Definition of CMO Trading: Look for People Dumber than You and Take Advantage of Them

A number of you have sent links to this piece in New York Magazine about former software programmer (now oyster farmer) Michael Osinski's reflection on his Wall Street days when he created the software program that turned mortgages into mortgage backed securities, enabling them to be traded around the world. Thanks.

It's well worth reading in its entirety: yet another story about how someone escaped the financial center of the world prior to its implosion, in this case, carrying a fair amount of guilt along with him, which, given the circumstances is quite understandable.

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.

The story of Michael's 20-year career on Wall Street is a fascinating tale to be sure and, like a lot of other similar accounts, it is the personalities and the culture that are most fascinating to someone like me, particularly when told from the point of view of a software type.

* * *

I'm glad I never went to New York looking for a job.

You get a good taste for his view of things, in the third slide of the nice little slide show that accompanies the piece when he notes, "Traders loved the software. As it did more of the thinking, they were able to do less".

The item below follows and you are left to discover for yourself the paragraph with the sordid details of a 3PM ritual in the men's room adjacent to the trading floor. It's pretty disgusting. You've been warned.
I've long wondered about this little subset of Wall Street culture - if his account is anywhere close to being a fair depiction, I count myself as fortunate for having learned everything I know on this subject second hand.

On the proliferation of Collateralized Mortgage Obligations (CMOs) he writes:

As CMOs became more complicated, my job was to make everything seem simple — to, in effect, mask the complexity that would’ve made the bonds difficult to trade. We invented a language for mortgage-backed bonds. I called it BondTalk. Lehman was a runner-up in CMO underwriting. I was told to rewrite the entire system. Make it all push-button. Flexible and faster. Traders told us what they wanted, and we wrote the software code to make it possible. We were on the cutting edge. When I finished that project, I approached my former boss to ask if I could move to the trading desk, to where the big money was.

“Mike,” he told me when denying my request, “can you really look for people dumber than you and then take advantage of them? That’s what trading is all about.”

Having worked very hard and escaped to a much simpler life with what was apparently a good pile of dough, it almost sounds as if he'd willingly exchange some of that big pile (perhaps a large portion) for a little peace of mind.

Last month, my neighbor, a retired schoolteacher, offered to deliver my oysters into the city. He had lost half his savings, and his pension had been cut by 30 percent. The chain of events from my computer to this guy’s pension is lengthy and intricate. But it’s there, somewhere. Buried like a keel in the sand. If you dive deep enough, you’ll see it. To know that a dozen years of diligent work somehow soured, and instead of benefiting society unhinged it, is humbling. I was never a player, a big swinger. I was behind the scenes, inside the boxes. My hard work, in its time and place, merited a reward, but it also contributed to what has become a massive, ever-expanding failure. For that, I must make a mea culpa. Not a mea maxima culpa, mind you, but some measure of responsibility, a few basis points of shame. Give my ego a haircut.

It hurts when people say I caused this mess. I was and am quite proud of the work I did. My software was a delicate, intricate web of logic. They don’t understand, I tell myself. Perhaps it was too complicated. But we live in a world largely of our own device. How to adjust and control these complexities, without stifling innovation, is the problem.

For some reason, the opening scene of 2001: A Space Odyssey just popped into my head:

Comments

[Moon Kil Woong:]

From the traders point of view, the buyers are the ones should be punished. Like in poker, the stupid fish is the one who walks away with nothing. Both the buyers and the sellers are paid well to use their brains. Both knows what risk and reward is. Both are greedy. Both wants to make money. So why shouldn't the dumbest greedy firm loose their shirt?

CMO's were packaged as a way for smart people to make money off of stupid people who wanted to make money off stupid people who who bought mortgages they couldn't afford. Little did they know they were the second tier suckers.

It is like bad karma. The only problem is the guys peddling the toxic waste deserves the most bad Karma but instead walks away with the treasure chest leaving the buyers with a mess. Moralists at least can say the mid-level greedy bankers got what they deserved.

In the end, only the taxpayers and the homebuyers who were sold a bill of goods they were not suppose to benefit from can claim some level of innocence.

