush to our early morning mortgage group meeting where Mike led a discussion of the status of all our modeling projects. We all brought our own breakfast, and as the meeting started, Mike would devote several minutes to scratching out a circular moatlike groove in each half of his sliced bagel, throwing away the doughy detritus and leaving behind a scooped-out half bagel crust into which you could then put butter or jam. It was very disconcerting. I was enviously impressed one morning when someone else in the group got the nerve to ask him “Does it taste better that way?”