I’m currently reading Nassim Nicholas Taleb’s Fooled by randomness. Have read some fifty pages so far. Like his later book The Black Swan, this too contains totally awesome fundaes. And contrary to reports that I’ve heard, it’s extremely easy reading. Either it’s because of my familiarity with derivatives or because I’m just coming off Chaos by James Gleick, which I found extremely difficult to read, and struggled to finish.
Now that that digression is done; in this book Taleb talks about the transformation of Wall Street in the 1980s. With the development of exotic derivatives, and as products became more sophisticated, MBAs and accountants found it difficult to cope. It was simply too much math for them. And they got replaced by Mathematical Physicists of Russian, French, Chinese and Indian origin. People who weren’t necessarily the most practical, but people who were completely at ease with the model. Soon they started recruiting more of their types, and i you look now, Wall Street is filled with people from a math background, and few MBAs work there (I’m talking about the derivatives division; MBAs do exist in large numbers inside the wall; the models there don’t get too complex, right?).
Similarly, in India, currently, the investment banking industry is dominated by Chartered Accountants, with even a large number of the MBAs there coming from a commerce kind of background. As regulations ease and products become more developed, it is likely that these guys are going to find the models too hot to handle, and make way for engineers, or MBAs from an engineering background. And hopefully, the day isn’t too far when we can see the Indian financial industry being dominated by engineers.
The recent forex derivatives “cheating” cases might be the first indicator of accountants finding things too hot to handle. Most CFOs, who sign off on these derivative products are from an accounting background, and understand little about the products they are getting into. It is only when the cash flows show up in the books that they realize they’ve gotten into a bad deal and then cry murder.
I wonder why companies still trust their CFOs (from an accounting background) when they get into complex financial products. They should instead hire bright engineers with a good knowledge of derivatives (i.e. people like me) in order to help them get into proper contracts. Accountants should just remain accountants.
Sometimes one wonders if the tight RBI regulations that prevent the development of new complex products are a conspiracy by the CAs to retain control of their turf.
On the way home from work this evening, I learnt about the dangers of leverage, and why it is especially dangerous when the situation is volatile. I was reading Fooled by Randomness. More importantly from the leverage perspective, I was sitting in the last seat of the bus.