Even then, from a ruthless traders perspective, the taxpayer are also stupid fools for voting for the people who give away their money and can be bribed by lobbyists and special interest groups. And as said before, everyone in this pecking chain knew the the mortgage buyers who couldn't afford the American dream and thought they might are just plain ignorant. That's why they were the target of the second level fools buying CMO's.

You have just entered the dog eat dog mentality of Wall Street. Do you really want to go further into the rabbit's hole? We can discuss Fannie Mae and Freddie Mac dump the bad assets on the public schemes.

For every government action there are a thousand smart greedy people figuring out how to take advantage of the stupid pubic or taxpayer. That's why the government should stay out of the public sector as much as it can. Being the biggest fool, they get robbed and stripped naked every time.

Apr 01 04:26 AM

[I am not a ...:]

Oppenheimer? I was thinking something similar myself ,as was uttered by those before the Nuremburg bench.


On Apr 01 02:08 AM Willy Walnuts wrote:

> "Traders told us what they wanted, and we wrote the software code
> to make it possible."
>
> Oppenheimer couldn't have said it better.
>
>

Apr 01 04:42 AM

[Dividend Gr...:]

Well trading is always looking for people who are "dumber" than you in order to execute your edge.
With dividends however you are not relying on the greater fool theory to make money- as long as you pick a solid dividend stock that would pay you a growing stream of dividend income, you don't need to worry about ever selling your stocks.

Apr 01 07:57 AM

[Pent up demand:]

Oh please. So it was the responsibility of a techie at some investment house to foresee all the trouble that could be caused in the future by securitization and say "Not in my Name"? Gimme a break.

Apr 01 09:27 AM

[doubleguns:]

Trader58: I would assume than that the person that built the cross that Christ was eventually hung on should also be vicerated as some kind of horrible person too!!!

Apr 01 09:37 AM

[Tall4MyHeight:]

Please, folks - lets not start sounding like the mob chasing the monster in some old 'B' movie. Why is everyone so convinced there are villians here - big fish, little fish, fish of all sizes who need to fry? Lets stop tilting at windmills and get down to the business of fixing a process we didn't know was broken 12 months ago. A shout out to Mayer Amschel for outing the 3rd grader wanting to play with big words. I enjoyed reading this article not because I blame him or sympathize with him, but because it is always interesting to hear from someone who was intimately involved in such a huge disaster. Kind of like hearing an interview with someone who helped build the Titanic. This guy isn't evil, nor a hero...just a guy who made a good living, got out at the right time and has an interesting story to tell.

Apr 01 09:38 AM

[frosty:]

OK Tim, what kind of fellow has an Irish first name and Italian last name? Just what are you up to?

Raising doubts about the integrity and intelligence of the best and brightest (you don't have to be best and brightest after all, just not as dumb)? Revealing the true motives traders (greed vs. greed - take advantage of whomever, whenever)? Behind every good trader is a good programmer who can take all the complicated thinking out of playing with other peoples' money and keeping it for yourself?

And really, kindergarteners? (This brings to mind a friend's son who took a job with a small firm on Wall Street right out of college, 22 years old, showed up months later in a Lanborghini with a really hot chick in it, and started lavishing his parents with goodies. Then at age 24 he went to prison, helped prosecutors put away the masterminds at the firm, which turned out to be a 'criminal enterprise', and got out with a reduced sentence and much wisdom.) Small firms can be prosecuted, but as with many other areas of justice, the wealthy and well connected are not. But really what's the difference between the small crooks and the big ones, most of which are still alive and well? AIG, Lehman, Bear Stearns, Goldman, Morgan Stanley - are their hands clean?

Unfortunately you missed the best allegory - the obelisk in 2001 Space Odyssey which took Dave (traders and their programmers) to Jupiter and beyond the infinite - well, at least that's what they were shooting at.

Apr 01 09:57 AM

[Jim Rodgers:]

The author is 100 percent correct. The CMO/CDO/SIV market was designed to be deliberately complex, so as to be beyond the comprehension of lawmakers and regulators. Only traders understood this market.

