My Life as a Quant (29 page)

Within a year, E. F. Hutton, damaged by a check-kiting scandal, was acquired by Shearson (another famous company whose name finally disappeared after mergers with Lehman Brothers and American Express). As a result of the restructuring, David pulled the ripcord. With the cash he received, he continued to fund RMS's development in Chicago throughout 1988. He told me they were close to making a sizable sale of their system to Shearson's trading desk.

David was excited about all these possibilities, and was spending lots of time in New York drumming up clients. I invited him over for a Rosh Hashanah dinner. He was tightly wound; he kept everyone entertained, working the table after dinner like a comedian in a club, sliding from chair to chair to engage different people, telling everyone about how well things were going.

Each year the Securities Industry Association has its annual meeting in New York with many exhibits devoted to financial software and hardware. RMS took a booth there in 1988 and displayed their risk system. It was beautiful: You could alter a yield curve by dragging at it with a computer mouse, and then see the subsequent effect of the change in interest rates on your bond or options portfolio.

Then came Euripidean disasters. Sometime in late 1989 we heard that O'Connor & Co. had obtained a preliminary injunction to stop David from selling the RMS system. We heard that O'Connor claimed that RMS had used O'Connor's trade secrets. David told me that he was fighting them in court. He said that they imagined that the well-known duration hedging techniques he provided in RMS were proprietary to them, whereas they were widely used on the Street—industry practice, in fact.

One summer weekend that year he and Ted Dengler, an exoceanographer friend of David's who had also become an options trader at Goldman, visited us in a house that we rented for the season on Fire Island. As we threw frisbees on a deserted stretch of beach, talking while keeping a watchful eye on my daughter Sonya, I remember David telling me that he had gone to see the movie
Tucker: The Man and His Dream
, directed by Francis Ford Coppola. It was the true story of how an inventor in the late 1940s tried to take on Detroit by building a much better car, and how Detroit then both copied and crushed him.

The expensive legal battle and the injunction put an end to RMS. In 1995, after giving a talk at a conference, I was approached by someone I knew who had worked at O'Connor during the RMS episode. When I asked if he had known David, he told me that O'Connor had been intent on shutting down David's enterprise. With their deep pockets, he said “they had guys spending all their time running
diff
on RMS's files and the O'Connor code.” (
Diff
is one of the great suite of UNIX tools that make a programmer's life easier. It compares two different files of text and finds any common strings of words in them, a simpler version of current bio-informatics programs that search for common strings of DNA in the mouse and human genome.) I have no idea whether there were in fact commonalities, but even independent people coding the same well-known algorithm might end up writing vaguely similar chunks of code.

O'Connor eventually disappeared, too, absorbed into Swiss Bank, which itself subsequently merged with UBS. Starting in 1990 David disappeared into some alternate nonfinancial New York; none of his old friends saw him anymore. Someone reported that he'd become a gourmet cook. I called him once and left a message, but was unable to track him down. I never resented it; I understood from my own experience the embarrassment of leaving a field. Ted told me that he ran into David in Central Park one afternoon in the mid-1990s, and exchanged a few words with him.

One Sunday morning in the early summer of 1998 I went for a run on Riverside Drive. The road was filled to overflowing with the annual AIDS march. Returning to my apartment, I walked past the crowds watching marchers on the corner of Eighty-Third Street. Suddenly I heard a vaguely familiar voice behind me, and turned to look. On the corner were a man and a woman with whom I briefly exchanged glances, and their child of four or five. A moment later I realized it was David, and I watched as he turned around and headed back down Eighty-Third Street towards Broadway with what I presumed were his wife and child.

Then, in October 2000 I was named the Sungard IAFE Financial Engineer of the Year, and gave a speech at the annual dinner in which I thanked several people, including David. The speech later appeared on the IAFE website, and a friend of David's, “googling” him in early 2002, found my reference. Suddenly, after more than twelve years of silence, David called. Now a successful entrepreneur and investor, he was passionately interested in mathematics education, and was working to persuade Israel, his native country, to adopt a more rigorous school mathematics curriculum. He wanted me to get involved. We met once or twice subsequently, and he was the David of old, confident and energetic. He and his wife and two children lived in New York and spent weekends on their farm in upstate New York. He seemed to have every-one's idea of a good life.

