At my investment bank, I am surrounded by the perfectly matched combination of models and 'modelizers'. And while the second was an established City stereotype, the first was a more modern phenomenon, ushered in with the Long-Term Capital crew circa 1995.
The financial models to which I’m referring have undisputed muscle within the banking world. But because these powerful toys differ from bank to bank, and because in this jittery market, no one can value anything from a CDO to a Krispy Kreme using them, one is left questioning the absolute value of these formulaic doodads.
One particular 'model-sode' echoes in my mind like an annoying advert. A few months back, two of the more senior guys on my floor, oblivious to the fact I had my bunny ears up, argued over which of two doodads to use for valuing our bank’s trading book - Model A giving a break-even P&L, or Model B, a painful £400 million hit. I’ll let you guess which one they picked. But the bonus-worried behaviour of these two jokers aside, which mechanism is, ultimately, correct? Is it impossible to create a model that always works?
It occurred to me that these devices built by 'modelizing' bankers hold many of the same disadvantages as real-world models. Both are high-maintenance, arrogant and accustomed to getting their way. Both could survive on a cocktail of male attention and money, but are prone to crash if given too much information. They are cherished one minute, and trashed for a fresh one the next.
But the most significant trait that both types of models share, as you might expect, is their stupidity. Pretty on the surface but lacking in substance. 'Working' models should have been able to price in the minefields which sent financial markets into a war zone the last twelve months. But perhaps a real-world beauty, with her international sophistication, would have had the context a computer lacks to accurately factor in the risk of default from subprime borrowers. Maybe, after seeing the credit-card saddled New Yorkers or the falling couture budgets of the Parisians, she could have leaked the inside info to Wall Street, who would have priced these dangers into their finicky gadgets.
I concluded with flair, it’s highly probable: fashion models have more common sense than financial ones.
Now if only I could convince these stunners to come help out the City modelizers (and not just between the sheets,) maybe the City could get some much needed perspective on how to solve this everlasting credit crisis. But would they trade Bond Street for Wall Street?
Without a doubt, I could promise them this: if there is a lot more to life than being really, really ridiculously good-looking, it’s being really, really ridiculously well-paid.