In early May, after weeks of delay prompted by the pandemic, the US Supreme Court will hear oral arguments in three highly-anticipated cases about president Donald Trump’s financial records. One of those matters involve a subpoena for Trump’s taxes.
The case is important. Trump, unlike any president in recent history, has refused to disclose his finances, obscuring potential conflict of interests between his government and his personal business. But the issue has now taken on a whole new urgency because the $2.2 trillion CARES Act passed by Congress last month contains deep within its 800 pages two barely-noticeable tax clauses that only benefit rich Americans, perhaps including the president.
The new tax clauses will cost Americans about $195 billion over 10 years. They suspend previously-placed limits on tax offsets and apply retroactively, meaning millionaires will make a killing based on past circumstances while millions of Americans lose their jobs and struggle to survive the economic effects of the coronavirus crisis. This, despite the fact that, officially, the businesses of Trump and others in government cannot benefit from the stimulus package.
In other words, politicians apparently found a workaround for the protections meant to shield the people from government corruption.
“The [tax] policy is complex,” senator Sheldon Whitehouse of Rhode Island told Quartz. “But the principle is straightforward: In the midst of a national health emergency, we ought to help those who need it—like healthcare workers and small businesses—not give huge tax breaks to hedge fund managers and real estate investors. This is a special-interest looting of the American taxpayer, plain and simple.”
Precisely how much Trump stands to gain from the “bonanza” tax breaks is unclear because he has refused to disclose his finances. The president has so far intervened in cases ordering his accountants and business associates to reveal their dealings with him, arguing that the chief executive’s records are special.
Supreme Court precedent indicates otherwise, however, and the new tax provisions in the CARES Act raise additional suspicions about his secret records that can’t be put to rest without full disclosure.
“If we had Trump’s tax returns, as we do for every other president in the modern era, the American people could see what kind of conflicts of interest and financial mischief swirl around their president,” Whitehouse said. “In this case, we could see whether Trump himself would benefit from giveaways like these provisions.”
On swindles and windfalls
The suspect clauses are hundreds of pages deep in the hastily-passed emergency CARES Act. They benefit a relatively small group of wealthy taxpayers and have nothing to do with battling Covid-19 or providing relief to the Americans worst-hit by the crisis, but Whitehouse said Republican politicians made them a priority during negotiations.
Members of Congress knew the tax clauses were in there. But the specifics, the extent to which these breaks could line the pockets of the rich and benefit wealthy real estate investors like the president and his son-in-law Jared Kushner, were not immediately apparent.
“What was a surprise was just how much money those provisions will loot from taxpayers to send to real estate investors and other million-dollar-plus earners—tax filers like the Trumps and Kushners,” Whitehouse said.
The astronomical cost only became evident a day after CARES was signed into law, when the nonpartisan congressional Joint Committee on Taxation (JCT) published an analysis of the provisions. The committee’s latest findings show that four of five millionaires will pocket an average of $1.6 million more this year alone thanks to the stimulus bill. This of course dwarfs the $1,200 one-time checks average Americans will receive.
In total the tax clauses will cost taxpayers more than the funding allotted in the CARES Act to all hospitals throughout the US, and more than the relief provided to all state and local governments, according to the JCT analysis. Together, they are the costliest elements of the relief package. For that reason, Whitehouse and Texas representative Lloyd Doggett, as committee members, want to know what role, if any, the Trump administration played in advocating for these policies.
On April 9, they sent a letter demanding to review all communications pertaining to any internal advocacy for the suspect clauses. The missive was addressed to vice president Mike Pence, secretary of the treasury Steven Mnuchin, and acting director of the Office of Management and Budget Russell Vought. The lawmakers want the records “so that Congress and the American public can better understand the provenance of these tax law changes, and assess whether any individuals within the Administration who stand to gain from these provisions were involved in their development.”
SCOTUS to the rescue?
One bitter irony of this especially cruel spring of 2020 is that the CARES Act was signed into law on March 27, just days before the Supreme Court was originally meant to hear the Trump finance matters.
The hearings were delayed due to concerns about crowds in the courtroom. They would not have addressed the suspicious provisions in the CARES Act. But perhaps the JCT’s discovery of the tax clauses’ astronomical cost, published just ahead of debates over the president’s unprecedented secrecy, would have alerted Americans to the need for full financial disclosure from Trump and his subpoenaed business associates.
Instead, whispers of the secret tax windfalls were drowned out by the roar of justified pandemic panic. At that point, the people were more worried about ventilator and mask shortages than secret surpluses for the super rich and there was no dearth of pressing news to preoccupy journalists and readers. Indeed, it seemed—at least to some—that the typical ideological rifts had been overcome for the common good. “At times, our nation can appear sharply divided; divided by generations, by left and right, by our differences, and even by the donkey and the elephant,” Forbes wrote hopefully of the stimulus bill. “Sometimes, circumstances arise that compel us to either rise as one or be shattered.”
Alas, that quickly proved to be an illusion. The reality is far more stark. As The Washington Post put it on April 14, “[E]very voter should know that, at a time when hospitals, cities and states cried out for help with the pandemic, the president’s allies in Congress tossed a [$195 billion] lifeline in the direction of Trump, Kushner and other rich people who needed it the least.”
Now, with the federal and state governments planning an easing of lockdowns—or as the Trump administration puts it “Opening Up America Again”—it’s perhaps also the right moment to pay attention to the president’s unprecedented secrecy about his finances.
If the Supreme Court decides after its historic telephonic oral arguments on May 4 that Trump doesn’t have the right to hide his taxes and financial records, contrary to his claims, the third parties subpoenaed over their dealings with Trump will turn the records over, they say. Whitehouse said the documentation could potentially clarify the extent to which Trump will personally benefit from the costly tax clauses in the CARES Act.
“We already know about massive conflicts of interest for the president, whether it’s foreign dignitaries staying at his hotels or shunting military planes to Scotland to steer business to his resorts,” the senator said. “Seeing the president’s full financial records would show us much more, like whether these provisions will pad the Trump family’s bottom line.”
The billionaire Tom Golisano was smoking a Padron cigar on his patio in Florida on Tuesday afternoon. He was worried.
“The damages of keeping the economy closed as it is could be worse than losing a few more people,” said Golisano, founder and chairman of the payroll processor Paychex Inc. “I have a very large concern that if businesses keep going along the way they’re going then so many of them will have to fold.”
President Donald Trump says he doesn’t want the cure for the Covid-19 pandemic “to be worse than the problem,” and some of America’s wealthiest people and executives are echoing his rallying cry. They want to revive an economy that could face its worst quarterly drop ever — even if it means pulling back on social distancing measures that public health officials say can help stop coronavirus. These investors aren’t prizing profits over lives, they say, they’re just willing to risk some horrors to avoid others.
“You’re picking the better of two evils,” said Golisano, who wants people to go back to their offices in states that have been relatively spared by the coronavirus, but remain at home in hot spots. “You have to weigh the pros and cons.”
In New York, where hospitals are at a tipping point and getting pummeled by patients, Governor Andrew Cuomo says the economy shouldn’t be restarted “at the cost of human life” and that he’s developing a plan that “lets younger people get back to work.”
The question is when they should do it.
Trump, guided by a group of hedge fund and private equity titans, wants the country up and running again by Easter, though public health officials warn that’s too soon for a virus that’s killed more than 18,400 and infected at least 400,000 worldwide. Only companies with less than 500 employees are required to provide paid sick leave for workers out with Covid-19. Economists from Northwestern University calculated that keeping social distancing practices in place until cases decline could save 600,000 lives nationwide.
Lloyd Blankfein, who ran Goldman Sachs Group Inc. until 2018, helped kickstart the calls to get back to work on Sunday when he tweeted that “extreme measures to flatten the virus ‘curve’” were sensible “for a time” but could crush the economy: “Within a very few weeks let those with a lower risk to the disease return to work.”
His longtime deputy, Gary Cohn, who left the bank to become Trump’s top economic adviser, asked if it was time “to start discussing the need for a date when the economy can turn back on.” Without clarity, businesses “will assume the worst,” he said.
Tilman Fertitta, owner of Golden Nugget casinos and Bubba Gump Shrimp, is calling on authorities to let businesses reopen at limited capacity in a couple of weeks to avoid a long economic disaster. Fertitta, who also owns the Houston Rockets and is worth $3.2 billion, said his company is “doing basically no business.” His demand goes against a school of thought that says prematurely reopening the economy could kill more people and eventually cause more economic harm.
Billionaires and other members of the elite have the luxury of social distancing while making money. The ones who want workers back in their jobs say they’re aiming to stop millions from suffering for years and falling further into debt. Officials are trying to accomplish that by restricting foreclosures and allowing Americans to defer mortgage payments.
