The Answer is the Question, the Question of the Deal

My recent post on the sorry state of financial engineering seems to have touched a raw nerve in the FE community.

I will not attempt to respond to anonymous comments since the US constitution gives every citizen the right to look his accusers in the eye. People who wish to remain in the dark usually have nothing to contribute themselves, and that’s fine of course. Besides, I am not here to try to win a popularity contest. Are you?

The most interesting puzzle is why someone who apparently teaches FE himself would bad-mouth his own occupation. It seems counter-productive and nonsensical at best. Perhaps you should reflect on this for a while before rushing in with sour grapes. By the way, please leave Baruch College out of this. Institutions don’t teach classes, professors teach classes. I wrote this on my own time, and nobody else but me needs to feel responsible. Taking responsibility is, however, what we are really talking about.

I wrote this post four years ago but was waiting for this easily predictable cesspool (the credit crisis) to point out that if financial engineers had been actually doing what they claimed to be doing, this mess would never have happened.

In the early days of bridge building and aerospace engineering, many bridges and airplanes crashed. That’s ancient history for you guys, but very relevant. Thereafter, the field improved rather quickly and, magically it seems, bridges and airplanes stopped crashing. The same thing could happen for structured deals.

In the end, it will not be possible for financial engineers to walk way clean from a trillion dollar disaster by saying they had nothing to do with it. They had a lot to do with it. What matters now is not to try and exculpate ourselves like the French cop in Casablanca, but to start getting to the heart of the matter. This means that we need to engage the field and find out how to become relevant to the mainstream segments of American finance.

These people manage other people’s money (yours, for instance) with essentially zero knowledge of structured finance and of what they are, in fact, investing in. They don’t have a Ph.D. in anything and are just trying to feed their families, and yours too. Why don’t you help them figure out what the Hell is going on out there, instead of speculating on the transcendental meaning of copula functions, and on how to invent the next one?

I would love to be proven wrong about FE graduates. What is it they say in Missouri? Don’t tell me, show me.

Originally published at The Spectrum and reproduced here with the author’s permission.

5 Responses to "The Answer is the Question, the Question of the Deal"

  1. Guest   December 8, 2008 at 3:20 am

    It appears to me that Wall Street didn’t want the Financial Engineers to inderstand things like the need for a downside put in the equation in order to adequately address the mortgage securities and their derivitive’s risk.Wall street supplied the jobs and academia supplied the workers exactly the way Wall Street wanted them. Bean crunchers being what they are only publish the numbers that the power brokers want to be seen. Whats the point of hiring FE’s if they (those securitizing the debt) have to use honest numbers and also have to pay more just to get someone capable of giving them. These jobs will dry up just like all the rest, vapourizing into nothingness just like so much of the wealth that many thought they had but instead turned out to be elusive.As another blogger wrote:”We might as well commit hari-kari sooner than later. The alternative is to go on living in this Alice-in-Wonderland chaos having to think like Keynes, then Marx, then Dali…”It has really become quite surreal.

  2. Anonymous   December 8, 2008 at 12:54 pm

    The biggest problem I have with this article is the continued use of “financial engineering”. I am a practicing, registered Petroleum Engineer. I have been active in drilling, production, and reservoir engineering for twenty-five years. The idea that “Wall Street” could consider their “CDO’s”, “SIV’s”, “MBS” as engineering work is an insult to any person who considers himself or herself as a practicing engineer.I would prefer this be re-titled as Financial Sanitation Engineers. They have proven their ability to generate “garbage in – garbage out” financial instruments that maximized their bonus with no concern to the outcome of the economy or the poor investor who bought these “bill of goods”. It was a huge mistake to allow Calculus and Differtial Equations to touch the financial community. Now, everything can be made into a “derivative”. Would that be first order or second order?

    • Sylvain Raynes   January 3, 2009 at 10:03 pm

      I totally agree with you sir. In fact, at this moment, financial engineering is neither. Of course, instead of merely deploring this fact, I am trying to do something about it, because no matter how trivial the subject might be to you, incompetent financial engineers can cause much more damage to the economy than incompetent petroleum engineers. As you obviously know already, making a contribution to any field, including basket weaving, is very difficult.I dare hope that people like you will, one day, join the fight for standards rather than smugly remain on the sidelines. Good luck, anonymous sir.

  3. walt   December 12, 2008 at 3:54 pm

    This PhD chemist would wellcome more calculus in FE if it meant an end to babble like “the rate of increase in inflation is slowing down.” Just show me the graph.On another hand, biologists are now using statistics, which reveals they are little more than bean counters.Don’t get me started on ‘models.’

  4. Kachda Ram   December 15, 2008 at 3:00 pm

    How much of this mess was created by Financial Engineers as opposed to the MBA managers who refused to listen to the FEs ? Time and again we hear that enough people warned upper management of most banks regarding the dangers in investing headlong into these securities without adequate insight, but they refused to do it in order to chase profit margin. As Chuck Prince summarised, they kept dancing while the music played.Why not blame the accountants who rated these securities AAA at S&P and Moodys ? Why not blame the real estate agents who helped creditors in falsifying credit scores and income history ?There is no point in blaming only financial engineers for this. While the tide was rising, everyone enjoyed the ride. Now that the tide is giving out, you blame the oarsman ?