Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy by Cathy O'Neil Read Free Book Online Page A

obviously came too late.
    At Shaw, these jitters dampened the mood a bit. Lots of companies were going to struggle, it was clear. The industry was going to take a hit, perhaps a very big one. But still, it might not be our problem. We didn’t plunge headlong into risky markets. Hedge funds, after all, hedged. That was our nature. Early on, we called the market turbulence “the kerfuffle.” For Shaw, it might cause some discomfort, maybe even an embarrassing episode or two, like when a rich man’s credit card is denied at a fancy restaurant. But there was a good chance we’d be okay.
    Hedge funds, after all, didn’t make these markets. They just played in them. That meant that when the market crashed, as it would, rich opportunities would emerge from the wreckage. The game for hedge funds was not so much to ride markets up as to predict the movements within them. Down could be every bit as lucrative.
    To understand how hedge funds operate at the margins, picture a World Series game at Chicago’s Wrigley Field. With a dramatic home run in the bottom of the ninth inning, the Cubs win their first championship since 1908, back when Teddy Roosevelt was president. The stadium explodes in celebration. But a single row of fans stays seated, quietly analyzing a slew of results. These gamblers don’t hold the traditional win-or-lose bets. Instead they may have bet that Yankees relievers would give up more walksthan strikeouts, that the game would feature at least one bunt but no more than two, or that the Cubs’ starter would last at least six innings. They even hold bets that other gamblers will win or lose their own bets. These people wager on many movements associated with the game, but not as much on the game itself. In this, they behave like hedge funds.
    That made us feel safe, or at least safer. I remember a gala event to celebrate the architects of the system that would soon crash. The firm welcomed Alan Greenspan, the former Fed chairman, and Robert Rubin, the former Treasury secretary and Goldman Sachs executive. Rubin had pushed for a 1999 revision of the Depression-era Glass-Steagall Act. This removed the glass wall between banking and investment operations, which facilitated the orgy of speculation over the following decade. Banks were free to originate loans (many of them fraudulent) and sell them to their customers in the form of securities. That wasn’t so unusual and could be considered a service they did for their customers. However, now that Glass-Steagall was gone, the banks could, and sometimes did, bet against the very same securities that they’d sold to customers. This created mountains of risk—and endless investment potential for hedge funds. We placed our bets, after all, on market movements, up or down, and those markets were frenetic.
    At the D. E. Shaw event, Greenspan warned us about problems in mortgage-backed securities. That memory nagged me when I realized a couple of years later that Rubin, who at the time worked at Citigroup, had been instrumental in collecting a massive portfolio of these exact toxic contracts—a major reason Citigroup later had to be bailed out at taxpayer expense.
    Sitting with these two was Rubin’s protégé and our part-time partner, Larry Summers. He had followed Rubin in Treasury and had gone on to serve as president of Harvard University. Summershad troubles with faculty, though. And professors had risen up against him in part because he suggested that the low numbers of women in math and the hard sciences might be due to genetic inferiority—what he called the unequal distribution of “intrinsic aptitude.”
    After Summers left the Harvard presidency, he landed at Shaw. And I remember that when it came time for our founder, David Shaw, to address the prestigious trio, he joked that Summers’s move from Harvard to Shaw had been a “promotion.” The markets might be rumbling, but Shaw was still on top of the world.
    Yet as the crisis deepened the partners at