Myron Scholes, 1988–2001
A thirteen-year relationship with the man who co-authored the equation underpinning modern derivatives markets — beginning when a twenty-two-year-old contradicted him in front of his own firm.
This is the longest continuous mentorship in Hare's record and the most consequential.
He took the Cornerstone Research job at twenty-two specifically to get near Scholes, reasoning that a recommendation from him would open Stanford. He got the recommendation and Stanford. He also got thirteen years of proximity to a man who had won the Nobel for pricing risk and then discovered, at enormous cost, which risk he had not priced.
Two mechanisms in the Quantum Privacy Network come directly out of it. Entangled tokens are built on the tax-structuring logic in Scholes and Wolfson's textbook, which Hare read as a junior analyst. And the Liquidity Pool is an answer to a question Scholes asked him on a deck in Greenwich before anything went wrong: can you trust the pricing signal?
Two mechanisms in the QPN come directly from this relationship. Entangled tokens are built on the tax-structuring logic in Scholes and Wolfson's textbook. And the Liquidity Pool's design is an answer to a question Scholes asked Hare on a deck in Greenwich, before LTCM failed: can you trust the pricing signal?
Two men in this record each designed something clever enough to defeat them. One structured a transaction so precisely hedged that his own bonus proved it had no profit motive. The other proposed an uncapped convertible note to let the market price his company, and handed his investors a reason to want the valuation low. The architecture described elsewhere on this site is an attempt to build a system where being too clever cannot do that to you.
The trail exists so that people who were there can reconstruct their own memories, recognize what they helped incubate, and add to or correct the record — or forward the few pages that belong to someone they know.
The Scholes work that matters most here is not option pricing — it is the tax strategy textbook with Wolfson, which Hare assimilated into the entangled token design.
Before the collapse, Scholes privately told Hare he was uneasy: they were investing in markets they did not understand and he doubted the pricing signals.
The tax case that followed is a matter of public record: Long-Term Capital Holdings v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004).
Both men designed something clever enough to defeat them. That is the theme, and it is the argument for structural rather than contractual safeguards.
Scholes is famous for the option-pricing formula. The book that mattered most to this architecture is a different one: Taxes and Business Strategy, written with Mark Wolfson — a planning approach to minimizing tax globally for multinational organizations and very wealthy people.
I assimilated it directly into the design of entangled tokens and the QP token platform. The lineage is exact rather than loose: a single instrument embodied simultaneously across multiple jurisdictions, with conversion routed to the most favorable environment at execution, is recognizably the same structure as multinational tax planning — turned to a different purpose.
After the Nobel, Scholes went on leave from Stanford to work with John Meriwether's group out of Salomon Brothers — Long-Term Capital Management, arguably the first of the mega hedge funds, carrying hundreds of billions in assets at a time when that was not done.
I visited the Greenwich offices while staying nearby with the Ayer family, and we had lunch on the deck. What Scholes said, as I remember it:
I feel like they're using me as a demo dolly because I won the Nobel Prize. They're raising enormous money talking about hedging strategies, and we're investing all over the world in assets we don't really understand. Minerals in Russia. Do we know these markets? Are they real markets or managed markets? Can we trust the pricing signals? I'm getting nervous.
Can you trust the pricing signal. That is the question this entire architecture exists to answer, asked on a deck in Connecticut by the man who wrote the equation, before it went wrong.
His recommendation was to exit the markets they did not understand and concentrate on well-regulated ones — Europe, the United States, a little of Asia. And to restore returns by adding leverage, on the reasoning that a sufficiently precise model makes the same money on less capital. They returned capital and levered up.
It worked until correlations went to one. The hedges priced relative differences between instruments; when liquidity vanished and everybody had to sell everything at once, there was no relative left. Margin calls arrived, the capital was not there to hold the positions, and the fund could not wait.
The rescue was brokered by the Federal Reserve Bank of New York — fourteen banks, $3.6 billion, no public money. And the positions came good. They were sound. The profit accrued to the institutions that had been assembled to buy them.
The tax shelter Babcock & Brown had designed for Long-Term became Long-Term Capital Holdings v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004) — an appeal against the IRS's denial of $106,058,228 in claimed capital losses. The opinion contains a section headed Scholes' Economic Analysis. The government's expert was Joseph Stiglitz.
I watched it, through access the firm had because half its cases were in that court. Counsel complimented the structure, drew out how brilliant it was, asked whether he had received a bonus for it, whether it was the main thing he did that year, how large it was — and Scholes, answering, realized mid-testimony that the bonus exceeded the maximum profit the deal could possibly have made, because the hedges were tight enough to cap it. Which meant it had no profit motive. Which meant it was not deductible.
My reaction, watching a friend see it arrive: oh no, it's a trap. Not satisfaction. I felt terrible, because Scholes is a nice man.
Scholes joined Oak Hill after Long-Term — a landing place near his old collaborator Mark Wolfson. I was poor by then, and still there having lunch with him. Same as ever, cheerful. He invested in my idea.
The tax case came later, and I still felt bad about it.
Sometimes you can be too smart for your own good. Scholes was; Hare says he is, frequently, and has learned to live with it. But the deeper lesson is the one from the deck at Greenwich: the models were not wrong about the instruments. They were wrong about whether the prices could be trusted and whether anyone could be forced to sell. Both of those are properties of the market's structure rather than of the assets — which is exactly the layer the Quantum Privacy Liquidity Pool removes.
Episodes are building blocks. The same material appears in more than one where it belongs in more than one, and every claim traces back to a primary source.
The closest of Hare's Nobel-laureate mentorships — thirteen years, from a contradicted lecture to an investment in Consilient
Open →In the graphVice Chairman of Consilient, and the introduction into Cisco
Open →In the graphExpert testimony, and where arguments learn to survive attack
Open →In the graphThree rounds, a silver bullet, and the end of Hare's tenure
Open →In the graphClearing without external balance sheets
Open →The record and the architecture are not separate arguments. Each of these mechanisms exists because of something in this episode, and each is what the episode turned out to require.
The episode is the story. The explainers are the mechanism — what problem it solves, how, and where it would fail.
The mechanism in full, with the condition that would defeat it.
Open the explainer →Consilient Innovators NetworkThe mechanism in full, with the condition that would defeat it.
Open the explainer →