[Marxism] The programmer who helped wreck Wall Street

Louis Proyect lnp3 at panix.com
Mon Mar 30 08:11:33 MDT 2009


http://nymag.com/news/business/55687/

My Manhattan Project
How I helped build the bomb that blew up Wall Street.
By Michael Osinski

I have been called the devil by strangers and “the Facilitator” by 
friends. It’s not uncommon for people, when I tell them what I used to 
do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I 
put it out of mind, it inevitably resurfaces, like a shipwreck at low 
tide. It’s been eight years since I compiled a program, but the last one 
lived on, becoming the industry standard that seeded itself into every 
investment bank in the world.

I wrote the software that turned mortgages into bonds.

Because of the news, you probably know more about this than you ever 
wanted to. The packaging of heterogeneous home mortgages into uniform 
securities that can be accurately priced and exchanged has been singled 
out by many critics as one of the root causes of the mess we’re in. I 
don’t completely disagree. But in my view, and of course I’m inescapably 
biased, there’s nothing inherently flawed about securitization. Done 
correctly and conservatively, it increases the efficiency with which 
banks can loan money and tailor risks to the needs of investors. Once 
upon a time, this seemed like a very good idea, and it might well again, 
provided banks don’t resume writing mortgages to people who can’t afford 
them. Here’s one thing that’s definitely true: The software proved to be 
more sophisticated than the people who used it, and that has caused the 
whole world a lot of problems.

The first collateralized mortgage obligation, or CMO, was created in 
1983 by First Boston and Salomon Brothers, but it would be years before 
computer technology advanced sufficiently to allow the practice to 
become widespread. Massive databases were required to track every 
mortgage in the country. You needed models to create the intricate 
network of bonds based on the homeowners’ payments, models to predict 
prepayment rates, and models to predict defaults. You needed the 
Internet to sail these bonds back and forth across the world, massaging 
their content to fit an investor’s needs at a moment’s notice. Add to 
all this the complacency, greed, entitlement, and callous stupidity that 
characterized banks in post-2001 America, and you have a recipe for 
disaster.

I started on Wall Street on October 5, 1985. I was 30 years old and had 
been writing software for six years. I originally got into it when my 
wife became ill and I took a job entering data, the bottom of the 
computer industry, at Emory University, so her rare kidney ailment could 
be treated. Before that, I had risked my life for $200 a week hauling 
shrimp 100 miles offshore from Cape Canaveral, and I had been the only 
white boy in my crew digging ditches in Alabama. Compared to all that, 
Wall Street was a country club. I recall my first day at Salomon 
Brothers, lingering at the windows by the elevator banks on the 25th 
floor of 55 Water Street. While groups of the well dressed and the 
professionally coiffed headed to their cubicles and offices, I stared 
out at the harbor, watching freighters, tankers, ferries, and garbage 
scows cross the great harbor. The perfection of the place was profound, 
the feng shui was palpable. As John Gutfreund, then the CEO, expected, I 
was ready to grab the balls of the bear.

My first assignment was to write a “machine-to-machine interrupt 
handler.” That was not exactly sexy in the world of finance, or in any 
world, and I won’t bore you by trying to explain. It was plumbing. As 
was all the programming, which, on the firm’s hierarchy, ranked 
somewhere above the secretarial pool but well below, literally and 
figuratively, the trading floor. I didn’t mind. To me, it was good, 
well-paying work. My manager, a former mathematics professor named 
Leszek Gesiak, an immigrant from Poland, became a friend. Neither one of 
us was on track, but we both enjoyed the challenges and pace of the job. 
We lunched at either Yip’s, a Chinese culinary cul-de-sac, or on Front 
Street, in the seaport, where you could get fresh fish cafeteria style 
across the street from the market. It was a different New York, still 
picking itself up from the seventies. Drug dealers loitered at the door 
of the brokerages, and taxis often smelled of pot from their previous 
occupants. Just a few years before, Michael Bloomberg had been fired 
from Salomon. He had the crazy idea that the data was as valuable as the 
firm’s capital.

When I asked Leszek what the busy group did that sat next to us, he told 
me they created mortgage-backed securities. It was an instrument, he 
claimed, designed to keep programmers employed. Having started to 
overcome my aversion to the overpaid life—I had recently bought a suit 
at Barneys, the old one on Seventh Avenue—I asked him how the bonds worked.

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