“You know why the dental hygienist got the mortgage for her million-dollar home? Because of this formula. You know why AIG needed a bailout? Because of the ways that Wall Street tried to profit off of that mortgage. You know why Wall Street thought that they could make millions off of the millions of people across the country with bad million-dollar mortgages? Because of this formula.
“The thing is, no one on Wall Street can make sense of this thing. I can’t make any real sense of it, and I grew up in a country that took math seriously, unlike America, where you just study the Top 40 pop hits of math. All you know is the Pythagorean theorem. Avogadro’s number. Eureka and apples on the head. So how can any of your finance guys possibly be expected to understand something even slightly more complex than A2+B2=C2?” He turned around again and skewered the formula on the board with arrows. “This is the Gaussian copula. Named after Carl Friedrich Gauss, one of the greatest mathematicians ever to live. What this particular formula does, as I’m sure none of you know, is correlate variables that seem unrelated, predicting a connection between them. Li didn’t invent the copula, but he did bring it into the finance game, and he was the one who made the crucial second mistake, which we all get to pay for: He made us think that risk could be quantified. And he thought that corporations were like people. Like people! Because before David X. Li rode into the canyons of Wall Street, way back in 1997, he worked on the broken-heart syndrome, which is a very real phenomenon that none of you have the experience to comprehend. True, dedicated love. Love beyond the grave. Take a couple: Whitehairs, oldsters, married for fifty years. One of them dies and odds are the other one is not far behind. They die because their heart is broken and they’re alone, and glorified accountants like David X. Li had to go in and meddle with the beauty of that because they wanted to figure out a better way to price life insurance policies. The antithesis of beauty, no? Those accountants developed a method whereby they could plug in various pieces of information and churn out one number: A likely date of death. David X. Li took one look at this and decided that with a few modifications he could use it to churn out another number entirely: An entity’s likelihood of default.
“If you’ve been paying any attention at all this semester, you know what is at the center of all studies of economics: Risk. Harness the risk and you’re minting money. Let the risk run you and you’re sunk. So, naturally, when David X. Li came along and said that he’d found a way to quantify risk, every hedge funder and bond trader out there was ready to hop aboard the Orient Express. He created a formula that he claimed could solve Wall Street’s biggest problem, without any complications, and set it loose in a field of greedy, shortsighted bastards.”
Andrew’s hand shot up. It was a surprise even to him.
He was all the way in the back of the room, so he shouted. “Professor Kalchefsky!”
The professor paused. Looked up at Andrew. A poisonous, tired look.
Andrew stood up. “Why is it David X. Li’s fault? I mean, I don’t think it’s his fault. He didn’t force anyone to use it, right? The . . . what’s it called? That formula? He just wrote it. He didn’t say that everyone had to use it.” Andrew paused, waiting for the professor to agree with him. He was right, he knew he was right.
“Force? No, he didn’t force anyone to use it. And no one forces children to pester their parents for the sugared cereal that’s packed with their favorite action figures; no one forces young women to starve themselves anorexic so they can look like a billboard. No, Li just created a formula he claimed could solve Wall Street’s biggest problem. But he’s perfectly innocent, perfectly. You know what else he’s innocent of? Besmirching Carl Friedrich Gauss’s good name. Gauss deserves to be remembered as the prince of mathematicians—his work impacted the fields of astronomy, optics, differential geometry, all the ways in which we observe and understand the physical world—but in democratic America, his name will forevermore be associated with financial ruin. And that’s not the inscrutable David X. Li’s fault either, is it?”
Andrew rolled his eyes. He couldn’t help it. Inscrutable was such a lame dig, it was barely worth protesting. “Are you getting scared yet? Are you finally sitting up and thinking about something besides keg parties and sexting? You know that Li was trained in China’s most respected university, the Harvard of Tianjin, and that the Communist government encouraged him to set sail for North America? How do we know that he wasn’t working for them from the start? Right now China owns 8 percent of America’s debt. How do we know that this wasn’t all a plot hatched in the honorable Deng Xiao Ping’s official opium den?”