Tag: investment bank

The Quants

Since investment bank bashing seems to be in fashion nowadays, let me add my two naya paise to the fire. I exited a large investment bank in September 2011, after having worked for a little over two years there. I used to work as a quant, spending most of my time building pricing and execution models. I was a bit of an anomaly there, since I had an MBA degree. What was also unusual was that I had previously spent time as a salesperson in an investment bank . Most other people in the quant organization came from a heavily technical background, with the most popular degrees being PhDs in Physics and Maths, and had no experience or interest in the business side of things at the bank.

You might wonder what PhDs in Physics and Maths do at investment banks. I used to wonder the same before I joined. Yes, there are some tough mathematical puzzles to be solved in the course of devising pricing and execution algorithms (part of the work that us quants did), which probably kept them interested. However, the one activity for which these pure science PhDs were prized for, and which they spent most of their time doing, was C++ coding. Yeah, you read that right. These guys could write mean algorithms – I don’t know if even Computer Science graduates (and there were plenty of those) could write as clean (and quick) C++ code as these guys.

While most banks stress heavily on diversity, and makes considerable efforts (in the form of recruitment, affiliation groups, etc.)  to ensure a diverse workplace, it is not enough to prevent a large portion of quants coming from a similar kind of background. And when you put large numbers of Physics and Math PhDs together, it is inevitable that there is some degree of groupthink. You have the mavericks like me who like to model things differently, but if everyone else in your organization thinks one way, who do you go to in order to push your idea? You stop dropping your own ideas and start thinking like everyone else does. And you become yet another cog in the big quant wheel.

The biggest problem with hardcore Math people working on trading strategies is that they do not seek to solve a business problem through their work – they seek to solve a math problem, which they will strive to do as elegantly and correctly as it is possible. It doesn’t matter to the quants if the assumption of asset prices being lognormal is widely off the mark. In fact, they don’t care how the models behave. All they care about is about their formulae and results being correct – GIVEN the model of the market. I remember once spending a significant amount of time (maybe a couple of weeks) looking for bugs in my pricing logic because prices from two methods didn’t match up to the required precision of twelve decimal places (or was it fourteen? I’ve forgotten). And this after making the not-very-accurate assumption that asset prices are log normal. The proverb that says, “measure with a micrometer, mark with a chalk, cut with an axe”, is quite apt to describe the priorities of most quants.

Before I joined the firm, I used to wonder how bankers can be so stupid to make the kind of obvious silly errors (like assuming that housing prices cannot go down) that led to the global financial crisis of 2008. Two years at the firm, however, made me realize why these things happen. In fact, the bigger surprise, after the two years there, was about why such gross mistakes don’t occur more regularly. I think I’ve already talked about the culprits earlier in the post, but I should repeat myself.

First, a large number of guys building models come from similar backgrounds, so they think similarly. Because so many people think similarly, the rest train themselves to think similarly (or else get nudged out, by whatever means). So you have massive organizations full of massively talented brilliant minds which all think similarly! Who is to ask the uncomfortable questions? Next, who has time to ask the uncomfortable questions? Every one, from Partner downwards, has significant amount of “day to day work” to take care of every day. Bankers are driven hard (in that sense, and in that they are mostly brilliant, they do deserve the money they make), and everyone has a full plate (if you don’t it is an indication that you may not have a plate any more). There is little scope for strategic thinking. Again, remember that in an organization full of people who think similarly, people who have got promoted and made it to the top are likely to be those that think best along that particular axis. While it is the top management of the firm that is supposed to be responsible for the “big” strategic decisions, the kind of attention to details (which Math/Physics PhDs are rich in) that takes them to the top doesn’t leave them enough bandwidth for such thinking.

And so shit happens. Anyone who had the ability to think differently has either been “converted” to the conventional way of thinking, or is playing around with big bucks at some tiny hedge fund somewhere – because he found that it wasn’t possible to grow significantly in a place where most people think different to the way he thinks, and no one has the patience for his thinking.

This is the real failure in investment banking (markets) culture that has led to innumerable crises. The screwing over of clients and loss of “culture” in terms of ethics is a problem that has existed for a long time, and nothing new, contrary to what Greg Smith (formerly of Goldman Sachs) has written. The real failure of banking culture is this promotion of one-dimensional in-line-with-the-party thought, and the curbs against thinking and acting contrary to popular (in the firm) wisdom. It is this failure of culture that has led to the large negative shocks to the economy in the years gone by, and it is these shocks that have led common people to lose money rather than one off acts by banks where they don’t necessarily act in the interest of clients. And irrespective of how many Business Standards Committees and Risk Committees banks constitute, it is unlikely that this risk is going to go away any time soon. And I can’t think of a regulatory cure against this.

Going Global

Ok the second word in the title doesn’t refer to B-school slang. It means “global” in the true sense of the word, and has nothing to do with what my father used to call as “bulldology” (derived from the kannada word “bullDe” which essentially means “globe” (in the B-school sense) )

Ok so the story goes back to 2003, when I headed my way north all the way to Delhi, to intern at IBM Research. I would be staying at the IIT Delhi hostels during the course of my visit. I traveled by Rajdhani express, and had rotis and dal makhni through the journey. And in the mornings I’d get a flask of hot water along with “chai saamagri” (tea bag, sugar, milk powder, etc.)

That was when it hit me that for the next two months I’d be in chOmland, devoid of access to South Indian food, and good filter coffee. I remember getting paneer-fatigue within two weeks of my stay in Delhi. I would salivate at the very thought of going to the nearby “hotel Karnataka” and eating “meals” for a then princely sum of Rupees Fifty. The primary reason I got bugged with my internship was that I wasn’t getting my kind of food, and coffee.