“It’s outrageous,” said Robert Reich, who was labor secretary for President Bill Clinton and now studies public policy at the University of California, Berkeley. “It is absolutely necessary to shut down the economy so that millions of people don’t die. For the privileged among us to fail to see that and to give the economy precedence over this public health emergency is morally reprehensible.”
The push to restart the economy makes a certain amount of sense to rich people, according to Reich, because they have come to expect disproportionate gains as the system’s top winners. “The one flaw in their logic this time is that the coronavirus doesn’t understand class,” he added. “The more people are infected, the more likely it is that Blankfein and other billionaires will become infected as well.”
Jim Conway was a server in an Olive Garden in Pennsylvania until it closed about two weeks ago. He’s been out of work and isn’t getting paid while his application for unemployment benefits gets processed.
“Being an older worker, I’m in no hurry to go back in the middle of an epidemic,” Conway, 63, said. “Being a server means you’re in contact with lots of different people, and puts you at bigger risk of getting infected. I’m kind of glad they closed when they did.” He wants the outbreak under control before the restaurant reopens, but worries that politicians and businesses tend to focus on their bottom line before people like him.
“They’ve never really had our interests at heart,” he said. “And now would be a weird time to start.”
One of those government officials, Texas Lieutenant Governor Dan Patrick, said on Fox News that Americans should get back to work and let “grandparents” take care of themselves.
Dick Kovacevich, who ran Wells Fargo & Co. until 2007, wants to see healthy workers below about 55 or so to return to work late next month if the outbreak is under control. “We’ll gradually bring those people back and see what happens. Some of them will get sick, some may even die, I don’t know,” said Kovacevich, who was also the bank’s chairman until 2009. “Do you want to suffer more economically or take some risk that you’ll get flu-like symptoms and a flu-like experience? Do you want to take an economic risk or a health risk? You get to choose.”
Mark Cuban, who owns the Dallas Mavericks, wants Americans to listen to epidemiologists instead. “Ignore anything someone like me might say,” Cuban wrote in an email. “Lives are at stake.”
- 1:03:01: The Financial Crisis was caused by the rating agencies changing their business model to get paid by the issuer rather than the buyer
An interview and Q&A with billionaire and founder of the quantitative hedge fund Renaissance Technologies, James Simons. In this interview, James discusses his quantitative approach to investing and how this has evolved over his career. James also talks about fundamental trading and how his management style has helped make Renaissance Technologies so successful.
5:20 Were you precocious about business as a child?
7:06 When did you start thinking about business?
12:15 Your first investment was leveraged contracts on futures?
13:05 What got you interested in business?
15:13 Did any code breaking have applicability to finance?
17:40 Investing in foreign currency after Stoneybrook?
29:19 Interesting history?
31:34 Joining Stoney Brook mathematics department?
37:03 Leaving Stoney Brook to trade?
37:57 Fundamental trading technique?
39:54 Track record of Medallion fund?
44:28 How many employees do you have?
47:25 Employees are top of their field?
49:53 How do you manage lots of talented people?
52:42 A theory as to why Renaissance is so successful?
56:26 How did you know about the Bernie Madoff ponzi scheme?
1:03:01 The 2008 financial crisis?
1:08:47 Start of Q&A
1:09:14 Has the rise of computes in markets changed your perspective on fundamental investing?
1:11:11 Are quants destined to slowly drive themselves out of business?
1:12:47 What is your favourite algorithm?
1:13:59 How did you protect your intellectual capital?
1:16:52 The balance between improving your model and keeping it simple enough to understand?
1:18:12 Is Medalion the same as it was 10 years ago?
1:19:38 At any point in time did you doubt yourself?
1:21:48 Is your internal compass better than others?
1:23:53 Inductive or deductive driven investment strategy?0
1:25:15 Have you encountered any unsolved finance problems?
1:26:20 Advice to future quants?
Transcript00:00welcome everyone I think you in for a00:03real treat00:05first of all I’d like to welcome you all00:08to MIT Sloan we’re here today because00:14this is part of this is the there’s been00:17a world made for the the Sussman00:19fellowship which is given every couple00:22of years and it was funded to honor the00:27achievements and the opportunity stone00:32Sussman is given to a bunch of people in00:35the fund management business00:36he’s also somebody who was very much a00:40Pena and the whole hedge fund arena we00:45have it Donald for those who weren’t00:49here last week runs paloma partners and00:52a Chinese private equity investment firm00:56and it’s very it’s very much involved01:02you know with all things investing to01:06this day this year we have awarded the01:10fellowship to Jim Simons when in fact01:13the award really is almost ours for Jim01:17having agreed to show up Jim is an01:22extraordinary man genuinely01:25extraordinary it’s very hard to describe01:28how extraordinary because if you think01:32about this you know every day he goes to01:35work or when he did go to work it’s a01:38discovery in a battle it’s a competition01:40it’s like an athlete winning the01:42Olympics pretty much every day that’s01:44probably the best analogy it’s a01:46fiercely competitive environment and01:48anybody who knows finance knows how01:50unbelievably difficult it is and how01:51many people would like to eat your meal01:55Jim01:56not only is a great mathematician and01:58again those who are last week will know02:01about this but he’s also what I02:03described as a real Mensch an extremely02:07nice person who when I first met him02:09which would have been around 1990 or 9102:12and his fund was maybe 200 Jim will02:14correct me maybe 250 million which by02:17then was fairly large but I did it02:19today’s standard it’s very small had02:22this certain irreverence and confidence02:24and directness and one of the things02:27features that that makes Jim so very02:29special and you’ll notice it today he02:31gives extremely concise direct and02:34unambiguous answers to any question you02:36ask him the other thing to note about02:40Jim is for those who know some of the02:42people who work for Jim I know some of02:43the history it’s unbelievably difficult02:46to manage intelligent people and I don’t02:51know many people who do it as well as02:52Jim does and it’s worse when there’s a02:55lot of money involved Jim03:00one other thing to say the few things03:02angusamy things to say but one of the03:03things to savor Jim is that his track03:05record is so extraordinary that to most03:10academics it’s inconceivable and it’s03:13somewhat ironic that we’re here at MIT03:15in a and this is probably the best03:17finance faculty in the world at least so03:19my friends tell me and there’s a there’s03:23a paradox here because Jim never hires03:25finance guys or MBA is so such a we you03:28never used to and it’s quite wonderful03:30to have him speak to this audience and03:33I’m sure the other departments here as03:34well but it is interesting that you know03:37you have two powerpoints studying all03:39kinds of features of the financial03:40markets and Jimmy does away with Jim03:44does a way of publishing papers instead03:46just cracks them so Jim Andrew over to03:52you thank you03:55[Applause]04:04well I want to I want to start by04:06joining Andre and my MIT colleagues in04:09thanking Jim for joining us today and04:11being here and I have to say that this04:16is a real pleasure and an honor for me04:18because I think it’s fair to say that04:21Jim Simons and Renaissance Technologies04:22is certainly the most successful04:25quantitative investor in the history of04:28investing but perhaps actually you can04:30drop the qualifier quantitative and so04:33there’s a really really interesting set04:35of issues that we want to get to today04:37before I do that though I need to lower04:41your expectations of the interviewer04:43because you know this three lectures04:46that are three fireside chats that Jim04:48is agreed to04:50mathematics money and making a04:52difference only one of those M’s is04:54proprietary and confidential and that04:57happens to be today’s topic of money so05:00so Jim and I agreed on some ground rules05:02I get to ask all sorts of nosy questions05:04and he gets to say pass because it’s05:07confidential and I’m sure that the05:09audience will have a chance to ask those05:11questions too and I’ll have a chance to05:14say no okay so um Jim oh I’m gonna ask05:20you if you don’t mind to recount a bit05:22of your biography the way we did last05:24week but instead of Tom’s focus on your05:27mathematics career I’d like to turn it05:30around and focus on your business and05:31finance career so I’m gonna start the05:34very beginning you were a very05:37precocious mathematics student you05:39mentioned last week that when you were 205:42or 3 years old you are already doing the05:43powers of two um were you also05:46precocious from a business perspective05:49did you think about any of these issues05:50as a child as a child I thought I had no05:56interest in business which is not to say05:59I had no interest in money but I had no06:02interest in business and but06:07you know was a little kid I had a friend06:10who was very rich okay it’s nice to be06:13very rich I deserved that but just I06:18just focused on math and for quite a06:20while06:21so unlike Warren Buffett who had a06:24newspaper route business or Bob Merton06:26who I think was trading stocks when he06:28was 10 you had nothing to do with with06:30finance nothing to do with finance06:33okay so uh when did you first get06:37interested in business when you were at06:39MIT you mentioned something about that06:40last week I’ll have to call you back06:48what can I say I hope that wasn’t a06:52margin call if it had been I would have07:01said the same thing so when did you07:07start thinking about business you07:08mentioned as an undergraduate you had07:10some