Peter Freund, though he was head of the burgeoning bond options business, also did not stay very long at Goldman. About eighteen months after I arrived, he left for Bankers Trust to start up their credit derivatives business, and is now commonly regarded as one of the founders of that industry.

Dave Griswold, who had used my models to build the new options trading system for Peter's group at Goldman, followed him to Bankers as a software consultant. There he created yet another object-oriented language he called
Seymour
, a pun on C++. Later, Dave started several small companies in succession, most of them focused around his love of computer languages in general and Smalltalk in particular. The last of these companies, Animorphic, used its Smalltalk expertise to produce a very fast Java interpreter, and was acquired by Sun Microsystems in 1997, presumably leaving Dave independent enough to continue to follow his true interests.

Like so many of the firms on the Street in the mid-1980s, when I began, Bankers Trust no longer exists as an independent entity. It became unviable in the mid-1990s after its involvement in the derivatives scandals of Orange County and Procter and Gamble, and was acquired by Deutsche Bank.

Jacob Goldfield, the
wunderkind
on the bond options desk when I arrived, was the only one of Peter's traders at that time who went on become a Goldman partner, and he did so quite rapidly.

Jacob had a precocious trading-genius aura that was augmented by his conspicuous idiosyncracies. While almost everyone new to Wall Street in those days wore suits and carried briefcases, he arrived each day lugging his belongings in a Jansport backpack. His face stubbled and impassively pale, he traversed the trading floor and rode the elevators up and down 85 Broad Street in stockinged feet, a silent character in a Munch painting. I still run into people nowadays who visited Goldman in the late 1980s and, though they don't recall his name, ask me about the trader who wore no shoes.

Jacob was very good at saying very little, an excellent quality in a trader. He had an intimidating email style, radically terse—no “Dear” or “Hi” at the beginning, no “Thanks” at the end, no punctuation, grammar or capital letters, no unnecessary segues or conventional lead-ins or fadeouts—just one cryptic sentence or query encapsulated entirely in the subject heading of the email, with no subsequent body. It was instant messaging ahead of its time, I suppose.
“What do u think about xxxx?”
the subject of an email might say. I would reply in a carefully thought out paragraph and then receive a three-letter message with “
Thx
” in the subject. I always ended up feeling like an uninhibited babbler.

One day in 1986 or 1987, Jacob called down from the trading floor to my office in FSG to ask me to check out a young man who had been introduced to Goldman through a friend of Bob Rubin's wife. I went up to Rubin's office on Goldman's executive floor. The interviewee was a young Israeli, aged 19 or 20, who told me that he had completed high school at fourteen and proceeded straight to medical school. Several years later, he said, he had decided to abandon medicine and study physics at the Sorbonne. Now he had come to New York. Bob Rubin had asked Jacob to speak to the young man, and Jacob passed him on to me.

When I asked him why he was interested in working at Goldman, he replied that people had told him that because he was so smart, he should “go into options.” This didn't impress me; I have always been skeptical about intellect in search of problems. We spoke for a half hour or so, and several things about his story seemed curiously illogical. Medicine seemed an unlikely choice for someone accomplished enough to finish high school at fourteen; I found it hard to imagine a fifteen-year-old with the aplomb to dissect cadavers and perform gynecological exams. And why go all the way from Israel to the Sorbonne to study physics?

I began to quiz him about physics and found that his knowledge was semipopular. When I asked him what he had read, he mentioned Capra's
The Tao of Physics
, an entertaining and fashionable mystico-physical book about quantum mechanics and Buddhism. Though he knew a little about the definition of an option, he knew nothing about the theory of how to value them. I pointed out these inconsistencies to Jacob, and said I wouldn't hire him.