A market that is even more complex is swaps and derivatives. Some of that market is beyond the comprehension of even traders. It is traded by BOTS, or robot traders -- artifical intelligence programs.

BOTS have effectively created a shadow banking system that will literally "fight for its life" and resist reform. BOTS essentially have taken on the characteristics of a conscious, living organism, and that includes instincts for self-preservation.

Think I'm kidding? Read Fred Dooling's op-ed piece in the New York Times on October 12, 2008.

Apr 01 10:54 AM

[Alex Filonov:]

Guy was just doing his job. Get real, people! I used to work on military projects, I don't feel guilty that maybe people are getting killed by remote results.
As for taking advantage of dumber people, I'm all for it! They deserve to be (legally) separated from their money.

Apr 01 11:17 AM

[speeddaimon:]

Some of these comments are simply mob mentality ruling. Blame everyone that had anything to do with any part of Wall Street. As a software developer (albeit in a much more mundane industry than Wall Street) I personally take offense at some of these comments. We become software developers because we love the challenge of creating useful code that allows others to do their jobs better, faster, and cheaper. Much like those that were trading, this guy had no idea about the havoc that his program was going to cause. He wasn't the architect of the downfall, he took a set of requirements, given to him by traders, converted them into code. He did his job well. The fact that he feels any remorse at all for it is a testament to his character. Just because someone builds something doesn't mean they should be eviscerated based on how others decide to use it.

Apr 01 12:07 PM

[larmanius:]

nobody did anything illegal, that i can spot. selling stuff to people is not illegal unless you can meet some test of the statute of frauds. which is hard to do.

look at tv ads...shamwow, slapchop (& his pal graty), still doing house flipping and internet scam "systems" to make millions, and enzyte?


On Apr 01 02:12 AM aarc wrote:

> You wrote about the PAWN in a game that has gone haywire.
>
> Where are the major PLAYERs?
>
> Are they going to be punished?

Apr 01 12:10 PM

[Alexiad99:]

The article is an April Fool's joke!


On Apr 01 01:28 AM trader58 wrote:

> Amazing that you would provide the platform so that this scumb could
> have his last hurray, giving him a chance to bask in his alter-ego
> in a public form. His only reason to want to be known is to have
> the world see him as some sort of Lex Luther. Your as pitiful as
> he is Tim, is this the best you can do. You disgrace real journalism.

Apr 01 12:39 PM

[John Sakowicz:]

Regarding Wall Street's BOTS, I think Jim Rogers meant to refer to "Richard" Dooling (not Fred Dooling).

Indeed, artical intelligence (AI) is a very real presence in trading rooms.

But I would further argue that AI has now gone beyond the mere trading of the very esoteric, and almost completely unregulated swaps and derivatives market.

I would argue that AI is now actively involved in designing highly innovative financial products. These are beyond the easy understanding of human traders or their investment banking counterparts.

Some may flatly respond: This is impossible.

No so. It's entirely possible, even probable, and certainly plausible.

If computers can routinely now beat human world chess champions, why can't computers beat traders and investment bankers?

Check out Richard Dooling.

Apr 01 12:46 PM

[Alan Young:]

I found the article very poignant. Who knows, perhaps 90-95% of the people in the chain of events who brought this catastrophe upon us, the ones we think of as evil scumbags today, are similarly regretful and/or thought they were doing something innocuous.

I'm not apologizing for the behavior--hell, if I found that kind of thing morally acceptable I could have done it myself--but I do have some sympathy for the author. Tim, I'm glad you posted this.

Apr 01 01:36 PM

[Whippet:]

Unfortunately, the phrase "caveat emptor" is completely lost on our modern, entitlement-based cradle-to-grave society. This guy was paid for his skills, and obviously did a masterful job. If he feels guilt, every winning participant in financial markets should also feel guilt- they are for the most part a zero-sum game. The real tragedy is that pension and IRA funds were completely devastated by this collapse, as those monies should be invested in extremely low-risk vehicles- not markets or CMOs (and projected returns adjusted appropriately). When average Joes start realizing that they are not Warren Buffett and cannot expect 8-10% annualized returns on a sustainable basis, perhaps the savings rate will reach a sustainable level.
If you have skin in the game, you better know the rules of the game. The markets are the last bastion of the gunslinging Wild West.