friends who are you know doing some07:13business in Colombia well I met some I07:17made friends at MIT with two Colombian07:20boys and they at a certain point started07:26a business and in fact it was my07:28encouragement that they started that07:30business and my father and I invested a07:33small amount in that business which07:36turned out eventually to be a big07:41success so what what possessed you to07:44think about that I mean that well it’s a07:46certain amount of initiative to actually07:47well there’s asked me to think about07:49that particular investment was that I07:51had when we graduated MIT three of us07:58one of whom was the Colombian boy and08:01his friend was in Bogota08:03cerebus road motor scooters from08:09Cambridge to Bogota now we’d expected to08:14go all the way to Buenos address but by08:17the time we got to Bogota we were08:19exhausted so we said we stopped in08:22Bogota and I stayed there a week or so08:25and I saw this country Columbia and it08:27was really a place that you could do08:29anything I real I was told if you start08:33a business a manufacturing business and08:36you’re making something that was08:37imported previously imported to Colombia08:41the government would shut off those08:43imports and give you clear roads to run08:47so I thought my friend should start some08:50kind of business like that but which08:53they did but that was my first08:57interaction with money09:01was when I was the first year well it09:07was a second year I went out to Berkeley09:09to finish my PhD I spent two years there09:11in the first year early on I got married09:15and we I had five I got $5,000 worth of09:21wedding gifts so I my wife and I decided09:26well I decided to shoot what she was09:28willing that we should invest this and I09:31I had a couple of stocks which for no09:35good reason I thought might do well and09:38so I want open an account in San09:42Francisco with with Merrill Lynch I09:44bought these two stocks I went home and09:48four months they did absolutely nothing09:50so they didn’t go down they didn’t go up09:53so I went back and I said you have09:56anything that’s a little more exciting09:59and he said yes he said you should buy10:03soybeans Merrill Lynch thinks that two10:07dollars and fifty cents now they’re10:08going to go up to three dollars and 5010:10cents what are you talking about I did10:12soybeans10:13I knew about stocks I didn’t know about10:16soybean users yes you could buy a10:18contract this 5,000 bushes you could buy10:20two contracts he did a lot of leverage10:23and so on all right so I bought two10:26contracts of soybeans and within a week10:30it had gone up quite a lot and I’d made10:33several thousand dollars maybe two or10:36three10:36now that was exciting and I came back to10:41the math department and I said to one of10:44the older guys I told him what happened10:46he said I said have any idea what I10:49should do is it absolutely sell it10:51immediately which was extremely good10:53advice because within a day or two it10:56hadn’t gone back down and it was10:58bouncing around and actually had a11:01little loss I closed out two position11:04and then I thought well I should have11:09taken a smaller position and then I11:10could have held it more11:13and I did I bought one contract of11:16soybeans and was going back and forth11:20early in the morning to watch the11:23opening in Chicago because it was it was11:28early in the morning in San Francisco11:31and Chicago open to trade these things11:33and I was going back and forth across11:36the Bay Bridge watching bored and and11:40then and I and I had a little profit at11:43a certain point and I realized I am11:47either gonna trade soybeans or write a11:50thesis I was in the middle of starting11:54to write a thesis and I could see I11:56can’t do both at the same time so I sold12:00that one contract for I think a very12:04small profit and that was the last time12:06I traded anything for a number of years12:09but I did write a thesis and got a job12:12here at MIT as a result so so just for12:16clarification your first investment was12:19a couple of stocks and then the second12:22investment was soybean futures contracts12:25yeah and these contracts as I recall are12:28leveraged like 25 or 50 to 1 is that12:32right it’s very highly leveraged I don’t12:35know I octane yeah it was yeah I felt12:38that you were you were a suitable12:40investor for that as a graduate student12:44well he didn’t ask any questions12:49he was just doing his job I came in I12:52had enough money to buy this stuff so he12:54he figured it was all ok yeah and so you12:58had never invested before that you13:00didn’t have to take a course in finance13:01or business nothing okay great so now13:05you’re an assistant professor at MIT and13:07it’s pretty clear based on your thesis13:09and the early work that you did that you13:12were gonna have a very good career in13:14math and you did so what got you13:18interested in business13:20at that same time because you continue13:22to have an interest in it didn’t you13:24continue having an interest in business13:26well when I came back to teach at MIT13:32the first intercession I went down to13:35Bogota to visit with my friends and told13:38him I was coming and I won’t leave until13:41we have found a business and they found13:45one while I was there and decided to13:47partner up and I knew there would be13:49there were very smart guys and they had13:51a very good sense of business which I13:54don’t think I ever had and so they13:58started this this business my father and14:01I invested a small amount and I had a14:04borrow from everybody but I did and so14:08that was the the first the first thing14:12and then there was there was not much I14:15could do about it so I kept doing doing14:18math and but I actually since I borrowed14:25some money I needed to pay it back and14:28it was there was a place in Princeton14:33called the Institute for Defense14:34analyses which was a very highly14:38classified joint and it specialized in14:42cracking Russian codes and protecting14:45her own so it was under the auspices of14:48the NSF and they paid a lot for14:50mathematicians so I applied to them and14:54got a job and enjoyed the job and was14:58able to start paying down some of my15:00debts because they it paid maybe double15:03what I was getting at at MIT Wow so so15:07well and I liked that place it was it15:11was interesting now you talked last week15:14about some of the work that you did15:16there15:16but one of the things that I wanted to15:18ask you and I didn’t think it was15:19appropriate to ask last week because the15:21focus is on mathematics15:22did any of the work that you were doing15:26there any of the mathematical tools that15:28you were developing15:29have any applicability to some of the15:33work that you did later on in finance in15:35a general sense yes now I didn’t get15:38into finance for 10 years after that I15:41left there in 68 and really didn’t get15:44into finance until the late 70s but I15:49learned about computers I learned about15:54you know the fun of coming up with some15:57algorithm which might crack a code most16:00of the time it didn’t but once in a16:01while you were lucky and and I didn’t16:05know how to program at all and never did16:07learn how to program but they had16:08programmers but I liked the idea of16:10developing algorithms seeing them put on16:13the computer and seeing you know if it’s16:16if it’s going to work so that experience16:20was very influential when I went into16:25the hedge fund business and then16:28gradually started to make it systematic16:31as well as opposed to the fundamental16:35training which we did at the beginning16:38and so anyway I was a mathematician I16:42was getting frustrated with some of the16:45research I was doing worked on a problem16:47for two years didn’t get anywhere and16:51it’s never been solved so well he could16:53see it was a hard problem that’s a good16:56one too and the South American business17:03had was beginning to throw off some17:05money so I had some money and I thought17:11I would and start investing and and I17:17had an interest in foreign currencies I17:19don’t know why but I did and I read a17:24lot about that so we started I started17:29and I got a partner investing in in17:31foreign currencies and that did very17:36well with this before you left for stony17:41brook or17:42Oh No was after I left I’d been in17:44Stoneybrook for six years by that okay17:47you know I was I went to Stony Brook in17:5068 and and it was 76 or 77 that we17:54started doing this and but I thought we17:57could I looked at the charts and they18:00looked like there was some structure to18:05these historical charts that one could18:07perhaps exploit so I hired the best18:11Crypt analyst in the world guy named18:14Lenny Baum who you may have heard of the18:20bomb Welsh algorithm the EEM algorithm18:23expectancy Maxim maximization he18:27discovered that so he came to work with18:30me and and we built a little system even18:35though I was trading fundamentally at18:38the time you know seat-of-the-pants sort18:42of thing which way this is wind blowing18:45we developed this sort of primitive18:49currency trading system but we didn’t18:55actually put it into practice because18:57one day when he didn’t show up for work19:01until the middle of the afternoon and I19:07should say that Lenny loved to read the19:11broad tape that was this tape we call it19:13was the Duke we’d called it the doomsday19:15machine because it just clicked that19:18this broad tape would roll all day long19:22giving the financial news of the world19:25and he liked to study that he was19:28supposed to be studying making systems19:30but he liked to read that tape so he19:32came in late and I said where you’ve19:34been and he said Margaret Thatcher has19:39been sitting on the pound and it has to19:43go up I said oh well I wish you’d come19:47here19:49this morning he said why because19:52Margaret Thatcher just stood up and19:56Margaret Thatcher just stood up and the19:59pound was way up he said how much is it20:00up I said well it’s up nickels five20:03cents so far he says it’s gonna go up 5020:06cents a dollar by pounds we should buy20:09pounds okay five pounds sure enough it20:13went way way up and that was the last20:17time Lennie wanted to look at any20:19systems he just felt his good intuition20:24would be suitable and we’d make a lot of20:29money and