Two years later, I would travel to London, for yet another internship, this time at an investment bank. The day I landed in London, I headed out for lunch with a few friends. Picked up a sandwich, and then it hit me how far away from home I’d come. Sandwich, for lunch! And I was the types who used to say stuff like “bread is for dogs”.

I remember going to this Sri Lankan store in Eastham every two weeks, carrying back “pirated” (smuggled, actually) packets of MTR Ready to Eat food, and frozen chapatis. And every evening I would microwave chapatis and some chOm dal or sabzis. The same chom food that I had so despised two years earlier was “home food” now. Of course every time I went to Eastham I’d also go to this “Madras Restaurant” and thulp madrasi masala dosa.

I don’t know where the knee-bend/point of inflexion happened but on my recent trip to New York, I didn’t have Indian food at all. The rationale being that there are certain kinds of food available in New York that are not easily available in India, so I shouldn’t miss the opportunity of eating them.

So I ate at Turkish, Greek, Ethiopian, Italian, Thai, Israeli, Korean restaurants, quite enjoyed the food, never asked a waiter “does this dish contain meat” (the reason for my vegetarianism is more because I get grossed out by meat, rather than any religious or cultural reason) (and I didn’t feel much when I set aside what looked like an octopus from my salad and continued eating the rest of the salad), never craved sambar, and generally had a good time.

My wife may not be the happiest when she reads this but frankly when I returned I didn’t exactly crave home-cooked Indian food. Of course the Rasam last night was wonderful, but it was now for me just yet another culinary item, just like coconut milk curry, or hummus or the ethiopian dals or pizza.

I seem to have truly gone global (again no pun intended)

Interior Design

Recently it has been reported that former ML MD John Thain spent some 1.2 million dollars  in decorating his office. And people say that this is very conservative by normal CEO standards. Normal people (like me) might wonder why one needs to spend so much on one’s office. Even if you were to list out what needs to go into an office, and then go on to buy the best possible item in each category, this kind of money seems obscene.

So if you are still wondering why people end up spending so much on their offices, you will need to get in touch with someone from the profession called interior design. It’s quite fascinating. The way these people think is extremely instructive, and actually it would make sense for an investment bank CEO to learn this from the designer and then use such ideas to trade. They way these people imagine stuff, they comparisons that they make, the associations that they draw, are incredible. Actually, I think interior designers might be good people to partner on a quiz team.

So it cannot be any random painting that needs to go on the walls. The painting needs to have a theme, and this theme needs to fit in with the general theme of the company. And interior designers being interior designers, will develop their own idea of the company’s theme. And then use this to design the office. So coming back, the painting needs to conform to the ideals of the company. Next, the painter who painted this painting needs to conform to the ideals of the company. Put these two together and the painting will cost a bomb. Doesn’t matter, they need to get everything right. And perfect. And in order

Interior designers also seem to be proficient in stuff such as vaastu, feng shui, numerology, and all such. So each and every desk in the office needs to be oriented in the right way. It’s ok if the employee doesn’t have space to stretch his legs. Doesn’t matter if the position of one particular desk means they can’t play gulli cricket in office. It has to be that way.

It is excellent that interior designers do their jobs so diligently. The way they think, their attention to detail, the way they see the big picture, is all extremely good. In fact, interior design is probably one profession where, to succeed, you need to be both a stud and a fighter. So kudos to the entire community. However, there is a small issue.

The biggest problem with interior design is that it’s all so subtle. Ok, the colour of this wall matches the theme colour of the company. But who would notice? Ok, the painter who painted this exquisite painting just outside the CEO’s door might belong to the same moon nakshatra as the CEO. Excellent attention to detail. But does anyone notice it? it is quite a pity. These designers spend so much time and clients’ money in bringing out the perfect design, but most of their excellent thinking, and work, goes unnoticed.

There is this story about Michelangelo painting the Sistine Chapel. He was painting an extremely dark corner, which was out of eyesight of most visitors, or maybe all visitors to the Chapel. Someone goes up to him and asks why he is taking so much trouble in painting this particular nook when no one will notice it. He replies that he is doing it because God is watching. Extremely commendable. And I suppose interior designers also work on the same principle. However, I’m not sure if Michelangelo billed any additional amount to the Chapel for painting this unseen corner.

The other day, I was talking to my uncle about the design of his drawing room in his Gurgaon house. He mentioned to me that soon after he bought the place, he had called an interior designer to help him design the drawing room. The lady broadly told him about her plans for the house, which my uncle seemed to appreciate, and they sat down to discuss fees. The deal was that the interior designer would instruct my uncle about where he needs to get each and every piece of his furniture from. She would determine the design, the designer and the shops. And my uncle would have to do exactly as she said. And here is the clincher: the interior designer’s fee would be 2% of my uncle’s total expenses on his drawing room.

I don’t think incentives can be more misaligned than this. You get paid to help your client spend his/her money, and the more money you make your client spend, the more money you make. So it is always in your best interest to make sure that the client spends as much as possible. The only limitation might be the client’s budget, but your incentives make sure that you will stretch it to its limit. In case of professional CEO’s, they don’t really have limits, and it is their shareholders that pay. Which is why you get situations like Thain’s expense of $1.2mm on his office room being considered low by industry standards.

It intrigues me as to how interior design fee structures have settled down this way. And the only thing I can think of is that most people are spending someone else’s money. Their shareholders’ money, in most cases. If I were to engage an interior designer some day, I would try and structure her fees differently. I would tell her (numbers here are indicative only) “I’m willing to spend Rs. 10 lakh, and I will pay you a minimum of 20,000 rupees. For every lakh less than 10 lakh that I end up spending, I will give you Rs. 10,000 more.”  Or maybe not. I may just negotiate a fixed fee.