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Wall Street versus us

August 9, 2011

There have been two articles in the past few days which address the mentality of people working on Wall Street versus the rest of us.

First, we have this article from William Cohen, posted on Bloomberg.com, which is the first part of a series entitled, “Ending the Moral Rot on Wall Street.” This first part doesn’t contain much new; it goes over just how obnoxious and easy to hate the various Goldman Sachs assholes were when they packaged and sold mortgage debris and then emailed their friends about how much money they stood to make. And the second (and perhaps further) parts promise to explain how we are going to address the corruption and greed. My complaint, which is totally unfounded since I haven’t read the next parts, is that this guy is not disagreeing well. In other words, he’s setting up the guys on Wall Street to be monstrous and ethically vapid. This attitude is not going to help really understand the situation, nor will it lend itself to satisfying solutions. Here’s an example of the kind of “they are monsters” prose that probably won’t help:

These crimes are being committed, he said, by people who “have already made more money than could ever be spent in one lifetime and achieved more impressive success than could ever be chronicled in one obituary. And it begs the question, is corporate culture becoming increasingly corrupt?”

Yes, it certainly does raise that question.

Second, we have this blog post by Mark Cuban, which was originally posted in 2010 but is still relevant. In it, an effort is made to understand the actual mentality of the traders on Wall Street. Namely, they are framed as hackers:

Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

I agree with this characterization, and moreover I applaud the effort to understand the culture. These guys actually do think they are playing fairly within the context of their “game” (and they do care that it’s legal). To change their mindset we need to actually change the rules of the game, not just complain that they are corrupt, because, like in a religious disagreement, they can easily dismiss such talk as irrelevant to their lives.

Going back to the first article, it says:

That Wall Street executives have been able to avoid any shred of responsibility for their actions in the years leading up to the crisis speaks volumes not only about an abject ethical deterioration but also about the unhealthy alliance that exists between the powerful in Washington and their patrons in New York. Our collective failure to demand redress against a Wall Street culture that remains out of control is one of the more troubling facts of life in America today.

I agree that we do need to demand redress, but not against a culture’s ethical deterioration, which is just far too vague, but rather against individual corrupt actions. In other words we need to make the punishments for well-defined evil deeds clear and we need to follow through with the consequences. In order to do this we need to demand transparency so we can start to even define evil deeds. This means some system of understanding the models that are being used, and the risks being taken, and a market consensus that the models are sufficient. It means the actual threat of losing actual money, or even going to jail, if the models being used are crappy or if it turns out you were lying about the risks you were taking – or even if you were ignorant of them.

Categories: finance, news, rant
  1. Eric Zaslow
    August 9, 2011 at 5:30 pm

    Hello mathbabe,

    I was referred to your site by a colleague who had heard me wonder
    the following: is it possible/feasible to create a polymath project with
    the goal of constructing an open-source, sovereign bond ratings
    algorithm which could improve upon Moody’s and S&P? I have read
    (Michael Lewis, Nate Silver) about rather simple but fatal errors
    that the ratings agencies have made, and have witnessed the
    consequences on the US and global economy. Could a community
    of mathematicians do better, say, in the case of sovereign bond
    ratings which are dependent on publicly available information?

    I don’t have the wherewithal to make such a thing happen, but
    in the spirit of “civic duty” you allude to in your blog, I think I should
    at least reach out and pose the question to those (such as yourself)
    who might!

    Thanks,
    Eric

    Like

  2. majordomo
    August 10, 2011 at 3:17 am

    Cathy, I know this is irrelevant to the current topic, but I’d really love to hear your view on a new Johns Hopkins study that shows that mathematical ability may be innate. The study (lead author: Melissa Libertus) indicates that math ability in preschool children is strongly linked to their inborn and primitive “number sense,” called an “Approximate Number System” or ANS.

    Like

  1. August 11, 2011 at 7:32 am
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