and we did we did doing20:34fundamental trading we started a fund20:37called limb Rory and the fees were 25%20:44of profits no fixed fee which was you20:47know sort of a reasonable thing and what20:51Lenny is my partner the first year the20:55fund doubled after fees and the next20:58year it multiplied by six after fees so21:02it had two times six is twelve so21:07everyone had 12 times as much money as21:09they started with and it was it was21:13fantastic and it was all fundamental21:15training still I felt that okay we can’t21:24we were lucky in certain ways I’ll tell21:29you one good story about luck gold which21:37was illegal to trade had become legal to21:42trade and the gold market gold prices21:45were going up and we bought gold and in21:50the firm21:51we bought gold we had a pretty big21:52position in fact Lenny and I split the21:55position half of it belonged to him in21:58some sense and half B belong to me22:01and it was a two hundred dollars and22:04fifty cents I’ve been a children for22:06$250 to 300 400 500 550 I think I said22:13Lenny you know I think we should sell22:15this already he said no no you don’t22:17know how far we’ll go you don’t know how22:19far it will go so I sold my half and it22:24kept going up and one day it reached22:27$800 and that day I happened to be22:33speaking to a friend of mine who was a22:36stockbroker but we would just I was just22:38chatting with him over the phone and I22:41said what’s new he said well what’s new22:43was this my wife went into my closet22:46this morning and cleaned it out of all22:48my old gold cufflinks and tie clasps and22:52she’s now down selling it22:56I said well dick I mean are you having22:59financial difficulties he said no no but23:03she’s a jeweler which he was and she23:06only had to stand in the short line I23:08said the short line he says don’t you23:11know there’s lines and lines of people23:13selling gold I said no but I’m very glad23:19you told me I hung up with him I picked23:23up the phone which went right to the23:25floor of the exchange and I’ve got23:26plenty to come over and I said Lenny23:29sell the gold he said no you don’t know23:32how far it’s been I was the boss and I23:36said sell the effing gold he said okay23:43okay and he sold the gold it was it was23:45eight hundred and ten dollars or23:47something like that the next morning we23:51came in and it was eight hundred and23:52twenty dollars and he was so mad by the23:55end of that day it was six hundred and23:57fifty dollars the market collapsed and24:00went nowhere but down after that until24:03it got back to two hundred and fifty24:05dollars a three hundred not not in a24:08week but it just collapsed now that was24:12totally good luck I mean it wasn’t24:14good that I realized that if everyone is24:16selling something it may be a time to24:18sell it yourself but but it was it was24:25luck it was just it was just luck so we24:31went we did well but I felt that this24:35should be systematized there should be a24:37way to systematize it and I brought in24:40another mathematician a very strong24:42mathematician named Gen X and to do24:47fundamental trading but he knew about24:49that we had made this currency system24:51and he looked at it and he got a good24:54programmer into the firm and he realized24:59this system could work for all all25:01commodities really it was it was a25:04pretty good system sort of so we started25:08trading that system and it did pretty25:11well and he did research have improved25:15it and improved it we were still25:18fundamental trading but that wasn’t even25:20going so well I had gotten interested in25:25venture capitals to some extent so this25:27memoride company was also starting to25:30invest in start-up companies and and ax25:37was running this training and at a25:42certain point the investors in Limerick25:47they didn’t like this liquid the venture25:53capital they liked the training and so I25:57decided to break up the company Lim Roy26:00and make a fund called medallion gym ax26:06would run that fund and we put the the26:10venture stuff into a liquidation only26:16fund and actually it ended up doing26:19pretty well so now we had the medallion26:22fund and everyone invested in the26:27medallions on26:29and it did very well for about six26:32months and then it started losing money26:34and it was losing money steadily now he26:39and his team had developed a very26:42complex system a very complex system and26:47it had many dimensions in it one thing26:52or another and I said you know I have to26:56understand what this system is actually26:58doing26:59he said it’s oh it’s too tough week I27:01can’t explain it to you it had this Bell27:03and that whistle so I said come on I’m27:06gonna project this into the two27:09principal dimensions and see what it27:12looks like and it was nothing but a27:14trending system plain and simple27:17trending it had this these other little27:20geek things whatever they were but it27:23was basically a trending system and27:25trending which in in commodities and27:28currencies to which historically was a27:32very strong thing had in the last27:36several years27:37just just sort of gone away with no27:40reason to think it would ever come back27:42so I said we’re closing the fund and he27:48was very annoyed but I was the boss so27:53we closed the fund and I told the27:55investors we’re gonna spend I’m gonna do27:58a study period and we’re not going to28:01trade at all of course we’re not gonna28:04charge any fees Oh at that point it was28:06five five and twenty who was a five28:09percent fixed fee and twenty percent of28:11profits and and everyone stuck with us a28:16few people redeemed but everyone stuck28:18with us and for six months and we28:22brought back someone who had left the28:25firm it’s a long story28:27we brought back this other very good guy28:29axe left and he and I especially he he28:34had some ideas of much shorter term28:36trading not high frequency in an out in28:41five minutes but28:42trading on a much shorter term and he28:45developed a pretty good system and28:48together I helped him and it got better28:51and after six months we went back in28:55business only only systematic training28:59and from then on we never looked back it29:05was it was just went from strength to29:07strength and I hired a lot of scientists29:11a lot a lot of computers and over the29:14years the system got better and better29:17and better so Jemma we’re gonna focus on29:20the Renaissance medallion fund in a few29:21minutes but I want to bring you back a29:23little bit because there are some29:25interesting precursors that I think29:27speak to the success that you enjoyed29:30one is that when you’re an idea is that29:34where you first met Lenny BAM was here29:35and down the street and as I recall his29:40early work the bomb Welch algorithm was29:43really designed to estimate hidden29:44Markov models that’s right which for29:48many of you I think you know that’s the29:49precursor for a lot of the techniques29:51that are used today including deep29:52learning so it’s an interesting history29:55to that yeah in terms of what you what29:58you encountered there yeah he developed29:59that algorithm with this guy named Lloyd30:01Welsh which was supposed to access30:05estimate hidden Markov models whatever30:09that is but there’s a lot of parameters30:11in and it was an algorithm which just30:16kept climbing30:17it kept re-estimated and re estimating30:21and with each restoration the expectancy30:23of these particular parameters whatever30:26they were got better and better and it30:28changed the parameters and to cut better30:30however no one could prove that it30:34worked no one could prove that it worked30:36it clearly did you could start at any30:39place as well it definitely worked but30:43how did you prove Oaxaca with proven so30:46actually I worked on that a little while30:48I was at I da and trying to prove30:53that actually works but it climbs at30:56every step but I couldn’t and anyway I31:01left I da and he when he and his friend31:06Petrie finally figured it out and they31:10wrote it was a a long paper it may have31:12been two or three papers now today it31:16turns out I’m told you can prove that in31:19just a couple of pages because there was31:21some theorem of which they were unaware31:23which would have made it short but but31:26anyway there was the algorithm speech31:29recognition it was very good for speech31:31recognition a whole lot of things yeah31:33yeah so um I’ll get to the medallion in31:37a minute but I want to just ask you two31:39more things that lead up to the31:40medallion fund one was you left I da to31:44join Stony Brook’s math department here31:46and at the time Stony Brook’s math31:48department wasn’t nearly as strong as it31:51is now can you tell us about that and31:53what motivated you and and what your31:56experiences were there well I got fired32:00from I da I got fired did I tell this32:05the last last time but I think it’ll be32:07worth repeating because not everybody32:08was here so okay so I always say getting32:13fired once is it could be a good32:15experience you just don’t want to make a32:17habit of it32:18I did I got fired okay the head of this32:27place I DEA was in Washington DC which32:34was a was a big organization and one of32:36its units it was this small unit in32:38Princeton he was named was Maxwell32:41Taylor some of the older folks in the32:44audience might remember that name and he32:48wrote an article lead article in The New32:49York Times Magazine section about how32:52we’re winning in Vietnam were doing32:54great we have to stay the course so on32:57this was 1968 and I did not have the33:02same opinion as he and I wrote a letter33:05to The Times33:06the first sentence of which was not33:08everyone who works for general Taylor33:10subscribes to his views or something33:13like that and I gave my views which was33:15he got out of there as fast as we can33:17and nobody said anything you know33:22nobody said anything they could have33:25tried to lift my security clearance but33:29no reason for it a few months later a33:34guy claiming to be a stringer for News33:38Newsweek magazine said he’s doing an33:42article on people who work for the33:43Defense Department and a repose to the33:46war and he’s having trouble finding33:47anyone in that category could he33:51interview me I was 29 years old no one33:54had ever asked to interview me before