Wall Street “Quant” Alexis Goldstein Joins the Opposition
Wall Street recruits young, just out of college computer science majors and mathematicians to become “quants” whose skills are used among other things to predict when pension funds are going to make huge trades so that Wall Street can jump in ahead of them and do deals effectively raising the price the pension fund must pay or lowering the profit they might make.
One such young twenty something quant was Alexis Goldstein. Goldstein devised trading software for Deutsche Bank and Merrill Lynch. She has divulged some of Wall Street’s most closely held cultural secrets such as the phrase “rip the client’s face off” which means selling some derivative “solution” to a naive client such as a convent of nuns in Europe at a huge profit to the trader and to Wall Street while convincing the client that it’s the best deal they ever made. Sometimes they refer to these clients as “muppets.”
JP Morgan Chase and Goldman Sachs fanned out all over Europe in the wake of the Commodities Futures Modernization Act of 2000 which legalized derivatives. The legalization of derivatives made it possible to design financial products which shifted the risks and rewards around among different clients, some seeking higher rewards at higher risk and some seeking safety with lower returns and lower risk. Derivatives could be custom designed on the trading floor taking each client’s “needs” into account.
Wall Street investment bankers sold derivatives to municipalities, hospitals, convents, school districts and other institutions mainly dealing with unsophisticated people who had no idea of what they were purchasing or what could be the ultimate denouement. They believed the “F9 monkeys” from Wall Street who were nothing more than salesmen making huge commissions by selling junk to unsuspecting rubes. F9 monkeys put in a couple of inputs on their computer and then hit F9. That priced the derivatives for them and then they hit the road. Star traders could make $10-$15 million a year, a heady sum for a young twenty something.
One of the highly touted products was an interest rate swap. The town of Casino near Rome was looking to reduce the 5% interest rate it was paying on its outstanding debt. No problem. An interest rate swap could reduce the interest rate on its debt to say 2%. Little did the town fathers realize that this meant taking on more risk. They swapped from fixed rate to variable rate, from high interest to low interest. Some counter-party would always take the other side of the bet. If Casino wanted a lower interest rate with concomitant higher risk, there was always some one or some institution that wanted lower risk and was willing to pay a higher interest rate. All went well for a while until the interest rate Casino’s swap was pegged to started to go up. They paid hundreds of thousands more in interest than they bargained for. Casino ended up paying Bear Stearns (now owned by JP Morgan Chase) over a million dollars in interest. They sued and recovered half a million but they are still in the red More than a thousand municipalities and institutions in Europe bought some type of derivative from Wall Street. Potential losses are estimated to be in the billions. Scores of lawsuits have been filed.
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