Financial Theory: Lecture 19 Transcript
November 8, 2009 (recorded December 8, 2010)
Hi, this is John Geanakoplos again. Here to give a lecture, that I gave one evening,
that we couldn't record. So I'm going to try and reproduce the lecture as faithfully as I can. And I think it's a
historical lecture. I hope you find it interesting. It's about the history of the mortgage market. And I call it a
personal history because by some accident, I participated at many of the key points in the recent history of the
So I started off in 1989. I was professor here at Yale. I was a mathematical economist. I thought of myself as
using mathematics to study economics and staying really pretty much as far from the real world as I could.
But for some reason, I decided that I wanted to see what was going on on Wall Street. The most interesting
mathematical modeling of that day was being done on Wall Street. And mathematical modeling and finance,
that is in economics. And so I decided. why not go see it?
And so I visited a bunch of investment banks. A number of my friends, including one from Yale, had worked
at Goldman Sachs. So that was the natural thing to do. But, I had a little cousin who had just been hired
recently, a little bit before that, at Kidder Peabody, which was sort of the number seventh investment bank at
the time, in terms of size. And he introduced me to the fellow, Ed Cerullo, who ran fixed income at the time.
And they persuaded me that it would be much more interesting to go to Kidder, Peabody and to talk to people
like Ed Cerullo, than go to Goldman Sachs and be one of a hundred visiting professors.
So I decided that the firm was a little bit smaller, but I would see more of it. And why not do something a
little bit different? So they never had an academic visitor, I think, like me spend a year there before. So I went
in 1989 to 1990. And while I was there I talked a lot to Ed Cerullo and to the traders and to a bunch of other
people. And at the end of the my sabbatical, Ed Cerullo came to me and he said, you know I've come to
realize that our fixed income research department isn't very mathematical. Why don't you hire a research
department for me? And I'll help you along. But, you find the people, you know the subject, you can judge,
your business is judging people doing research, why don't you hire me a research department?
So I hired him a research department, which ultimately grew to 75 people. And I returned to Yale. And after I
got back to Yale, he called me up and he said, now that you've hired the research department, you have heads
of all these different groups, why don't you run the research department? You can do it from Yale, as a
consultant. And so I became the head of fixed income research at Kidder Peabody from Yale.