For My Son, And Yours

The Frontline series I mentioned before -- Money, Power & Wall Street -- really hit home in the final episode -- episode four. An important fact to remember for this blog is that my son -- a recent college graduate -- is a mathematician. I've tried to warn him of the moral pitfalls that await him in life but this documentary provides so many concrete examples (compared to my generalities) that I thought I'd use it to reinforce what I have tried to say before.

Frontline: Money, Power & Wall Street (Episode Four)

"NARRATOR: Cathy O’Neil, a mathematician, came to Wall Street in 2007 after beginning her career in academia.

CATHY O’NEIL: I went to U.C. Berkeley as an undergrad. I went to Harvard for grad school. And then I was a post-doc for five years at MIT. And I applied to work at a hedge fund, D.E. Shaw, and I got the job. And I thought this was great.

I was a quant. A quant uses statistical methods to try to predict patterns in the market."

In case you've never hear the term, a "quant" takes their high-level math skill and applies it to gambling on Wall Street (as opposed to furthering the cause of mankind). For instance, I've mentioned that all of this high-powered finance is nothing but a scheme to get at the big pools of money -- the pension funds. I never thought of this particular method (detailed below) of stealing someone's labor before...

"NARRATOR: Her work was used to predict when big pension funds would buy or sell, so the firm could jump in ahead of their trades.

CATHY O’NEIL: I just felt like I was doing something immoral. I was taking advantage of people I don’t even know whose retirements were in these funds.

We all put money into our 401(k)s. And Wall Street takes this money and just skims off, like, a certain percentage every quarter. At the very end of somebody’s career, they retire and they get some of that back. This is this person’s money, and it’s just basically going to— to Wall Street. This doesn’t seem right."

There's a lesson in this next one for controllers...or anybody.

"CAITLIN KLINE, Credit Suisse, 2004-10: Everybody kind of knows in their heart that something’s not right. But once you are making money for a while, you don’t ever want to stop making money."

Is there something in your world that you know in your "heart that something’s not right"? ERAM? URET? A 10-hour workday in a safety-critical job? Week after week of overtime? But "you don’t ever want to stop making money"? Especially "easy" overtime on the midshift?

You're being paid money for your labor -- your special skill. You are not being paid to compromise your conscience. It's not your fault that the FAA hasn't hired enough controllers, soon enough. It is your job, as a public servant, to do everything within your power to make the situation better (as opposed to worse.) That should go for everyone in the human race.

Let's get back to Ms. Kline in her interview. You can see that I'm not unique -- my thoughts about "furthering the cause of mankind" are not particularly insightful. And here's another observation for you; these observations are much easier to make in hindsight. I wasn't any better than anybody else when I was having to make the judgments in real time. Being young and not ever having been in morally confusing situations does not help.

"NARRATOR: Kline was a math major at New York University and considered becoming a teacher. But she remained on Wall Street for six years.

CAITLIN KLINE: You have the sneaking suspicion that you’re not contributing to society. But it was always really easy to say, “I know the risks. They know the risks. None of this is our money. So you know, we can kind of do these things, and it’s all fair game.”"

This is more than just a personal problem of conscience. This is a societal problem. This brilliant woman -- and the thousands like her -- went to Wall Street to gamble with other people's money instead of becoming a teacher. A doctor. An engineer. An air traffic controller. It was a "brain drain" of massive proportions.

Let me pull you back into real time for a second here. We're not even five minutes into this episode and it's a hour long. And this is one episode of four. I really want you watch and listen to every minute. I'm not the only one with insight. You can think for yourself. I'm just here to encourage you to think.

"...And if it blows up three years from now, that’s not going to affect the bonus I make today.”"

Do you want this person working on ERAM? How about a retiree with "no skin in the game"? Yet, thousands were playing on Wall Street with this attitude because that is the way the system was designed to work. Don't worry if it blows up because that won't cost you. Making money off of it (before it blows up) will make you rich beyond your (teacher/engineer/doctor) wildest dreams.

Greed has been around a lot longer than Wall Street. Banksters were not the first to figure out how to manipulate people with it.

"BERTRAND DES PALLIERES: I was— I think I was a star performer, so I probably followed the— the pay curve of the star performers, yeah.

MARTIN SMITH: So between $5 million to $10 million a year.

BERTRAND DES PALLIERES: I mean, I guess so.

MARTIN SMITH: Is that— is it a secret?

BERTRAND DES PALLIERES: Well, it— it was a secret, in fact. I mean, compensations were not public, for all the obvious reasons."

Any kind of secret should set off alarm bells in your head. I'm not naive enough to think that nothing should remain secret. But if you're hiding how much you are paid, there is probably something wrong.

"ALEXIS GOLDSTEIN: I’d really rather not say, if that’s OK, because I just don’t know if that’s publicly available information. But it’s certainly, like, more than you would get at most first-time jobs.

CAITLIN KLINE: I shouldn’t talk about that. That’s in— that’s in the contract. I can’t talk about any salaries or bonuses or anything like that. But it was a lot of money, I mean, especially for young people, you know?

NARRATOR: It wasn’t always this way. For most of the last century, bankers made the same salaries as lawyers, doctors and engineers. The last time Wall Street saw extravagant compensation was in the run-up to the crash of 1929."

And there's the crux of the matter. We forgot. Well, that's not really true is it? We knew about the Great Depression. I'm old enough to have heard the stories from my grandparents. But we thought we were smarter. We thought we understood the concepts and -- for some reason -- thought the details were unimportant. We were fools.

The problem -- my problem, my son's problem, your problem -- is how do we make people remember? Are we doomed to relearn these hard lessons every other generation? Is there an algorithm for that little piece of mental alchemy?

One last thing for when you watch this piece; look for the word "regulate" and all its derivatives.

"SIMON JOHNSON: From the 1930s, we got a period of reform and constraints placed on banks. They became much more regulated. And many of the banks were forced to do what you might call plain vanilla business— taking deposits, lend it out."

"ALEXIS GOLDSTEIN: Normally, the only people that comment on these regulations are the industries that are about to be regulated. And you can probably guess what they say, right? They say, “This is too harsh. You have to take this out. This is going to ruin our business.” They’ll say, “This’ll ruin the economy.”"

Airlines can't fly those antiquated routes. They're too inefficient. They'll ruin the airline business. Oh, wait, that the next blog.

Find some time this weekend. Watch it. Think.

Frontline: Money, Power & Wall Street

Don Brown
September 14, 2012