Peter Robert, one of the first ORIE financial engineers, gave M.Eng. students a survey of "What Went Wrong" in the recent financial crisis and described changes in the opportunities for jobs in quantitative finance.
Peter Robert M.Eng. '81 told the weekly Engineering Enterprise Colloquium how the world of finance has changed as a result of the recent financial crisis, emphasizing what the changes mean for new graduates in the field.
Robert is currently with the Global Financial Institutions Group of BBVA, an international bank that has 47 million customers in 30 countries, including the United States, Spain, Mexico, China and Turkey. He received his BA in physics and M. Eng. in operations research from Cornell. Robert started his finance career at Indosuez International capital Markets as a fixed income and interest rate derivative trader, and subsequently held senior positions in equity derivatives marketing at Morgan Stanley, Bear Stearns, Lazard, and the Citigroup Private Bank.
In his talk, Robert provided a comprehensive survey of events of the past decade, tracing the steps by which the financial markets deteriorated. Listing more than a dozen factors, from monetary policy, the structured credit and mortgage market, failure of the rating agencies, and limitations of the mark-to-market model to contagion, he asked the audience of financial engineering and other students "what went wrong?"
His own answer: "all of the above." In expanding upon each of the factors, he described a financial system that went from equilibrium to one in transition, which he characterized as a "phase change." "The landscape has changed, not only in the US but internationally, and you should understand the new environment" he told the students. By way of illustration he compared the role of risk management teams, who previously had fairly routine daily measurement and reporting responsibilities, to their main focus now, analyzing a wide variety of interrelated risks.
"There is opportunity if you grab it," he said, since "people haven't decided the best way to do risk management." In particular, models such as those used for so-called collateralized debt obligations (CDOs) "were just not right." He noted "normal curve models are not suitable." While options traders have recognized that event probability distributions have "fat tails," with moves five standard deviations from the mean occurring multiple days in succession, there is not yet a consensus as to how to deal with such phenomena, especially in a way that integrates across categories of risk.
"These are questions for you," he advised the students. "You are the up and coming generation that will figure out how to solve these things. When you have a big change in a field it takes time for the best ideas to surface. Academics and business people need to talk together." The crisis brought to light many shortcomings in the field of risk management, "which is ripe for a big overhaul; operations research can be extremely important in addressing these new challenges." He urged that "Cornell OR take the lead" in coming up with the next generation blueprint for financial risk management.
Robert compared areas of shrinking and growing opportunities in the current landscape for jobs in financial engineering. Areas that have been impaired include asset backed securitization, proprietary trading, and leverage products: "on Wall Street, it's back to basics," he said. The regulated area of the financial sector is smaller, has less leverage, and employs fewer people.
On the other hand, "job opportunities are going to come from new, non-traditional areas, in areas such as alternative investments, government, regulatory agencies, insurance companies, emerging markets, and companies in other sectors of the economy that use risk management," including "real companies such as BP and Conoco Phillips." There is also a use for OR techniques to explore the massive information banks have on clients, payments and the like. Robert urged students to determine where their strengths lie and suggested the ways in which specific strengths such as sales, analysis, and risk management expertise relate to specific components of the industry.
Robert reminisced that when he first started in the financial services industry, he was asked "how does this Black-Scholes work impact our trading?" Now questions relate to the impact of explicit rules, such as the Dodd-Frank Act and the Volcker Rule, and implicit rules such as new standards of disclosure, as illustrated by the Goldman Sachs / Fabrice Tourre case. He reminded the audience that Tourre has a degree in operations research from Stanford. Alluding to the role of financial engineering in the overall crisis, he admonished the audience: "as FE's and risk people, let's not do this again."
Slides from the talk are available from the speaker, peter.robert01@gmail.com.
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