so33:57I was very excited and he said well okay34:01so how are you responding to this I said34:04well and I DEA you’re supposed to do and34:10at least half your time on their work34:13but you could also spend up to half your34:17time on your homework and I had been34:19doing a lot of math in that period as I34:24said so my attitude is my policy is34:27until the war is over I’ll do only my34:30own work and then when it’s over I’ll do34:33an equal amount of time doing only their34:36work and so that allow balance of so34:40that’s what I said then I went back to34:43the office and I decided I better tell34:45my boss that I gave this interview it34:49would have been more intelligent if I34:50had told him before I gave the interview34:53because he would have said don’t give34:55any interviews but he said well what did34:58you say I said well I said about the35:00half and half and so he said okay he35:03went into his inner office and called35:06Maxwell Taylor he came out in five35:08minutes and I said well you fired35:12I said I’m fired I see you can’t fire me35:16my title is permanent35:18number permanent member and he said well35:22you know but difference between a35:24permanent number and a temporary member35:26I said no he says a temporary member has35:29a contract but I was a permanent member35:32and I didn’t have a contract so I left35:36that’s of course I had to leave and I35:40had to look for a job I had three kids35:42but I was certain I would get a pretty35:45good job because I had just done some35:47actually quite important mathematics and35:49it was I’ve been giving talks and so on35:52so I knew I’d get a good job but as a35:59professor somewhere but Stony Brook came36:02along and offered me the position of36:05being chair of their math department and36:08it was a weak department with one of two36:12exceptions and they wanted to build it36:15up and they’ve been trying for a long36:16time to find a older distinguished36:19person to come as chair and they36:21couldn’t find anybody but they found me36:23and I thought this would be really fun36:29I’d like to build something and so I36:33took the job and the university had a36:37lot of money at that time which it36:39doesn’t have so much today they had a36:42lot of money Rockefeller was the36:45governor and he loved the state36:47university so I hired a lot of great36:51people it was a wonderful experience I36:54did a lot of mathematics during those36:57first few years myself it was a very37:00very productive time so that’s so then37:03what led you to start doing your37:05currency trading because you at some37:07point you left Stony Brook to do37:08currency trading yeah the time I left37:10Stony Brook first I went half time and37:12then I left altogether and what was in37:15the training business yes and so what37:18what led you to do that that why did37:20well because I as I said I was stuck on37:24a problem I had come into some money37:28I was trying that out I liked it37:32and I thought well I’ll just have a new37:34career my father was very opposed to it37:38he said look you have tenure you have37:40this wonderful job they can’t take it37:41away from you I did have a contract in37:45that sense and what why do you want to37:48take this risk but I I thought it would37:52work I thought it would work out yeah37:54and I was pretty confident and so in37:56your fundamental trading for currencies37:58can you share with us how you did it38:01well I mean it was totally non38:03quantitative would you say and so do you38:07how we use for example technical38:09analysis people are no Charlie didn’t do38:12our technical analysis I read all the38:15newspapers The Economist there was a lot38:19of writing I just pay a lot of attention38:22to two currencies and in these38:26currencies has just been tradable in the38:30open market because some some countries38:32still had fixed currencies fixed to the38:35dollar and you couldn’t well you could38:39trade it but it would it was fixed but38:44so it was malicious fundamental38:46fundamental stuff and it worked it38:50worked reasonably well I would say work38:52reasonably well and so but that was it38:58but but the problem with a business like39:03that is I walk in one day everything was39:08going my way I’m a genius the next day39:12I’d walk in everything was against me oh39:14I’m a dope it was a very stomach39:17wrenching business whereas with a system39:22that you can develop okay you have a39:25system you do what the computer says to39:28do you haven’t made a historical study39:32of the system that you’re using and it39:35worked with a very high probability the39:38system was going to work and so I39:42I was much more satisfied with that39:45approach and and we hired scientists and39:49so on and to build these systems and39:52improve them okay so now let me talk39:54about the medallion fund so you know39:56when I teach introductory finance I39:58usually start with a single equation on40:00the board and the equation is40:02mathematics plus money equals finance40:05and I would argue that the medallion40:07fund pretty much epitomizes that because40:09the system that as you described has40:12yielded just extraordinary returns and40:16at this point the track record is40:18confidential but you did give an40:20interview one of you very few interviews40:23that you gave in 2002 how luxe and so I40:26want to just read to you what was40:28written at that time about the medallion40:30track record Symonds by contrast just40:35keeps getting better consider his40:37performance over the past decade and40:39this is between 1988 when it was40:42launched and 2000 since its inception in40:45March 1988 Symons flagship three point40:48three billion dollar medallion fund has40:50amassed annual returns of thirty five40:53point six percent compared with eighteen40:57percent for the SP during that that was41:00after fees and at that time the fees for41:03the medallion fund at its peak was five41:06and forty four so five percent fixed fee41:09and forty four percent of the profits so41:13that that track record yielded two41:16thousand four hundred and seventy eight41:18point six percent return over the eleven41:20years from 98 to 88 to 99 and the41:26next-best fund in the hedge fund41:28databases at the time was the Soros Fund41:31the Quantum Fund which was only one41:34thousand seven hundred and ten percent41:36so and but that was of two thousand so41:40first question how’s the track record41:43been since then because nobody knows for41:46sure I know41:53and if you and a few other people know41:56the tracrac that has continued good we I41:59don’t know if at that time we had42:01already raised the fees to five and42:03forty four first we raised them to five42:05and thirty six and then the investors42:09are all complained but they just wanted42:12to have more so how can I get more and42:14then five and forty four and there was42:18still a very good return at five and42:20forty four so no one wanted to redeem42:22but we realized that there was a limit42:26to how much we could manage we42:29understood the system and you know it42:34could manage a certain amount but it42:36couldn’t have managed huge you know huge42:40amounts and trillions42:43hundreds of billions that certainly42:44couldn’t manage that kind of money so we42:47decided to and because we were making so42:51much money the fund was growing42:55internally first we prevented any42:59outsiders from no new investing43:03investments from outsiders except for43:06the employees and then we decided to buy43:12in the outsiders that was in oh three I43:17think oh three or four no five by the43:20end of oh five we had bought out all the43:23outside investors and it was just owned43:25by owned by the employees and it did43:30grow to some extent but because it did43:36and it could manage that much but at a43:38certain point it’s been it’s been capped43:43off and we started and in that same year43:47oh five we started some funds for the43:51public which have done very nicely and43:55they have no43:57clash with medallion there there much44:00longer term expectations but those funds44:04have done very nicely and so at the44:08moment as it that there’s 45 billion in44:11those funds being managed and but the44:16medallion fund has always stayed44:17medallion fund has stayed at a certain44:19size which I won’t share yeah but it’s44:23not as big as 45 million yes can you44:27share with us how many employees you44:28have yeah we have three hundred and ten44:32to twenty or something like that yeah44:34counting everyone we have a lot of44:36scientists we really you know you have44:43to in a business like this just keep44:46making things better keep improving the44:50system because other parts of it are44:54gonna wear out after a while people will44:57catch on to this so they’ll catch on to44:59that so you you just have to like in any45:01business in any business you just have45:03to make things better and better and45:05better because that’s what everyone else45:07is trying to do and so so we hire the45:12best scientists we can people have said45:16to me although yo you know you’re you’re45:18not doing the world a favor these people45:20could be doing great scientists you know45:23for they’ll make all this money and then45:26they’ll give it to charity I’m not45:28worried that it’s gonna ruin the world45:29by having good scientists working at45:32Renaissance but we do have good45:34scientists working there and and that’s45:37been that’s been the model the model has45:42been first hire the smartest people you45:47possibly can sensible principal work45:58collaboratively let everyone know what46:02everyone else is doing now some46:07firms that do have these systems they46:11have little groups of people this is46:12ours and this is theirs and and they’ll46:15get paid accordingly and so on to how46:17their system goes up we have one system46:20and once a week there’s a research46:27meeting if someone has something new to46:29present it gets presented it gets shoot46:33or shoot up and and and looked at from46:35everyone has a chance to the code is46:39there they can run the code and see what46:42they think is this really work and so on46:45so it’s a very collaborative enterprise46:48and and I think that’s the best way to46:52accelerate science is people working46:54together and so that’s that’s that and47:00we have great infrastructure wonderful47:04infrastructure so people can get right47:05to