Deutsche Bank's secret agreement with German's Quant Finance lab

[Andy Nguyen]

As a textbook example of how not to manage the relationship between private industry and the academy, Deutsche Bank’s agreement with two leading German universities to sponsor their joint institute for applied mathematical research has a lot going for it.

Under the terms of the contract signed by Deutsche Bank, Humboldt University and the Technical University of Berlin, the bank agreed to put up €12 million, or $17 million, over four years, starting in 2007, to finance the Quantitative Products Laboratory, which would apply advanced mathematical techniques to the world of finance, and to pay the cost of two endowed professorships, one at each university.

In return the bank was allowed a say in the hiring of the two professors. It was also given the right to have bank employees designated as adjunct professors, allowed to grade student work. Appropriate topics for research and research strategy would be decided by a steering committee made up of two academics and two bank employees, with the managing director, a bank employee, casting the deciding vote in the event of a tie.

Deutsche Bank was given the right to review any research produced by members of the Quantitative Products Laboratory 60 days before it was published and could withhold permission for publication for as long as two years. The agreement even specified that the laboratory would be located “in close proximity to the Deutsche Bank” headquarters in Berlin.

Finally, the whole agreement was to be secret, which ensured that when Peter Grottian, a political scientist and emeritus professor at Humboldt, obtained a copy last month after becoming a shareholder in Deutsche Bank, the ensuing scandal produced huge headlines in the German news media.
http://www.nytimes.com/2011/07/18/education/18iht-educLede.html

 

[IlyaKEightSix]

Lucky Germans. How often do industry and academia interact so intimately? Plus, those adjunct professors would be a one-stop shop to landing an excellent job at Deutsche Bank.

If we had such kinds of opportunities throughout the US, know how many people would find good jobs and become productive that much more quickly?

 

[boneil]

Lucky Germans. How often do industry and academia interact so intimately? Plus, those adjunct professors would be a one-stop shop to landing an excellent job at Deutsche Bank.

If we had such kinds of opportunities throughout the US, know how many people would find good jobs and become productive that much more quickly?

Uhhh, you don't have a problem with an incredibly large for-profit institution having a say in what used to be (and probably still are) respected academic institutions?

 

[euroazn]

Uhhh, you don't have a problem with an incredibly large for-profit institution having a say in what used to be (and probably still are) respected academic institutions?

Nope. In the case of finance, there is a very thin line between academia and commercial research.

 

[joel_b]

This article really doesn't go for the jugular; it spends a lot of time focusing on the say in appointments of professors, in an attempt to link it to some things that have happened in the US with Charles Koch. It's irrelevant as he's not embargoing research, it's minor influence on a couple of posiitons yes, but not the big issue here. Plus some of the comments used "it's corporate training" are totally of the mark. It's as if some of the people in the article just don't understand the real implications because they're tied up in education-politico rhetoric.

Ilya, the 'adjuncts' are already bank employees, it's not about landing a job; they have a say in hiring professors yes, but they will already have a 'relationship' with the bank.

The real issue here is the power to delay the publication of research, which is mentioned, but the real implications are not highlighted.

let's be clear here, it's about stealing new research from young minds and profiting from it before anyone else can. It's a tax deductible funnel for research and development. The article does a bad job of getting to the real issue.

 

[boneil]

Nope. In the case of finance, there is a very thin line between academia and commercial research.

Obviously. Countless pricing models weren't developed by full-time professors and most are considered "academic" contributions. The point is what joel brings up, in addition to the fact that academic contributions, especially from full-time contributors, are supposed to be for the advancement of man and his endeavors (science or otherwise)-- not the for-profit motivations of a large bank. It's kosher for the bank to donate to research, but most would frown upon them essentially doing some sort of non-disclosure agreement--as implied by the "secret" nature of the agreement.

 

[IlyaKEightSix]

Joel, I don't mean jobs for the professors. I mean jobs for the students.

EG if someone at Lehigh were teaching a derivatives course who was a derivatives trader at Goldman Sachs, you can bet your ass on it that I'd instantly sign up for that course, probably torch it, and say "hey professor, I want a job trading derivatives. Help me out here plzkthx?"

As for "stealing research", at the end of the day, it's the students' choice whether or not to take a class taught by a bank employee. It'd be no different than a Google statistician teaching a multivariate analysis or design of experiments course in statistics, or a Microsoft engineer teaching a computer science class (insert joke about microsoft products stinking here--but at least they're not shamelessly overcosted like apple is).

