Back in 1933, when Ferdinand Pecora uncovered huge scandals on Wall Street, they were easy for all Americans to understand, and easy to protect against. This time around, Wall Street’s activities are incomprehensible not only to the lay person but even to senior bankers: a big part of the reason why the crisis was so big and so bad is precisely that people like Stan O’Neal and Bob Rubin failed at their job of understanding the risks their banks were taking. They were knavishly foolish, but still more fools than knaves — which means that it’s extremely hard to make a strong case in front of a jury that what they did was criminal.
And thought to himself, "I think I wrote something similar earlier." Sure enough, FLG had, and on the exact same topic referring to the exact same issue:
The real problem isn't Li's model, subprime loans, CDOs, or credit default swaps. The real problem is that the MBAs who run the banks don't have enough mathematical education, and may ultimately not be smart enough to understand the nuances and potential dangers posed by complex financial models and products created by the quants in the abstract, and perhaps nobody can know what the possible results will be when those products are shot around the world by automated systems.
Speaking of which, here's a conversation from earlier today:
Mrs. FLG: It'll be good when you're done with the Masters.
FLG: Uh, well, um, I'm toying with the idea of getting another one.
Mrs. FLG: Ugh. I figured something like this was coming. In what exactly?
FLG: Uh, financial mathematics.
Mrs. FLG: Why?
FLG: Well, I really want to understand Itō calculus and Brownian motion.
Mrs. FLG: Why?
FLG: Because I don't now.