work we’ve had people come in start47:10to work as I got oh I’m doing this after47:13after three days I’ve never been in any47:15place where you could get up and running47:16so quick so it’s well organized and we47:21have great people so you know obviously47:26much of what Renaissance does is47:28confidential and in particular the even47:32the people that you have are47:34confidential but I think it’s fair to47:36say that if you looked at the quality of47:40the colleagues you have they are47:43probably among the top scientists in47:46their field in many different fields is47:49that fair to say well I don’t think47:53there’s anyone who would well okay I’ll47:55tell you a funny story we had a we have48:02a Renaissance a colloquium every week48:05someone comes and gives a talk the48:07scientists and and it’s open to the48:10public and one day an astronomer and48:13young astronomer came in a friend of his48:16already worked at Renaissance48:18and this guy came and he gave a very48:21good talk he gave a very good talk48:23and I took them aside afterwards and48:26says you know your friend is here and48:30you would like working here you would48:33like working here we would like to have48:34you work here48:36and he said well it sounds very48:38appealing but I’m right now I’m in a48:41project that I science project that I48:44really want to complete before I think48:46about so he won the Nobel Prize he won48:52the Nobel Prize he was one of the two48:55teams that learned that the universe48:58instead of decelerating was actually49:02accelerating and it was it was big news49:05and so I think he made the right49:08decision you know most people would49:11rather have been Nobel Prize so so he’s49:16the only scientists of Nobel Prize49:19quality that we almost got and and I49:23don’t think anyone else in the firm is49:25probably that good although some of them49:27have been terrific I some of them they49:33don’t give Nobel prizes in mathematics49:35but what they do in physics of course49:39and we have a lot of people who were49:40physicists experimental physicists do49:43well astronomers do well they look at a49:46lot of data and analyze it and that’s49:49and that’s what we do analyze data so49:52that leads me to my next question how do49:54you manage with all of these incredibly49:58talented people often with really huge50:01egos you talked about collaboration but50:04having been a chair of a department and50:07you’re having a manager an apartment50:09it’s not always easy to get big egos to50:11collaborate well a department chair does50:18not have that much power right50:22and I’m sure and any professors in the50:26audience know that you don’t have to do50:29what your department UOB says you have50:31to teach this class okay it teaches a50:33class but as far as your research goes50:35you can do what you want so but we did50:43at Renaissance say you know we’d like50:45you to work over in this area or work50:47over in that area but but nonetheless50:51other groups there are groups that work50:54on different things and in the research50:57area but because they see what’s going51:00on every week and everyone else’s group51:02they can sometimes and often do make a51:05suggestion hey you know what we’re doing51:09over here I think could affect what you51:11want to do over there the the the way51:15people are paid everyone gets a piece of51:19the profits and but they’re judged it’s51:24not why don’t you accomplish this year51:27you know I’d have every year people come51:29in would convince me and say you know I51:32made so much money for the company my51:34work made so much money for the company51:37last year I deserve a big raise I said51:39oh yeah well that was that was good work51:41didn’t it derive from Shawn selves work51:44he says yeah yeah but we really made it51:46better and I said well and didn’t you51:49work with Joe and Susan on this yes yes51:53I agree I did I did that so I said you51:57know if I added up all the money that52:00everyone who comes in here tells me they52:03made for the company this year it would52:05be five times as much assess the company52:08made so you know but we look back on52:13three years four years five years how52:16they’ve done and they’ll get raises52:19accordingly and and that’s the way it52:24works and people no one’s perfectly52:29happy with everything and I can’t say52:31there’s no one who thinks he should be52:33paid more52:34which is human nature but everyone’s52:37pretty happy it’s a it’s a very happy52:39place yeah so very happy so this this52:42leads me to the the final point that I52:45wanted to make about the medallion fund52:46and what what you built over the years52:48so you must know that that you and your52:52colleagues at Renaissance have been an52:53inspiration to many many quantitative52:56investors many students here many52:58faculty myself included and the favorite53:01topic among quants getting together for53:05beer or or stronger is how do you do it53:09and why is it the case that even to this53:11day there’s nobody close to Renaissance53:15and so I have my own conjecture that I’d53:18like to run by you and and get you to53:20react early and my conjecture is a53:23little different it’s not about the53:24systems it’s not about any particular53:27magic formula or or algorithm but rather53:32being at a management school I guess I’m53:35biased I actually think it’s about the53:37management specifically I think it’s the53:41combination of the fact that you53:44actually ended up being a very good prop53:47trader first before you even thought53:51about the mathematics you actually53:52became a good trader and then with that53:55intuition of what it means to make money53:58and lose money you ended up being a good54:01people picker and you ended up building54:05around you an extraordinary team and54:08that team has grown based upon the54:10culture that you created if you just54:12mentioned that at the end of every year54:14you have these awkward conversations54:16with people who can adjudicate among54:18these very big egos except somebody the54:21command of the respect of anybody so do54:24you agree or disagree with that54:25characterization more or less I mean it54:29was it was certainly good to have done54:32fundamental trading to you know just54:34understand the mechanics of markets and54:38so on54:40of course we don’t do that people don’t54:44do that54:44and I have to say I left Renaissance54:48when I was 72 so that was almost nine54:53years ago and the management there just54:59carried on we had some great leaders and55:04we haven’t missed a beat they’ve done55:08just as well maybe better than they55:10wouldn’t have if I had stuck around but55:13I felt it was time for the younger55:16people to take over I was had started55:21spending more of my time with our55:23foundation which is a topic of next55:27week’s encounter and so I thought okay55:34what it was two people who were called55:40executive I don’t know I don’t remember55:43what that title was but they had a very55:45high title and gradually I’d given them55:47more and more responsibilities so when I55:50left it was it was just fine and and I55:58always keep pushing them to hire very56:00smart young people and that’s I think my56:04biggest contribution I’m the chair and56:07we meet every every month and so on but56:10just hiring great young people into the56:15incident into the business is the best56:19thing you can do in your tenure as chair56:21of Stony Brook’s math department56:22prepared you for that in some ways yeah56:24sure so I want to turn to a few56:28miscellaneous topics now and again feel56:31free to tell me that not interested in56:34them as early as 2003 renaissance56:38technologies raised concerns about the56:40Bernie Madoff Ponzi scheme how did you56:45get wind of that and what motivated you56:49to even say anything to the SEC we had56:55had money invested with Madoff for a56:58long time not not too firm but57:02relatives of mine our foundation had an57:07investment with with Madoff and I knew57:13him a little bit and he was really57:16amazing he kept coming up with with57:19these very very steady returns very57:22steady returns come rain or shine57:27so at a certain point I said this guy57:30has to know something that we don’t know57:35he certainly knew something that we57:37didn’t know I had all the the tickets57:45the what he calls the confirmations for57:49going back two years so I asked one of57:52the guys in the at Renaissance and well57:55in the company I was apprentice on set57:57to look analyze these trades that he was58:00going and tell me what you learn what’s58:04his secret so this guy went to work and58:09it was his conclusion well when they put58:15on a position they they buying something58:18they generally get a very good price58:22maybe the low of the day if they’re58:25buying maybe the high of the day if58:26they’re selling but most of the time58:28they’re not putting on positions they58:31stick with the position that accounts he58:34said for maybe ten percent of their58:35profits they claim they have t-bills58:39sometimes and so was an interest but 8058:42percent of the profits was a complete58:44mystery it was a complete mystery now58:48what they did was let’s see they would58:55put on a big position according to the58:59tickets with stocks which would the59:06collection of which would be59:08approximately the SP and then59:13they would buy a put or a call to59:17protect themselves against outside moves59:24well from what we understood they had a59:28huge amount of money under management so59:32you would think when they put on these59:34puts or calls or whatever it was it59:38would it would move the market actually59:39in those things but we could see no no59:44evidence of that they said they were59:47putting on these puts and calls but you59:50look at the pudding call market there59:53was no evidence of any such activity so59:57I thought well let’s let’s get out of60:04this thing even medallion had a little60:07bit invested in it it with medallion had60:10extra cash at that time and we had put60:13it with me so we sold it and and then60:18nothing happened60:20and several years went by one of my60:25relatives called me and said you know60:27you still like Madoff I said well I60:34can’t tell you to take your bunny out of60:37it because he’s been going for a long60:39time and he keeps on going and he’s he60:42must know something I don’t I