Apr 01 02:57 PM

[hamsami:]

Have yet to see a program written or developed with moral and ethical responsibility built into it. Why blame the programmer or Oppenheimer, for what it is worth let's blame the Creator, we seem to do a good job pissing in the the soup of late.

Apr 01 08:33 PM

[Boldhawk:]

Socially Legalized Immorality-Ethics fraud

Michael Osinski's confessions, entitled “My Manhattan Project” which appeared in New York Magazine in Mar 29, 2009, (a must read for anyone) is not so much as self indictment, as it is a revelation of an endemic social problem of decayed morality and loss of social integrity on a national scale.
If an action isn’t legally forbidden, it is not only legal, but also morally acceptable is a commonly accepted principle ingrained in people’s ethics of life. Inflation is theft; period. Theft is a simply concept: taking what belongs to others without their consent. The classifications can be broken up in degrees of severity, such as fraud, deception, larceny, and so on: they are just variations on a theme. Inflation is an institutionalize crime, which no matter how acceptable it may be, it is purely, unmitigated theft.
Inflation always causes a good many people to lose the value of their resources, and they normally shift towards the haves away from the not-haves. In the economic debacle we are undergoing the simple fact is that through a variety of complex mechanisms, the financial community created huge sums of money, inflating not only the financial markets, but flowing huge sums of money into the real economy, causing accelerated price increases, and the loss of millions and millions of people to lose their savings, retirements, and various resources and nest eggs acquired by their production of real products and services.
Simply put, to increase the money supply in the financial circles and financial markets at a ratio greater than the real economic production, result in a “rising market” due to inflation created by the increase of the money supply added through the sophisticated trading instruments we've been hearing about for some time now, up until the implosion. Traders can offer more money for the identical product that was half the price a few months earlier. When one is aware that he is outright gambling, he may not see himself as a victim of theft. But the most of the rank and file who entrusted their 401K’s and lives’ saving to financial gurus to keep it safe without loss of purchasing power by the time they were ready to use it, are simply the victims of fraud and other forms of theft.
If it hasn’t yet sunk that these acts by the financial community and government is theft, whether forbidden or condoned, it is due to one morose sense of ethics, at the pit of its degradation; it says how far down we have sunk. One can justify it and try to persuade oneself of his own rightness, but it does not change the fact, nor does it excuse the responsibility, not exempt the culprit from the penalty of retribution, that is, he must return what he has stolen.
When I say financial markets and financial community, I’m really talking about each and every individual who knowing that he or she isn’t a thousand times better nor more productive than the rest of us, continues to accept a thousand times the reward than the rest of us. This is not “productivity” as it has been called by politicians. AIG wasn’t pursued for refund of the unearned, stolen money in their bonuses. The reason given was they were legally binding contracts. Since when can a private contract to steal have precedence over laws that forbid for the crime it is?
The complexity of these thefts can give a person pause to determine the ethics decision to make about these actions; but when one faces oneself, one knows better. So why not simply return to a path of high integrity, regardless of how many criminals surround us? Maybe it will catch on.

Apr 03 12:29 AM

[Ariel Cui:]

Your comments are rationalizations to explain why theft is OK.


