Wall Street Comes to Columbia

By John Wong


An Academic in Finance: Dr. Robert Putz, a former math professor, now a financial analyst.

Dr. Robert Putz, an analyst in the Bond Department of Sanford Bernstein, spoke at an American Institute of Industrial Engineers (AIIE) event on Friday, March 3. He presented a short discussion of the workings of the financial center at Wall Street, as well as answered questions concerning students' desire to work in the field.

There are two sides to Wall Street according to Dr. Putz: the buying and the selling sides. The selling side involves a very small number of firms, including Saloman Brothers and Merill Lynch, firms which dominate about 90% of the business. The selling side involves both stocks and bonds. Stocks are units of a corporation's equity, while bonds are a debt or a liability of a corporation. Dr. Putz's view is that bonds are more sedate, but involve more money.

The functioning of Wall Street is based on the sellers' interaction with the buyers. In the past, the sellers would contact the buyers, and would try to convince the buyers into buying a certain type of security (stock or bond). For example, a seller would inform a buyer that because the federal interest rates would rise, the buying of federal bonds would be a wise choice. Therefore, many transactions were based primarily on stories and speculation. There was a gradual desire by the buyers for a more systematic and sophisticated way of dealing with securities.

The advent of computers allowed people to perform complicated qualitative techniques with relative ease. Because of the sheer volume of monetary flow in some companies (Saloman Brothers handles $100 billion in securities), more mathematical models were desired to make the art of transactions more scientific. During the early 80's, more physics and mathematics Ph.D.'s were employed to create complicated mathematical models in order to prevent traders from making costly mistakes.

In the early 1980's, a concept called mortgage dock securities was established. The process started when people borrowed mortgages on their homes from banks. The banks then sold the loans to brokers, who in turn sliced and sold the smaller portions to individual bondholders. However, the market for these bonds behaved erratically. During this period, a Merill Lynch mortgage trader made a wrong guess, costing his company $350 million. After this disaster occurred, many companies sought more mathematical techniques in making decisions to prevent such losses. In effect, qualitative analysis exploded. These "rocket scientists" eventually played a greater role to the sellers as well.

In building these mathematical models, assumptions were first made to predict how assets would behave. In essence, financial data would be entered into such a model. Then, the results would be tested against real world results. Using mathematical ideas such as binomial trees and differential equations, variables such as stock prices and interest rates are entered into the models, which would predict possible states of the future.

Many students asked Dr. Putz about possible employment opportunities at Wall Street after coming out of college. Also, students wanted to know which skills were essential for obtaining employment, skills which could be developed at college. Dr. Putz responded by saying that Wall Street looks for different types of analysts. However, all these positions involve computer programming to build financial models. A typical college graduate analyzes the financial needs of companies and gathers data. Wall Street looks for people with certain technical skills, such as equity research, programming, and stochastic processes. Therefore, it is important to master one or more of these skills.


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