said I60:45took my money out but I couldn’t advise60:48someone to take their money out it never60:51dawned on me that it was a Ponzi scheme60:53I didn’t know what the heck he was doing60:56but I just didn’t like the looks of it60:59so we couldn’t understand what he was61:02doing said that’s why we got out five61:03years later the crap hit the fan and he61:10was he was outed and and it was61:16everyone knows what happened next so and61:20actually they look back six years for61:24any profits that you’ve made have made61:25so we our foundation had to give back61:29some money to the two people who had61:33lost it but it was it was just the61:40craziest thing the craziest thing in the61:42world61:43Madoff the irony is that the fake track61:47record that Madoff posted was actually61:50not as good as the real track record the61:51medallion fund that’s true that’s true61:54well it was pretty steady I have to say61:57that it was a pretty pretty it was61:59pretty steady but it was and then the62:03the I don’t know the sec started62:07investigating us because some people had62:11said oh look these Renaissance people we62:12don’t know what they do we because of62:14course no one knew exactly what what62:16made of did and of course we didn’t tell62:18people what we would doing they couldn’t62:20see our portfolio they couldn’t see62:22anything by that time I think we had62:27already given all the money back to the62:30investors so I could say well look we we62:35can’t be doing anything wrong because62:36it’s all our own money we’ve already62:40given back all the money to the62:42investors but they did study us and work62:47us over for a while and of course they62:51couldn’t find anything bad and then they62:54went home but it was as a result of made62:57up that we will show examined by the SEC63:00right so right around that time ofcourse was the financial crisis and thatprobably precipitated Madoff unravelingwhat do you make of that natural crisisin the aftermath you talk about 2008yeah wellit should never have happenedit should never have happenedthe there were these mortgage-backedsecurities had been created they’dalways existed mortgage-backedsecurities but very fancy ones weregetting created and they had all kindsf this and that and so on and so forthand in the old days the rating agenciestheir customers were the buyers of bondsthe bond rating agencies so they wantedto do right by their customers but at acertain point and then you’d get areport every week or a newsletter orsomething like that but with theinternet coming along people weresharing this who didn’t subscribe so therating agencies decided ok we’re notgoing to charge the buyers of the bondswe’re going to charge the sellers of thebonds now if you think about it that’s aconflict of interest because they reallywant to get the bundt have the bondssold so maybe they won’t be so tough inrating them and that’s what happened thestuff was sold which you’d have to be amoron and stamp triple-a and you knowpeople were getting mortgages no docksyou’d walk in you’d get a mortgage how64:54much money do you have oh I have64:55$100,000 and how much money do you make64:57oh I make $200,000 ok fine we’ll give me65:02this much of a mortgage well they didn’t65:04even ask the doc for doc for documents65:06in many cases or your income tax forms65:09or they do and why were the bank’s being65:12so lenient because they could sell them65:17to people who would package up these65:20these mortgages and put them there would65:23they ultimately end up as a65:25mortgage-backed security stamped65:28double-a triple-a so everything had just65:34become very wax and and Bear Sterns for65:41example which was a firm that we had65:43always had great confidence in they were65:46very conservative outfit they almost65:52went down the drain because of this65:56fortunately they didn’t we had money65:58with them and as soon as it looked like66:01they were going to be in trouble we66:04bailed out and got out three days before66:07they folded then we were working with66:13Lehman Brothers and we had a lot of66:17money with Lehman Brothers but this is66:19this is medallion and so on we had a lot66:21of money with Lehman Brothers and some66:24of our outside funds also did but it was66:28beginning to look not so good for them66:30and I called up the head of Lehman66:35Brothers had said you know dick we’re66:39gonna have to take some of our money66:40I’ll I’m gonna have to take half of it66:43out I’m uncomfortable with that much66:47being with you and he said ok fine so we66:50did that and then things were looking66:55worse and worse and we had a some66:59insight into his into their balance67:01sheet and we knew it was stuffed with67:02these a lot of the assets were these67:05mortgage-backed securities and I called67:07him and I remember I was driving and I67:11said dick what we’re gonna have to take67:13out the rest of the money and he said67:16all he said I thought you called me to67:19buy these new bonds that were issuing67:21their oversubscribed but for you I’ll67:24you know I’ll give you a piece and I67:28said well I I don’t want to buy your67:32bonds but I’ll wait a few days and see67:34how they sell before I take the rest of67:38the money huh67:39and a few days went by then the list of67:43buyers of these bonds came up and it was67:46the most unsophisticated group of you67:49know an obscure Teachers Retirement Fund67:52no no reputable big outfit was buying67:57these bonds and said I call him okay68:01we’re taking the rest of the money out68:03and that was three months I think before68:07Lehman Lehman collapsed so but if therating agencies had done their job thiswould not have happened and but no onewants to blame the rating agenciesbecause who’s ever heard of rating aidsI mean the newspapers want to blame thebanks right they want to blame the bigplayers but it was it was you know maybenot quite as simple as I’m saying but itwas a mortgage-backed collapse and thesebonds were rated improperly that’s whathappened so let me now since we’regetting a short on time I want to makesure there’s plenty of time for audience68:52questions so maybe we can open it up and68:55and while we’re looking for our68:57questions raise your hand and then Kelly69:00and Italy will pass a mic to you while69:03we’re getting our first question maybe I69:06was the first one with the white shirt69:08of the hold of his hand so yeah69:14hi I’m Myles I’m a junior at Harvard I69:17was wanting to ask so over the years69:19obviously the the general markets have69:21changed with the advent of more computer69:23technology has that shifted your view on69:25fundamental versus quantitative and69:27investing I mean early you seemed to69:29kind of point to the fact that at the69:30end of the day fundamental investing is69:32very wishy-washy and based on intuition69:33do you think that that is always true or69:36do you think there are people that truly69:37have an advantage in in fundamental69:39investing that people have in doing fun69:43of is it possible to do yes I mean69:45obviously Renaissance is is quantitative69:47but are you always Pro quant over69:50fundamental or do you think69:52scream for fun knowing that he’s had a69:55great career I know I don’t think he has69:58a computer on the premises except maybe70:01to count his money but no very it’s a70:08perfectly legitimate way to invest then70:13I guess what are the skill sets that70:14differentiates a good fundamental70:15investor from a good quantitative70:16investor say it again what what are the70:18different skill sets that separate a70:20good fundamental from a good70:21quantitative investor oh I think it’s a70:24it’s a world of difference I think a70:27good fundamental investor let’s say in a70:30company he wants to evaluate the70:33management have a sense of the human70:35beings that are running this thing he70:38wants to have a sense of where the70:40market might be going and it’s you know70:47it’s a set of skills and some people of70:50a very good habit70:54quantitative stuff is a it’s a different70:56set of skills and which suited me and so71:04does that answer your question71:11mr. Simon some ask wants with71:13increasingly powerful tools seek out71:16inefficiencies and the markets to71:18exploit and we keep exploiting them71:21until there’s nothing left to exploit71:23that’ll overcome transaction costs are71:25we destined to slowly drive ourselves71:28out of business and also how long as we71:31weak wants or weak watch as we keep71:34seeking the inefficiencies to exploit71:36and thereby diminishing them that’s a71:39good question71:40yes inefficiency do eventually get71:44traded out if they’re discovered but the71:48market is not static it’s dynamic things71:54change and therefore this room I think71:57for new inefficiencies to materialize72:01and so72:04I think it’s never gonna be you know all72:08inefficiencies are out of it there’s72:10nothing to just discover on the other72:14hand you know so far we’ve managed to72:18you know our returns have been more or72:22less stable for a long time so but we72:26keep finding new things and throwing out72:29things that are no longer working to new72:33things emerge as quants are looking for72:36new things so the quants are exploiting72:38other quants I have no idea okay well72:44she’s giving no hi what’s your favorite72:49algorithm what’s my favorite algorithm72:54I’ll tell you my favorite algorithm my73:02favorite algorithm is something that I73:05worked out when I was at the Institute73:07for Defense analyses and it has to do73:11with it has to do with solving a certain73:18classical problem in the field and I73:22solved that but it’s classified it is I73:29solved this problem and they made a73:30special purpose machine at NSA and I73:34heard that thirty years later it was73:37still they were still using this special73:38purpose machine to implement this this73:41algorithm so that’s that’s my favorite73:43algorithm and it’s classified so there’s73:48a guy right there well hi you’ll get73:54your turn hi right here I was wondering74:00what I was wondering what you did over74:03time to kind of protect your74:05intellectual capital you had a lot of74:08people working for you how did you keep74:10everybody rowing in the same direction74:13and how did you protect kind of this74:15special yeah the question it’s a good74:18question74:18well everyone signs forever non-compete74:24no not a pro man on computer