My Life as a Quant (32 page)

What impressed me most about Salomon was precisely the professional way they used quantitative research to generate business. I thought of financial research as a scientific endeavor, and I loved it with an amateur's passion. At Salomon, they were businessmen: They used financial modeling as a marketing tool, and they tackled it like merchandisers. They were experts at using models as yardsticks to measure and then rank different securities by value, and they were proficient at then using those rankings to push securities to clients.

I wasn't good at marketing and I disliked it, but I learned a lot that year. I also grew to see the logic of using models as sales tools. The truth is that there are so many different securities in the world, so many varieties of stocks, bonds, options, and even bonds with embedded optionality, that it's very difficult for anyone to know which security in a class provides the best value. A model can provide you with a conceptual basis for thinking about value; it can project a scattered universe of bond prices onto a one-dimensional line that orders them by value.

I came to see that creating a successful financial model is not just a battle for finding the truth, but also a battle for the hearts and minds of the people who use it. The right model and the right concept, when they make thinking about value easier, can stick and take over the world. A firm whose clients start to rely on the results that its model generates can dominate the market. This is what happened with Salomon's concept of option-adjusted spread—a short while after they invented it, every other firm on the Street was writing their own version of the model to do the same analysis, because clients demanded it.

Salomon people, who had been in the quantitative business much longer than Goldman, thought about research in this way instinctively. As soon as I arrived, I noticed that their salespeople and quants were prodigiously agile at using quick, back-of-the-envelope methods to compare bonds in terms of yield to maturity or option-adjusted spread. All new hires, not only traders and salespeople but even quants, went through a several-month-long training program. I say “even quants” with real admiration, because at Goldman, in those days, it was considered a luxurious waste of resources to send quants to a training program. Salomon's fixed-income program was exceptional. It was taught by traders, salespeople, and quants who together covered market conventions as well as quantitative concepts and the use of quantitative tools. There were regular exams, and the trainees became expert at bond math. Everyone had studied Homer and Leibowitz's classic
Inside the Yield Curve
; they emerged from the program with a visceral feel for yields, forward rates, and durations.

To my admiration, it was clear that someone at Salomon had once understood the advantages of a firmwide, uniform interface to all its models. The sales tools and models that everyone in the firm used in 1989 ran on an outmoded and clunky Quotron terminal, an infrastructure that had been built in the 1970s under the farsighted leadership of Michael Bloomberg. Awkward though it was, everyone at Salomon had learned how to use the Quotron proficiently to access internal and external information, in much the way that people used Web browsers a decade or more later. In 1989 Bloomberg was no longer at Salomon but already the head of his burgeoning information and modeling-tool empire, and his Bloomberg terminal for clients was by that time far in advance of the Quotron. A few years later I was pleased to see that the BDT model, too, was available through his terminals.

Throughout 1989 my problems worsened. In truth, I was still a bit of an amateur who didn't know as much about the world of sales as most of the comparably senior people around me. My friends Mark Koenigsberg and Armand Tatevossian still tease me about a stupid answer I gave to a question about the term structure of volatility that Mike squeezed out of me at a BPA meeting. I can only plead guilty. It didn't help that Mark would joke publicly about how much money he imagined I had been guaranteed to join BPA.

Month after month I clenched my teeth and tried to stick it out. Sometimes I imagined that with enough time I would eventually manage to become one of them. Most of the time, however, I longed to leave, but since my employment contract guaranteed my bonus for 1988 and my total compensation for all of 1989, I was reluctant to give that up, and so I struggled on.

Working for Mike was no pleasure, though, even for someone with fewer faults than I had. He seemed to have to control everything. Sometime in early 1990 Phelim Boyle, a well-known pioneer of quantitative finance and a professor at the University of Waterloo in Canada, invited me to speak at an academic conference on the BDT model, which had just been published. Mike refused to allow me to attend and to talk about my previously published work, even on my own time. When I asked why, he smiled and said that we shouldn't help the competition. Like many bosses on Wall Street, he thought he owned the people who worked for him. I suppose I believed that, too. I turned down the invitation.

