Red-Blooded Risk: The Secret History of Wall Street

Where Did the Money Go?

So how did these three great ideas—massive free capital, improved capital allocation, and better price discovery—lead to disaster? Not just the one big disaster in 2007, but the many others: the Drexel Burnham bankruptcy, the Bankers Trust scandal, the Kidder Peabody crash, and Long-Term Capital Management's failure, to name only four. These were among the most advanced firms in these techniques. I haven't included the collateral damage from Wall Street abuses such as the Orange County bankruptcy, nor the non–Wall Street financial firms like Enron, nor the damage overseas as with the Asian financial crisis, nor the ones that entered more people's homes like the Internet stock collapse and the mutual fund timing scandal.

First, let me reiterate that the good from financial innovations far exceeds the damage. There were scandals and bankruptcies and disasters before quants came to Wall Street. Taking the good and bad together, the past 30 years have been the most extraordinarily good economic time for the globe in history. The horrendous times are decades of stagnation or totalitarian repression, not the exuberant and painful times of boom and bust. I know that not everyone shared in the fruits of this time, and even among those who shared the gains were unequal. I consider that a separate issue, however. The new techniques were empowering and liberating. They lifted more people out of poverty than any previous innovations in human history, and they also created ...