for now74:27forever non-disclosure and after you’ve74:32been there a couple years there’s a74:34non-compete agreement that you’re74:36invited to sign and pretty much everyone74:39does because there’s a lot of money74:41that’s out of your bonus a certain74:44amount is held back for a while and then74:49invested in medallion actually and then74:52you get it all the time but so there’s74:55always you always have a lot of money on74:58the table which you’ve not yet gotten75:01received which keeps people from running75:04off we’ve only had one incident a couple75:08of Russian guys left and stole some of75:14our secrets and well we had a lawsuit75:19against them and so on and so forth75:22and and well that they’re not in75:27business anymore and the system but they75:30had made off with this now pretty75:32antiquated so we’re not worried about75:35that but it’s a very good question but75:39the main reason people don’t want to75:42leave it’s it’s a very nice atmosphere75:43it’s it’s fun to work there people get75:46paid a lot of money there’s no doubt75:49about that and it’s fun so we we’ve had75:56people retire and but they’ve put the75:59exception of those two Russians they’ve76:00never gone into any investment business76:03they’ve just retired and I don’t know76:06done this and that one guy went up to76:09the Broad Institute and became a76:14terrific scientist genetic scientist76:17working for bird so I think if76:23turnover is very important in any76:26company and if a company has a great76:28deal of turnover there’s something76:30there’s something wrong and and you know76:34with something right if turnover is very76:39well of course one thing that could be76:40right is you’re paying too much76:44but-but-but it’s good to have low76:46turnover and that’s what Renaissance has76:50[Music]76:51at the beginning of your talk you76:54mentioned that you wanted to understand76:56how the system that has presented you76:58you want to understand how it works and77:01at another point you also mentioned that77:03once you have the system it’s all about77:05like making it better and better so my77:08question is the balance between those77:10two because as you try to make your77:12system better and better there is the77:14risk of making it more complex to a77:18point that you don’t understand it77:20anymore how do you balance improving77:22your model and keeping it simple enough77:24to understand the tech job well that’s a77:30good question77:32it’s completely understandable because77:37you can understand that if you wanted to77:43spend a week doing nothing but77:46understanding the system it’s all77:48written down and so it’s perfectly77:51understandable77:52there are a lot of you know predictive77:56signals there’s a lot of stuff going on77:58it is very complicated but it’s not not78:03understandable so we understand it78:11I’m a Jedi I work with grace dan I’m78:15sorry yes78:16so you mentioned continuous improvements78:19of the systems I wonder is medallion of78:24today the core of it at least similar to78:27what it was ten or 20 years ago or has78:30medallions reinvented itself over that78:33time to be completely different things78:35you know I didn’t my ears not so good78:37can you understand what he asked yeah so78:39is the medallion of today pretty much78:42the same as it was ten or twenty years78:44ago or has it reinvented itself78:46oh it’s continuously reinventing itself78:48I think there are some parts of it that78:51would probably have been there for ten78:53years or maybe even 20 years but that’s78:57less and less as as new as new things79:03come along so like I said you just have79:09to keep you just have to keep running79:11people will discover some of the things79:13that you’ve discovered then they’ll get79:15traded out so you have to keep coming up79:19with with more and more things and we79:23have a great computer system and and you79:29know and great scientists very good ones79:33so that’s the answer79:37hi Jim so you mentioned during the79:42beginning phases of the medallion there79:44was a short period of time when you guys79:46weren’t doing so well I’d like to ask to79:49you any point in time did you doubt79:51yourself and if so how did you will79:54yourself to continue and eventually79:56succeed well in that period80:02well we shut it down I wasn’t certain80:08but I did feel that we could improve it80:13to the point where we were happy to80:16continue trading so and80:22I’ve never doubted that things would80:27keep working reasonably well I think you80:34know we’ve been lucky to a certain80:36extent you know luck has placed quite a80:39role in life and a lot of people don’t80:43you know the guy’s business fails he80:50says was bad luck80:52if a guy’s business succeeds he says oh80:54you know I’m a hard worker and naturally80:56it succeeded but there’s luck everyone81:01so so far we’ve been pretty lucky but I81:06haven’t been I haven’t been very worried81:11you know there are times when when a81:13month goes by we don’t make money one81:15month there it’s very rare we don’t make81:19money in a month but once in a while81:20that happens but it’s always come back81:28okay there’s a woman right there I’m81:35looking at you who didn’t you didn’t you81:38raise your hand all right well we’ll see81:44if we’d get you you’re big on behavioral81:50finance and dr. Simmons it seems like81:54when you talk about your past you talk81:56about your gut instincts and you kind of81:59just pass it off as you know I felt this82:02way but I was wondering if you had more82:04I don’t know if your internal compass is82:07a little bit better than most in guiding82:10you through tough decisions like the82:11last person asked again I couldn’t82:13understand true the acoustics in this82:15room are not great yeah I think that the82:18she was asking about the role of human82:21behavior in quantitative investing that82:24the fact is that you do have some kind82:26of a gut instinct about when a system is82:28working or underperforming what role82:31does that play this intuition and82:33judgment82:34thinking about these strategies well I82:37mean if you see something that’s that’s82:38steadily losing you don’t that does not82:41take into ition to determine that82:45something is wrong and you ought to stop82:47doing that but well intuition you know82:55scientists some scientists have pretty82:59good intuition scientific intuition how83:03does that happen in math you might say83:06hey this this operation worked over83:10there maybe it’ll work over here I’ll83:14give it a try so as people come into the83:18firm they learn what has worked and83:22sometimes they say oh oh if we perturb83:25that a little bit it could work even83:27better or stuff like that some people83:31you know have better scientific83:33intuition but I think it’s scientific83:35intuition it’s not market intuition that83:38the the guys who work there are usually83:45so we’re just about out of time I saw I83:49want to have it one last question and83:50then we’re gonna wrap up with it would83:53you say that fundamental approach in83:56your investment modeling is primarily83:58inductive reasoning based or deductive84:02by nature in other words data-driven to84:05come up with your models or more logic84:07driven to come up with your models well84:10we certainly are logical it’s hard to84:14work without logic84:21there’s a lot of data sometimes one84:27might come up with a number of things84:32and just try them all out and see in84:35front of one of them works now the84:38danger of that is if you try and up84:41things something’s gonna work but you84:43have to be sure but the statistics are84:47still in your favor if there was so much84:51data that even though we tried a million84:53things and one of them worked the84:57probability of that was very very slim85:00and therefore you were probably okay so85:03you know we do try try a bunch of stuff85:07and I don’t know if that answers your85:10question but okay so so Jim and wrapping85:14up I’m gonna ask you two quick questions85:16it related one is that you moved from85:20Stony Brook to doing trading because you85:23were working on a problem that you were85:25struggling with and to this day it’s85:27still unsolved you went back to working85:28on it it’s a tough problem I imagine did85:31you encounter any unsolved finance85:34problems that that you think about and85:37struggle with unsolved finance problems85:41well it doesn’t seem like they’re given85:44the track record of medallion well I85:47think there’s a lot of people who will85:48worry about how they’re gonna pay their85:50rent which is perhaps an unsolved85:53problem as far as they’re concerned yeah85:55I don’t know what an unsolved financial86:00problem really means but okay have you86:07had any financial problems uh uh a whole86:10bunch I would love to get access to the86:14Renaissance research staff to have them86:16working with us on it well but the the86:18last question is for all of the future86:21quants in the audience any advice about86:25how they ought approach this field and86:28career I think any potential coin should86:30just not get into the business we don’t86:32need to have a86:33a whole lot of people in this business86:38well on behalf of what advice could I86:47give you it’s just you know work hard86:50hire good people and it’s not easy to86:54get into the business business you need86:57big databases and a lot of computers and87:00stuff like that to to even startup but87:04you know if you have an idea you can87:08test it out and think it’s good you know87:13more power to you I could say well Jim87:17on behalf of all of us here at MIT we87:20want to thank you so much for sharing87:21your wisdom with us and I I think that87:24your career in finance is just87:27extraordinary and it’s been an87:29incredible inspiration to many many87:30people and will continue to be an87:32inspiration but what I want to tell87:34everybody is what might be even more87:37inspiring is what you can talk about87:38next week this not only have you made87:40tens of billions of dollars for87:42investors and billions for yourself but87:44you’ve also given away a tremendous87:46amount of money for philanthropic87:49purposes and we’re going to hear about87:51that next Wednesday so I urge all of you87:52to come back and hear the the third and87:55the three MS of money87:59mathematics money and making a88:01difference so thank you very much88:02[Applause]