I wasn't the only unhappy person in the mortgage group. In the end, I noticed that those who had previously enjoyed some semblance of an independent life, in business or academia, could not long tolerate Mike's need to stifle them. Most of the senior people who joined during that year were gone a year later. Some, like me, had to leave because they were too different from Mike; others I knew, like Ravi Mattu who had moved to Salomon from Citibank, had to leave because they too closely resembled Mike in their skill sets and felt suffocated. Only fresh young recruits who had been imperceptibly eased into servitude before they knew any other kind of life could tolerate the incessant control. Finally, a few years later, I heard that Mike himself had to leave.

My personal end came fast. In late 1989, in a bad market, Salomon began to lay off staff. Layoffs are always more convenient for a firm than firings; it is easier to let someone go because of adverse economic conditions than because of some inadequacy that might be challenged in court. Firms do not publicize the names of the people laid off, but this is how it works: First, you hear the general rumor that layoffs are about to occur. Then you begin to hear mention of one or two people who have suddenly disappeared from work. Finally, you notice that some of the people you normally interact with are beginning to avoid you. Later, you realize that they knew in advance. The sad truth is that when you know that friends or colleagues are about to be laid off and you can do nothing about it, you avoid them, too.

One day, walking together down the stairwell between floors, Mike encouraged me to explain really thoroughly to the young man working for me exactly how far I had progressed with my regression model of ARMs prepayment rates. “Got to keep bringing the younger generation up to speed!” he smirked unconvincingly, as he tried to make sure nothing would be lost when I was gone. I understood subliminally that I was going to be let go, but I couldn't quite absorb it. I continued to think of sticking it out until I found a better job, but I didn't really look for one.

Then, one afternoon, early in the Thanksgiving week of 1989, I received a call at my desk from Mike, who asked me to descend a few floors to see him in an office downstairs. I felt my heart sink into my stomach. I quickly called Eva, telling her I thought that “it” was about to happen. She told me in the nicest way not to worry about it. Then I left my office and went downstairs.

When I knocked on the door of the unfamiliar office to which I had been summoned, Mike opened it. Inside were Tom Klaffky, who had hired me, Marty Leibowitz who ran all of BPA, and someone from Human Resources or the legal department to ensure that everything was done properly. I sat down and, in words I no longer recall, they told me that I was being laid off, but that I would continue to be paid (at a lower rate,
sans
bonus) for a few more months. They told me to debrief the people working for me about the state of my projects and then to leave the building.

When you're told to leave, you feel as though you've done something shameful and you simply slink out. I spent a short time with the young man who worked for me, who had obviously been told what was coming, and then, without a farewell to anyone, set off to meet my wife and daughter Sonya at a pediatrician's appointment, glad to have a distraction. Finally, it was just about over.

We celebrated Thanksgiving with friends in upstate New York a few days later; then, on the last Sunday of the holiday weekend, I drove downtown to my office at Salomon at 7 A.M., when it was certain that no one would be there to see me, to pack my books into boxes for shipping. A few days later I received confused calls from Mark and Armand, who had no idea why I was no longer at work.

Ultimately, it wasn't that bad. I like to imagine there was a kind of karma working its way with me: If I hadn't left FSG for Salomon, if I hadn't suffered the humiliations of the inadequacy I felt at Salomon that year, I would never eventually have come back to a position at Goldman that suited my skills and personality so much better.

I never saw Mike Waldman again, though for about a year I often had fantasies of what I would say if we met on the street. But, about six years later I was invited to give a speech about Fischer Black on the occasion of his posthumous induction into the Fixed Income Analysts Society Hall of Fame. At the award luncheon I found myself seated at the table of honor adjacent to Marty Leibowitz, by then the Chief Investment Officer at the TIAA-CREF, Teachers Insurance and Annuity Association-College Retirement Equities Fund. As Waldman's boss's boss at Salomon, he had delivered my sentence on that November day in 1989. This time he was cordial and complimentary, and neither of us mentioned the circumstances in which we had last spoken to each other.