On Apr 01 04:26 AM Moon Kil Woong wrote:

> From the traders point of view, the buyers are the ones should be
> punished. Like in poker, the stupid fish is the one who walks away
> with nothing. Both the buyers and the sellers are paid well to use
> their brains. Both knows what risk and reward is. Both are greedy.
> Both wants to make money. So why shouldn't the dumbest greedy firm
> loose their shirt?
>
> CMO's were packaged as a way for smart people to make money off of
> stupid people who wanted to make money off stupid people who who
> bought mortgages they couldn't afford. Little did they know they
> were the second tier suckers.
>
> It is like bad karma. The only problem is the guys peddling the toxic
> waste deserves the most bad Karma but instead walks away with the
> treasure chest leaving the buyers with a mess. Moralists at least
> can say the mid-level greedy bankers got what they deserved.
>
> In the end, only the taxpayers and the homebuyers who were sold a
> bill of goods they were not suppose to benefit from can claim some
> level of innocence.
>
> Even then, from a ruthless traders perspective, the taxpayer are
> also stupid fools for voting for the people who give away their money
> and can be bribed by lobbyists and special interest groups. And as
> said before, everyone in this pecking chain knew the the mortgage
> buyers who couldn't afford the American dream and thought they might
> are just plain ignorant. That's why they were the target of the second
> level fools buying CMO's.
>
> You have just entered the dog eat dog mentality of Wall Street. Do
> you really want to go further into the rabbit's hole? We can discuss
> Fannie Mae and Freddie Mac dump the bad assets on the public schemes.
>
>
> For every government action there are a thousand smart greedy people
> figuring out how to take advantage of the stupid pubic or taxpayer.
> That's why the government should stay out of the public sector as
> much as it can. Being the biggest fool, they get robbed and stripped
> naked every time.

Apr 03 01:34 AM

[Boldhawk:]

I'm guessing you make money off foolish or uninformed people, Moon Kil Woong! The way you explain it, is the way kids explain to themselves why it was OK to hurt another kid. They build up a mental case in favor of why the other guy deserved it, so one can finally feel good about what they did!
Sure, you say, that's the reality of the markets. Socially speaking, an activity by a group within that society that harms the entire society, even innocent by standers (401K owners do not have much of choices on how the managers manage or invest their 401K's), needs to change, to say the least.


On Apr 01 04:26 AM Moon Kil Woong wrote:

> From the traders point of view, the buyers are the ones should be punished. Like in poker, the stupid fish is the one who walks away
> with nothing. Both the buyers and the sellers are paid well to use
> their brains. Both knows what risk and reward is. Both are greedy.
> Both wants to make money. So why shouldn't the dumbest greedy firm
> loose their shirt?
>
> CMO's were packaged as a way for smart people to make money off of
> stupid people who wanted to make money off stupid people who who
> bought mortgages they couldn't afford. Little did they know they
> were the second tier suckers.
>
> It is like bad karma. The only problem is the guys peddling the toxic
> waste deserves the most bad Karma but instead walks away with the
> treasure chest leaving the buyers with a mess. Moralists at least
> can say the mid-level greedy bankers got what they deserved.
>
> In the end, only the taxpayers and the homebuyers who were sold a
> bill of goods they were not suppose to benefit from can claim some
> level of innocence.
>
> Even then, from a ruthless traders perspective, the taxpayer are
> also stupid fools for voting for the people who give away their money
> and can be bribed by lobbyists and special interest groups. And as
> said before, everyone in this pecking chain knew the the mortgage
> buyers who couldn't afford the American dream and thought they might
> are just plain ignorant. That's why they were the target of the second
> level fools buying CMO's.
>
> You have just entered the dog eat dog mentality of Wall Street. Do
> you really want to go further into the rabbit's hole? We can discuss
> Fannie Mae and Freddie Mac dump the bad assets on the public schemes.
>
>
> For every government action there are a thousand smart greedy people
> figuring out how to take advantage of the stupid pubic or taxpayer.
> That's why the government should stay out of the public sector as
> much as it can. Being the biggest fool, they get robbed and stripped
> naked every time.

Apr 03 01:42 AM

[Willy Walnuts:]

Why all the thumbs down? I was just playing on Warren Buffett's analogy, now cliche, "financial weapons of mass destruction" and Oppenheimer is famous for publicly having to deal with his moral qualms after the deed was done and it was really much too late for remorse.

I guess if you have to explain it... it probably deserves a thumbs down.

On Apr 01 04:42 AM User 369125 wrote:

> Oppenheimer? I was thinking something similar myself ,as was uttered
> by those before the Nuremburg bench.

Apr 03 03:03 AM