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

by: Tim Iacono

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.

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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.
IMAGE 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: