I swear I didn't do it!

Thanks to Karl for posing a few questions to provide some structure to the discussion. As a preface I should make clear / remind that I am considered a "quant" by some people and work for/manage what most would consider a "hedge fund". I have met Cliff Asness (one of the "players") and am friendly with Boaz Weinstein (another "player"). So I am hardly an objective witness.

Before answering Karl's questions I'll start with my overall view of the book---namely that the author has no idea what he's talking about. He makes obvious that he doesn't know what quants are or what they do, and he has very little grasp of what happened in financial markets over the last few years. He's misinformed but with a strong (and populist) opinion, which makes for a dangerous combination.

1. Wall St is not moral. But are most people/professions? Commerce generally exists to make participants to a transaction better off. This is also the purpose of "Wall St". Yes it is full of egotistical, hedonistic gamblers. I'm not sure why that's relevant, except for schadenfreude, but even that is a failure here as the "quants" actually did very well in the crisis of the last few years (as I said, the author is fairly misinformed here).

1a. What is the line between investing and exploitation or gambling? I'm not sure where "exploitation" enters here as a possibility. The counterparties to transactions on Wall St are typically multi-billion dollar institutions, so it's hard for me to understand exactly how they are "exploited". Maybe the taxpayers are exploited because of the relationship between Wall St and the federal government (hint: not both working hard to help average taxpayer)?

More interesting to me is the difference between gambling and investing. Frankly I've never really been sure of this (but then again I've never really had an internal moral aversion to gambling). Life is full of decision-making with uncertainty. Is spending money on graduate school gambling? Buying a house? Buying home-owner's insurance? Waiting to get my transmission fixed? All of these have implications for my financial well-being. Maybe part of them is not gambling (part of the result is near certain) but that still leaves part of it as gambling. Most non-professional investors lose far more money picking stocks than they ever could in Las Vegas, yet view the former as prudent and honorable and the latter as scandalous and immoral. In both cases the deck is stacked against them, they on average give money away, and are doing it for no reason than to make money. On the other hand, if I play poker (which I enjoy doing from time to time) I on average make (small) money and do it primarily because I find it intellectually stimulating. As I said, I've never really understood this, so I'd be glad to hear others' thoughts.

2. The solution to what? It'd be helpful to know what we're solving before prescribing a solution.

"Leverage" is actually pretty hard to define. How levered is your car insurance company? If even 10% of their customers totaled their cars on the same day, they'd be insolvent. So is this imprudent "leverage"? Too often these terms are thrown around without proper context.

Was leverage in hedge funds a cause of the crisis? Not in the slightest. Of course that's because hedge funds had almost nothing to do with the crisis, especially quant hedge funds, but you'd never know that from reading this book. Can anyone name a single hedge fund that went under during this crisis that had any effect whatsoever on the rest of the market?

Leverage in banks? Now we're getting warmer. Govt regulation allowed banks to take on significant leverage but made it worse by arbitrary modifications to how that leverage was calculated (mark-to-market rules, etc). Regulation also allowed institutions to abdicate the responsibility for risk management in investments as they simply owned as much appropriately rated stuff as regulation would allow. "The govt says I can own up to 20% AAA securities, this is AAA, so I'm fine".

Leverage in the govt-sponsored enterprises (Fannie Mae, Freddie Mac) and residential real estate market...bingo! If we're discussing outlawing anyone putting less than 30% down on their home then we're talking about something with real teeth...though somehow a bit less popular politically...

3. Quants if anything made the crisis less severe. Patterson is clueless but pushes a narrative that most people will find intuitive. Quants buy and sell things based on models of their value. The people who exacerbated the problems bought based on ratings/regulatory capital requirements. Again, can anyone name a single hedge fund whose demise had any effect whatsoever on the markets? It's really stunning how off-target this book is.

I'll skip the other questions as their answers would mostly refer to what I've already written. In sum I obviously didn't find the book too enlightening and think it mostly confuses what really happened. Of course to write what I think really happened would take more time than I have, but if any of you are ever in town and want to grab lunch...