A few months later, sitting at my desk, I picked up the ringing phone to hear Jacob, again calling from Bob Rubin's office. In his usual give-no-information style, he queried me: “Tell me, do you remember that young Israeli guy you interviewed? What did we conclude at the time?” The reverberating tone indicated that my voice was coming out at the other end on speakerphone.

I answered carefully.

“I thought there was something fishy about him,” I said.“He seemed to know too little about the things he was supposed to be good at. For someone who was supposed to have studied physics, he didn't have much depth. Why do you ask?”

“He was arrested a few days ago in Ace Greenberg's office at Bear Stearns—entering under false pretenses,” replied Jacob, only slightly more loquacious than usual. I think he wanted Bob Rubin to hear what a good call he and I had previously made.

After Peter Freund left Goldman, Jacob soon became head of the bond options desk, and then, a few years later, one of the youngest Goldman partners ever, eventually running the entire swaps desk. He left the firm in 2000 to pursue his own investments, and recently became Chief Investment Officer for Soros Fund Management.

Observing all this mobility had its effect on me, too. By 1988, after only two and a half years in FSG, I had grown weary of the constant instability. I had worked for four heads of FSG in less than two years, and a fifth one, Markiewicz's replacement, was clearly looming.

I had also began to feel that my lack of a formal economics background would count against me. After completing my work on BDT and GS-ONE I began to think about new projects. When I told Ed Markiewicz that I would like to work on a better model for valuing the delivery option embedded in Treasury bond futures contracts, he said I should check with the “brains trust” on whether that was reasonable.

The brains trust was Jacob's apt name for Bob Litterman, José Scheinkman, and Larry Weiss, three very smart PhDs in economics who were also in FSG. Jacob, now making lots of money for the firm, had begun to refer to them by that name, and Ed, who admired Jacob, used it, too. Though Bob, Larry, and José deserved their reputation, I was uncomfortable with further intellectual constraints.

Finally, there was the question of pay, always forefront in everyone's mind. In those days at Goldman, the value of your annual bonus was communicated to you just before Thanksgiving, and then paid in mid-December. The archaic payroll system was unable to cut a check for more than $100,000 dollars. If, on that December day when Goldman delivered the actual bonus payment to you, your year-end bonus was, say, $1,000,000, then you received ten checks, each one sealed in its own envelope, the whole bundle neatly stacked and secured by a rubber band. Bonuses were all paid on the same day, and someone senior went around the floor handing out the check bundles to each employee. Thus, although bonus amounts were private and company heads encouraged you to keep them that way, you could guess the order of magnitude of someone's bonus by the thickness of their deck of checks. Even a minibundle of two checks was instantaneously distinguishable from one. Some traders received a fat stack and some of them flaunted it. One well-paid young trader had a habit of taking his bundle and silently riffling through it, meticulously counting the envelopes one at a time in full view of his colleagues. Nowadays, the payroll system has no check-size limit, or, more honestly, no limit my bonus was ever able to cross.

Goldman was wisely conservative and pay grew slowly. As long as you kept working at the same firm, your future bonus was determined by your past. The raise you got in a good year, or the cut in a bad one, was quoted as a percentage of what you made the previous year, which had the effect of damping a raise and cushioning a decline in your compensation. It wasn't easy to move to a new level. Some people who worked for me have detested this smoothing, arguing heatedly you should be paid “what you're worth” each year. Personally, I didn't dislike it that much. In research, who knows exactly how to put a number on your contribution?

More than pay, I cared about doing something interesting; had someone offered to make me the Goldman Sachs partner in charge of Information Technology for the back office, I would have refused. Nevertheless, in early 1988, even I started to become dissatisfied about my compensation prospects in FSG.

I took to on-and-off commiseration with Bill Toy, also an ex-physicist and my collaborator on BDT. Bill, who had arrived on Wall Street a year or so before me, was already in the far reaches of “disgruntledom.” Somehow, he had internalized the trading-and-sales view of quants as unworldly
luftmenschen
, and had by now acquired a disdain for the stigma of having a PhD that bordered on self-hatred. Though he wanted to be one of “them”—the front-office real “businesspeople”—to them, however, he was still just a quant.