Main Street

American folk music speaks of simple things: love, loss, the yen to up-and-go. Often, the travel is about running away—because deep down, those simple things aren’t simple at all.

Families made and broken, war and death, the call of the highway, the freight train, or the wild country—that’s Main Street.

Those are values people understand: a job, a place, watching a boy become a man, a girl turn into a woman…

So how did it all go so horribly wrong? What made simple things not matter?

I took a trip down memory lane to revisit the market meltdown of 2007-2008, a result of extraordinary institutional greed and regulatory neglect. On Wall Street, even traders who saw how fragile the system was continued pushing it, like a heroin addict who knows he’s killing himself but can’t stop.

My journey down that road began with an English trader of humble Pakistani origin and a book called Flash Crash by Bloomberg journalist Liam Vaughan.

Navinder Singh Sarao—Nav, to his mates—was accused by the US Department of Justice of cheating the Chicago Mercantile Exchange, or CME, and causing the stock market flash crash of May 6th, 2010. The fact that he did it from the comfort of his own home, located in an immigrant neighborhood near London’s Heathrow Airport, was even more remarkable.

That got me into the fascinating world of automated trading—in other words, computers. Put it this way—if you trade shares manually, it’s like running the hundred meters in flippers.

As I revisited the sub-prime mortgage scandal of 2007 and 2008 that led to the worldwide collapse of the banking system, the bankruptcy of Lehman Bros., and the bailout of AIG—the world’s largest insurance company—by the federal government, all I could think about was venality and greed.

And what the fuck was an insurance company doing in the sub-prime housing market anyhow? Greed, greed, fucking greed!

At a speech in Houston in 2008, George W.Bush—an intellectual stalwart by today’s presidential standards—went off the record:

Wall Street got drunk, that’s one of the reasons I asked you to turn off the TV cameras. It got drunk and now it’s got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments.

When you look at the way things are going now, with Wall Street on a tear and Main Street in the ditch, it’s pretty clear the market is back swigging from the poisoned cup.

For a fee, brokers supply a mechanism called web services that allows anyone with the money or the know-how to design and implement their own trading strategies—that’s the way the game is played in the new millenium.

In the lead-up to the mortgage crisis, traders were looking at the most bizarre stuff. This is how rogue trader Mark Wendale sums it up in my 2013 book, Atmos Fear.

“You got property goin’ up a steady six points or more, re-fi in suburbia is hotter than wife swapping. Yup, we’re good for a while yet,” said Wendale, the consummate trader.

Only one or two of the more clear-headed understood that the ship was headed for the rocks. After all, selling mortgages to sub-prime clients, charging the interest on only half the principal and then adding the unpaid part to the total owed, so that the new homeowner’s debt went up over the years instead of down, was bound to end in tears. But for pretty much everyone in finance, it was boom time. Dot com all over again.

“Some of those products we reviewed, I rather think they might put one in a spot of hot water.”

More Brit pinstripe-speak.

Wendale was now trading CDOs squared, and even cubed, where the product was supported on an identical product, making it increasingly difficult to grasp what the exposure was.

The height of bizarre, both in name and purpose, was called the Gaussian copula—I’ll spare you the sex jokes.

In 2000, David Li, a Wall Street mathematician employed by the Canadian Imperial Bank of Commerce—a touch of the Raj, methinks—worked out a formula to co-correlate probabilities, and the formula became a Wall Street darling.

But the formula was flawed—in worked well in some circumstances, in others it was disastrous.

Don’t blame Gauss—he’s one of my heroes. At three years old, Johann Carl Friedrich Gauss was correcting his father’s arithmetic. At seven, he came up with a lovely way to add consecutive numbers.

If you want to add the numbers between one and a hundred by hand (or mentally), it’s a tedious job. Bear in mind we’re in 1784, when the child prodigy was seven—no calculator. No Excel.

One of my math teachers told me that all good mathematicians are lazy—that’s why they find quick ways to solve problems.

Young Carl realized that 1 + 100 = 101. No prizes there. But he also figured out that 2 + 99 = 101. Better. And 3 + 98. And 4 + 97. And 50 + 51. Wow!

So, after he discovered that every convergent pair added to 101, he understood that 101 multiplied by 50 (one hundred numbers gives fifty pairs) gave the result he was after: 5050.

Pretty cool.

I played around with his trick and worked up a formula. Then I tested it in Excel. I’m sure any mathematician will laugh—this is old hat. But it made me happy, and the Gauss formula will add any list of consecutive numbers, for instance 102346 to 2487371. Instantly.

The answer is 3 088 271 188 821. This would take you a while in Excel. On a calculator, if you entered a number every five seconds, never made a mistake, and didn’t sleep, it would take you twenty-three days.

If you want to try a simple example, add the consecutive numbers from 1 to 4. Gives you 10. So does (1+4) X 2 (there are four numbers in the series, or two pairs). Try 3 to 6. That’s 9 X 2, or 18. I am easily amused.

What I don’t find nearly as amusing is the market rock ‘n roll. That’s how simple became complicated, and how we all got screwed.

Greed and irresponsibility is what I see. Trading mountains of mickey mouse money leveraged on virus bailouts.

I’ll leave you with a country tune, maybe we’ll get back to our roots.

Kind of crazy, with summer coming on, but all I see is black clouds.

The India Road, Atmos Fear, Clear Eyes, and Folk Tales For Future Dreamers. QR links for smartphones and tablets.

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