I ran across this interesting article on Newsweek over the weekend about "quants"--the uber math geeks who used their mathematical models in quantitative finance to parlay "nothing" into billions of dollars of profit from all manner of derivatives, like the infamous credit default swaps. Although upper management is the target of most people's ire, very little attention has been paid to the math geeks who "enabled" all this unrestrained greed and risk-taking.

One interesting angle to this article is the effort--a crusade really--of one former Wall St. quant to train a new generation of quants who create mathematical risk models based more in line with reality, and not just abstract math, which in many ways is a game. Tweak your hypothetical model enough and in theory, we can't lose money!!! That's basically the sentiment and rationale that helped stoke the derivatives bubble.

I remember watching Alan Greenspan being interviewed for a CNBC program ("House of Cards" was it?) and he made the comment that he has an extensive mathematics background, has dozens of math PhD's available on his staff, and even they couldn't make heads or tails of the mathematical rationale behind these financial instruments. Or remember the almost-financial-collapse-that-never-happened in the late 90's with Long Term Capital Management? They used these models heavily. They even had not just one, but two, Nobel prize winners in economics on their board, and they almost failed spectularly, but were bailed out at the last minute by quick Fed-coordinated action and the help of Wall St. There was talk that LTCM's failure would trigger a global crisis because it was just so big, if it were allowed to fail. Really, that was a foreshadowing of what could happen as these models spread beyond just the elite circles of hedge funds like LTCM in the 90's, and onto Wall St. and even Main St. in the last 5-10 years.