Goldman as home

Heading the Quantitative Strategies Group

Equity derivatives

The Nikkei puts and exotic options

Nothing beats working closely with traders

Financial engineering becomes a real field

Out on the street in December 1989, I grew slightly panicked. I visited headhunters, went on job interviews and called most of the people I knew. Several possibilities emerged, none compelling. I had no desire to fall into the wrong position; I had seen too many people move from one one-year job to another, making money but spoiling their reputation.

Through all these mental peregrinations I thought of Fischer as my lender of last resort. Holding no grudge against me for having left Goldman, he brought me in to interview with the Quantitative Strategies (QS) group he led in the Equities Division. There I reacquainted myself with Jeff Wecker, who was in charge of the trading systems being built in the group, and Bill Toy. I also met Bob Granovsky, a yellow-bearded, perpetually perplexed-looking equity options trader whom everyone called “Granny”; he had been there trading options for as long as anyone could remember. Then Fischer offered me a job.

I had been the head of a group in FSG and at Salomon, but QS was a small, flat organization with no managerial slot for me. Nevertheless, I thought the position would suit my abilities—at bottom, I liked doing research. I did worry a little about pay—Bill Toy, now departing the quant world to realize his dream of moving to the business side, warned me that compensation in equities was lower than it was in fixed income. I queried Fischer who brushed this aside. Without further anxiety, in mid-December I accepted my destiny and agreed to return to Goldman and begin working for Fischer on January 22, 1990.

It didn't go as planned. A few days before I was to start, Fischer unexpectedly called me at home to say that he was leaving the Equities Division for Goldman Sachs Asset Management (GSAM), and that he had recommended that Jeff Wecker and I jointly comanage QS. Shortly thereafter, the heads of the Equities Division sent out a Memo To All that announced Fischer's move and our ascension to his former role. Nowhere did the memo mention that I was not currently an employee of Goldman Sachs. In subsequent years I learned that there's nothing the firm likes more than the appearance of a smooth transition.

For Fischer, GSAM may not have been the best place, and I suspect they twisted his arm to move him there. Coinventor of the world's most famous and useful financial model, he was more of a thinker than the manager or salesman that GSAM needed. Though his attitude to change was invariably positive and though he had only praise for the firm, I felt that they had not completely figured out how to use him to their greatest advantage.

For me, though, this was a lucky stroke and the beginning of several years of the most absorbing work I had ever had, a time of almost drunk delight, tempered though it was by battle with my peers (and bosses) far on the ringing plains of lower Manhattan. I was immensely happy to return to Goldman Sachs, and lucky, too. By Wall Street standards it was a civilized place. During bad times in bad organizations, I had sometimes childishly wished for retribution, willing to be hurt myself as long as it hurt my employers, too. I never felt that way about Goldman. It was the only place I never secretly hoped would crash and burn.

Jeff thought it wonderful that he and I had an opportunity to step into Fischer's shoes, and predicted that we would be Goldman Sachs partners in a few years. Older, less upbeat and more battered by history, I was dubious about our prospects. Still, I set about acclimating to my new home after so many years as a fixed-income person.

In 1990, Equities was the most old-fashioned division at Goldman. Its workers radiated a genteel white-collar, white-shoe pedigree, and they looked down on the rough-and-tumble
nouveau riche
world of the Fixed Income bond traders, who in their turn thought themselves a little classier than J.Aron, the commodities and currencies business Goldman had acquired in the 1970s. That year I met a woman from Aron who didn't have the obvious Harvard/Wharton aristocratic pedigree typical of so many Goldman employees, and she unashamedly told me that she would never have been at Goldman had she not been a part of J. Aron when they were acquired. Aron had a scrappy make-do culture, and by 2004 their people were running most of the trading divisions in the firm, including equities.