At the end of the day, I freaking wish I had such professors. In fact, I think this kind of a model would be great for all parties involved--these adjuncts get a pick of the litter for the next intern/entry-level class, the students get the chance to compete for an amazing job, the university gets a course taught by a practitioner who knows what the heck he talks about beyond what's in a textbook, and gets to pay him or her at an adjunct rate.

This is a wonderful idea on the part of DB.

 

[tobias elbert]

Though there is an obvious conflict of interest, I have no problem with this at all. Obviously, DB won't nominate unqualified people as Adjuncts - it'd be harming their own reputation and that of the Lab.

In actual fact, the Lab was recently putting out ads for MSc and PhD grads from all over Europe to apply and engage in risk research projects sponsored by DB through the Lab. I think this entailed that the researchers also rotate through DBs risk departments on a global scale to get exposure to all sorts of markets. Future employment with DB is obviously also a real possibility.

Unfortunately, this is a bit of a German thing - politics cry for better interaction and knowledge transfer between academia and industry, similar to the Ivy Leagues' model. When it's actually being done then they dont like the terms of it - ie how dare the evil business to actually wanting to have a say as to where they [businesses] deem the allocation of their sponsored capital fit. German banks, especially DB, have been taking a bit of a public beating since the GFC, so something as "outrageous" as this helps feed the fire.

Vicinity to DB and DB directing industry relevant research can only benefit the researchers working for the Lab, so I honestly dont see what the issue is.

 

[DominiConnor]

This is a really shit article, written by someone with apparently zero/negative knowledge of academia.

My father in law was a distinguished law professor and was paid for by a huge telecoms firm and so many acdemics are in that position that in large universities there is in effect a price list. They got a top tier legal consultant at a bargain price since he literally wrote the book on a topic that was critical to their business. A large % of the most senior chairs at universities have been endowed by private firms
or individuals.
Of course the sponsor has a say, if you're dealing with a 3rd tier place like Humboldt (QS has it at 168 in the world for science & engineering) you don't want them foisting some time serving droid on you.

A good % of all the scientific & engineering research on the planet is paid for by governments, especially the military, and (surprise) it is often secret.
Drug companies do this as well, they are really into secrecy, trust me on this, as do computer companies.

DB decided to do the same but with quant stuff, personally I think they paid too much but the HR department at DB is arguably the worst on the planet, nothing of any kind that they ever do would shock me.
Every bank that I know well has some such arrangement, typically smaller but a large chunk of all the money for applicable finance research comes from the financial sector, if someone told me it was the majority, I'd find it hard to argue.
My colleague Paul Wilmott got real money out of Nomura for Oxford, and very few people see him as the pet of any interest group and generally I have found academics to be highly independent people, not just of their sponsors but their own universities, and often even their own departments. When you sponsor research you get quantifiable benefits in prestige, you might even get results you see as useful but the idea that you control anything is just dumb. If you want control you hire people to work in your office.

DB required them to keep the group near DB in Berlin. If you read Quantnet or Wilmott.com you will find that prospective students see the physical location of a school as important, sometimes declining schools that are too far from a banking centre. Also if you're going to have DB staff popping its convenient if they don't have to spend hours getting there. Also it is based in Berlin, DB has required a Berlin university to be in Berlin, that's hardly evil is it ?

But as I say DB were dumb.
Humboldt University, who the fuck are they ?
In the QS ratings it is 198th in the world for science and technology in the world.
The average bar in the City of London has more distinguished quants in any given evening, on the right day a pub might have more distinguished German quants than that place.

I have no issue with bank quants being adjunct professors, in fact a good number of the people on my database are in that position, the CQF has a higher % of practitioners than the average MFE, but recall that Baruch has people like Jim Gatheral.
This is not in any way unique to quant stuff, pretty much every applicable area from Engineering to Acting does this.

But...
Every quant I know who moonlights as an academic is chosen because of his personal merit as defined by the people running that department. Occasionally my work as a headhunter requires that I try to find a "parking spot" for a Quant whose garden leave or other legal issues require that he doesn't do banking for a while, but they still have to be good enough to be useful.
The idea that that DB HR gets to choose lecturers at Humboldt is enough all by itself to put it next to Fordham at the top of my "avoid this place" list for financial education. One day, soon a lecturer there will be appointed because he answered correctly the question"what is your favourite colour" if DB HR has that power.