Soldier Monks of Paris and the Rocket Scientists of Wall Street
Team Latte
February 7, 2008

A few days back we were having coffee with a couple of French bankers in Hong Kong who started splitting hairs about why café latte is really not café au lait and that no Starbucks in the world can serve café au lait. Timothy, the not so quiet and the only American in the group, had initiated the discussion by stating that café latte was something that was invented by Starbucks in America. The discussion eventually turned a bit more intellectual and far more hostile with each, the French and the lone American protecting his turf. The object of the discussion then turned towards futures trading and a man named Jerome Kerviel. Finally, it all became philosophy.

Sometimes in the early eighties as the American economy was coming out of the shadows of inflation and sluggish growth and as the bulls on the Wall Street were raring to charge ahead a few talented physicists and mathematicians started getting interested in the world of finance. At the same time, financial derivatives, as a product class started becoming popular amongst the sell side bankers. The timing of the marriage of the mind and the matter – the product – was perfect. This handful of physicists and mathematicians working at a Goldman Sachs or a Bankers Trust would eventually, in a span of a few years, revolutionize the derivatives landscape on the Street; and their numbers would soon swell. The field of financial derivatives, however, was quite esoteric and complex and very few outside the ranks of these so called “rocket scientists” really understood them.

Closeted in their ivory towers these rocket scientists would toy with new mathematical models to price a particular financial derivative. They would think of synthesizing new products from the existing ones and how mathematical complexity could be literally translated into complex product design. And all this was done with the noble objective of expanding the frontiers of finance. Mathematicians and physicists had become alchemists.

It is strange that people would call these high paid and high flying physicists and mathematicians “rocket scientists”. Rocket science is actually the study of aerospace and aeronautical engineering. NASA and other space centres have a lot of rocket scientists. Boeing Company would have a lot of rocket scientists on their payroll. It is further amusing to think that perhaps others in the field, the more conventional bankers and finance professionals, thought that rocket science was the most challenging and complex branch of physics and hence these physicists who were working with these equally challenging stuff like the financial derivatives were worthy of that name.

Rocket science, is more engineering than physics, and is certainly not the most challenging branch of applied physics. It is neither complex. But the name “rocket scientist” somehow got accepted amongst bankers. And a very public revolution got started on Wall Street.

At about the same time, in the early eighties, a couple of French banks such as Societe Generale and BNP started hiring talented engineers and mathematicians (more engineers though) to work in the field of risk management within the banks. And soon it would become more than just risk management. These trained engineers would look at better and more efficient ways of trading futures, devising strategies to trade options and other financial derivatives using computer models, creating arbitrage desks, and amongst a host of other things brining in innovation in all areas of front and middle office banking. These select few, unlike their brethren in American, were given a more somber name. They were called les moines-soldats, literally meaning “soldier monks”.

The phrase refers to the medieval fighters, like the Hospitallers who fought alongside the Knights Templar in the Holy War, the Crusades. The soldier monks fought mightily but they also preached and healed like the priests.

These soldier monks of French banking were neither flashy nor high profile. They were neither moved by the lowly passion of making money nor were secluded in an island of their own. Their mandate was to rise above the rank and file of others in the banks and bring in discipline and innovation to field of derivatives trading and risk management. Of course, making money would follow, but that was not the end in itself. The idea was to make money through disciplined and innovate trading of financial derivatives and properly manage the risk so that any money made is not subsequently lost. And this was the grand mandate of the soldier monks, the trained mathematicians and engineers who now had to excel in banking.

This was a powerful, but a quiet revolution. No fancy press, no propaganda marketing by the banks to their customers or the public at large. Soon the soldier monks started growing in numbers as the French banks started recruiting graduates from France’s top engineering schools and polytechniques in hundreds. They spread deep and wide within the system and yet managed to remain a cut above others, a school by itself. Their defining characteristic became their belief that they could both manage risks of financial trading and at the same time make money through efficient and innovating strategies and methods. And banks such as Societe General, BNP and others moved ahead, with vigour, confidence and spirit no less than that of Goldman Sachs, Morgan Stanely or Bankers Trust.

In the end, however, these soldier monks would prove to be as fallible as the rocket scientists of America. It’s a long story, covering two and a half decades and one that we all know too well now.

Since we are only some lowly spreadsheet guys who have neither the mind nor the credentials to talk about such big issues like risk management, arbitrage trading, and what have you we had to say something to bring back the discussion to coffee. And so we said, hey guys it doesn’t matter whether you call coffee with milk café latte or café au lait. They mean the same, and hell, they taste the same. And Starbucks doesn’t give a shit about names; they can just as well invent one and serve you the same stuff. The point is what are you drinking? Is it coffee or is it something else? So let’s just chill! And thus we were friends again.

Amongst ourselves we would opine that it is purely coincidental that Jerome Kerviel was working for Societe Generale. He could as well have been a John Barrymore or Thomas Arlington working for Goldman Sachs or Morgan Stanley. No amount of math can improve the risk management models and systems in banks and no theory of physics can synthesize financial products that will fly on their own. No matter what, once every few decades a tsunami will happen that will wreak havoc on civilization and every decade or so banks will face $7 billion losses.

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