Here's an article in the Cambridge News that might interest this group ...
April 1, 2002.
Computer Scientist Gets to the "Bottom" of Financial Scandal
A Cambridge computer professor, Simon Peyton Jones, has made an interesting discovery regarding the Enron collapse. Enron, an American energy company, started life as a regional natural gas pipeline provider, the result of a merger between Houston Natural Gas and InterNorth in 1985. Its chairman, Kenneth Lay, eventually transformed Enron into the world's largest energy trading company and America's seventh-biggest corporation. Enron filed for bankruptcy on December 2 last year in the biggest collapse in American history.
Enron's collapse was due to a nearly impenetrable web of financial contracts that disguised the true financial state of the company and allowed Enron to report record profits while actually losing money. A complex set of partnerships were set up in 1999 to move debt off its balance sheet and hide losses.
The most complex of these financial contracts are derivative instruments in which the value of a contract depends on other financial contracts. Accountants find that even when they are scrupulously honest about the valuation of such contracts there can still be sharp disagreements in regard to the worth of trading reserves, debts, and other components.
Enter Professor Peyton Jones. As part of his research at Microsoft in Cambridge, he developed a computer language for describing and valuing financial contracts. With a colleagues Jean-Marc Eber and Julian Seward, they developed a language capable of accurately describing and valuing even the most complex financial instruments. "While accountants find financial derivatives to be mysterious and difficult, for us they are just ordinary recursive equations," says Jones. "We have been dealing with these for many years and have developed a wide range of techniques for handling them."
This language is turning heads in the financial community. According to Emanuel Derman, managing director of firm-wide risk at Goldman Sachs, "In all areas of computer science, there has been a natural evolution towards building high-level languages with a syntax and semantics specifically geared to the domain of the application. Much of the power of the Unix programming environment, as well as its popularity among scientists and engineers, came from the pleasure of working in this framework. It makes sense to do the same thing in the financial arena, and some of the tools we built at Goldman have actually been small steps in this direction."
When Professor Jones heard about the Enron collapse, he decided to use his new language to investigate. After weeks of poring over financial statements and contracts, he was able to create a set of mathematical equations using his financial contract language. Once everything was ready, his team was ready to evaluate Enron's financial worth.
"It was very dramatic," he relates, "we were all gathered around my computer and I hit the enter key. Instead of generating a value, the program returned `bottom'." Bottom is a special value that computer scientists use to denote a meaningless program. Here, it indicated that Enron had used financial contracts whose values did not actually have any formal meaning." He went on to explain how this works: "It's really very simple. If I write a contract that says it's value is derived from a stock price and the worth of the stock depends solely on the contract, we have bottom. So in the end, Enron had created a complicated series of contracts that ultimately had no value at all."
News of this discovery spread quickly. While some accountants feel that computers cannot replace human judgment in the interpretation of financial contracts, others see this as just the first step in a trend towards a more precise language of accounting and financial contracts. Nearly everyone in the accounting field agrees, however, that this work by Peyton Jones will have a significant impact on the legal case against Enron.
According to Peyton Jones, his success in the financial world comes from years of research in Haskell, an esoteric computer language. "Without the tools developed by the Haskell community I would never have been able to do what I've done. It's a jolly wonderful way to program computers" he stated.
The Arthur Anderson accounting firm is rumored to have made overtures to Peyton Jones. A spokesman for Andersen's Cambridge office said it was too early to speculate as to whether Peyton Jones might leave Microsoft Research but he added "It would be a tremendous boost the credibility of our company and the whole accounting profession to bring someone of this caliber into our company." But Professor Peyton Jones plans to remain where he is. "I'm flattered that my research has finally been of use to someone but I'm quite happy working on Haskell. Besides, I don't want to have to wear a suit to work every day."