1) Some hedge funds shorted “subprime” – MBS, REIT, title companies, insurance companies, lenders, homebuilders — and made fortunes in 2007-2008. 2) Some buy-side hedge fund investments came from pension funds impacting little guys (“others”). 3) It was not just the hedge funds who bought MBS. Foreign central banks buying garbage with precious reservers under false premise (ratigns) hurt little guys in those countries. 4) Big guys were at least partially hedged against stock market wipeout, when average 401K investor who has been taught to “buy-and-hold” forever thinks hedges have something to do with bushes. 5) Most subprime borrowers at the beginning of the pyramid scheme got nothing in the end, except credit destruction, stress, unemployment, divorce and bankruptcy. Yes, some of them spent and enjoyed some of what they borrowed (cash-out refis). But bulk of what they borrowed remained in houses (upgrades, second home, remodel) prices of which crashed and would never recover. How many do you think flipped their Miami/Vegas condos and Inland Empire McMansion right at the peak in 06 and put that money in a portfolio shorting aig, citi, toll brothers, mbia, lehman and countrywide?

Who are the others? If we are talking about the hedge fund world that means the traders fooled their bosses and limited partners in the fund. Actually, that has happenned before, buts its a case of the relative little guy outmaneuvering the bigger fish.

Did the people who were selling junk as AAA products know that their products were mispriced? Of course they did. That’s how they made a killing,

Lets assume you’re right. That means relatively unsophisticated salesman at the buldge bracket ibanks fooled the mit-educated traders at the top hedge funds. remember, this is not like the Internet scandal, where sophisticated investors (hedge funds, vc’s) sold shares, thru and ibank like in an ipo, to unknowing individual invesors with accounts at merrill and morgan.

here, the flow of money went the other way (subprime borrowers getting cash from commercial banks, banks selling the note to ibanks, ibanks selling them to hedge funds). the guy at the beginning of the pyramid scheme alwsys walks away the winner.

did i say that? my main point is was that scientists hold postions of power in high finance, especially in the biggest baddest subsector of wall street over the last decade: hedge fund management…where top firms like de shaw, aqr, rennisnce, goldman sachs asset managemnt, soros’s quantum fund, hire from the science elite and have paid traders sums that dwarf their brehten at the traditional sell side banks, like morgan, merrrill, etc.

Now, how all this brainpower led to such a great crises is a topic for the ages. personally i see the fall of ltcm as a precursor, though there are certainly other culprits besides high financiers: the federal reserve, fannie and freddie, subprime lenders, clever no-doc borrowers, etc. but its the behaviour of the most sophisticated investors that needs explaining, which i attempted to try to do earlier.

as a sidenote, its a well established rule of thumb in the biotech vc world to discount the science of a company seeking funding. you will find so many brilliant researchers in this field convinced they have the ultimate treatment for brain cancer, chronic wounds, etc. they’re convinced its a slam dunk and and can explain the mechanism to you till you drop dead. they even have data that will knock your socks off.

but then you put the damn thing thru a true ph III trial and what happens?…the fucker doesn’t get approved. they fell in love with their theory. but unlike other intellectuals, they do eventually have to admit their mistakes.

Manju, scientist are intellectuals, and like all intellectuals they fall in love with their theories. in the political world, we call them ideologues

G W Bush, Harriet Myers, Alberto Gonzales, Rush Limbaugh, Dick Cheny, etc led America for the better part of the last decade. None of them had a scientific background. Yet no-one blames liberal arts / law for making people unfit to lead.

Think of the people like Benjamin Franklin, Edison, A.G. Bell, Bill Gates, Jack Welsh, Sergey Brin, etc. scientists / Engineers? Yes. If not for the leadership of scientists / engineers in Industry through the ages there would not have been a real economy,

. Not many people would call men like larry summers, robert merton, and myron scholes ignoramuses, yet all have proven complete disasters as money managers

As for the finance bunglers, their failure can be explained easily by upton sinclair “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Their theories worked out very well — for them. When a system offers several lifetimes pay in a single year to follow a course of action that is destructive to others, and at little personal consequence, well, what do you expect?

There were folks who made millions based on the flimsiest of rationales. The system offered great rewards to everyone to misguide the credit rating agencies. Did the people who were selling junk as AAA products know that their products were mispriced? Of course they did. That’s how they made a killing,

P.S. The majority of finance leaders were and continue to be liberal arts majors, not quants. The thinking behind it is given here http://financecareers.about.com/od/majors/a/majors.htm

It is only natural that scientists fall in love with their theories since there is so much of evidence, experimentation, and research involved. A scientific theory is very robust and some long standing theories – take evolution – have withstood the test of time and been found to be in line with the latest evidence. In science you are always trying to disprove theories, proof is for mathematics and philosophy, not for science. A scientist understands applied science to be something like engineering, not derivatives trading. There are any number of scientists – and quite a few philosophers – who are derisive of the assertion that economics is a science or even has any science to it! Because regardless of what happens economists are in love with what they call their “theories” and never abandon hypotheses or “theories” that have been refuted.

the further one moves away from the natural world, the less reliable the scientific method becomes, since human behavior has a high degree of free will and chance. when predicting economic behaviour,

There is nothing wrong with the scientific method – the best we have and the simplest too. Entities such as free will have no empirical validity, rendering them useless for experimentation, without which scientific theory making is all but impossible. We have a very long way to go, and will have to make do with place holders, while economists and public policy practitioners of every stripe tool around with their pet assumptions. Economists generally get a free pass. While a kook like Velikovsky and biological creationists were laughed out of polite discourse in a matter of months, “economics” pontificators/cranks like Friedman and Greenspan continue to be taken seriously.

If it were only that simple. Not many people would call men like larry summers, robert merton, and myron scholes ignoramuses, yet all have proven complete disasters as money managers. larry being responsible for the singlest biggest mony-losing trade (involving derivatives) at harvard management, robert and myron driving ltcm into the ground, and i believe myron’s latest fund is down 38% this year. Yet even warren buffet is in awe of their intelligence, while wisely declining to invest in any of their funds.

scientist are intellectuals, and like all intellectuals they fall in love with their theories. in the political world, we call them ideologues, but in the world of applied science, like quant-based trading, there’s no way to describe their behaviour.

the further one moves away from the natural world, the less reliable the scientific method becomes, since human behavior has a high degree of free will and chance. when predicting economic behaviour, these financial models often prove right in the long run, but they cannot survive a short term irrationality, which happens more than the black swan theory would indicate. thus wall street is littered with people who are brilliantly wrong, or even right but at the wrong time.

Qualifications don’t mean anything if the suited booted gentry act like ignoramuses. For all their “scienctific” skills the Wall St jokers couldn’t care much about independent and dependent probabilities, mistaking one for the other, till everything collapsed.

I went to Johns Hopkins with Chopra. He was head of the College Democrats and even then was becoming very well connected with senior figures in the Democratic Party. Whatever technical knowledge he has was gained on the the job. He spent much of the 90′s working with consulting firms focusing on health care and technology, which seemed strange given his background.

I am not sure I would agree with your last comment though. For whatever it is worth he did seem genuinely interested in public service and certainly would be earning more money in the private sector than in his new job.