Nerds on Wall Street: Math, Machines, and Wired Markets

12.6. Quants Who Saw It Coming

There was an e-mail thread that was passed around among a group of MIT people working in quantitative finance. It seems to have disappeared, along with many other lists of this sort, replaced by discussions on the Web. Most of the time, the thread was comprised of requests for open source mathematical code, technical questions, and an occasional puzzle. Toward the end of 2007, inspired by a couple of "blame the quants" articles in Technology Review and Forbes, the topics turned to the stressed financial system. By 2008, the list appeared to have vanished. Here are some excerpts from the 2007 discussion, which give a sense of what it was like when the sky started to fall.

It didn't take a quant to realize the inordinate risks being generated. Some of these guidelines were blatant, creating notes commonly referred to as "liar loans."

Everyone was simply crossing their fingers that the accidents wouldn't happen all at once or all in the same place. Everyone knew there would be accidents; they were just hoping for them to be spread out in time and geography.

It was commonly known by industry insiders that these loans would blow up. You could go to any mortgage conference and hear the jokes and labels they gave to these loans and underwriting guidelines. Believe me, this was no surprise to anyone in the industry. The only surprise was how fast investors walked away from buying this crap.

For quants in control functions (or rating agencies), there's often ...