Friendship at the 103rd Precinct (Part 2)

The Cuban Restaurant is across from the 103rd Precinct, separated by a single road. Its storefront is small, the green awning is somewhat faded, and the windows are plastered with a few menus, one in Spanish and one in English.

The two walked inside, where the air was filled with the aroma of garlic, lime juice, and the charred scent of roasted meat.

A baseball game was playing on the television mounted on the wall, the volume turned down low. A few police officers in uniform and plainclothes sat toward the back; seeing Morales enter, a few raised their hands in greeting.

Morales chose a seat by the window, from which he could see the precinct's main entrance.

He sat down, placed his police cap on the chair beside him, and picked up the menu on the table to hand to Dr. Lin An.

"Order whatever you like, it's my treat today."

"Thank you."

Dr. Lin An took the menu and glanced at it.

The dish names on the menu were half in Spanish and half in English. He couldn't quite understand them, but the Bullet Screen could. He flipped directly to the "Main Dishes" page and pointed to the sixth item.

"I'll have the roast pork with black beans and rice."

"Good choice."

Morales handed the menu to the server who walked over—a Cuban woman in her fifties with graying hair and oil stains on her apron.

"Two roast porks with black beans and rice, and two mango juices."

The server took note and turned to leave.

Morales leaned back in his chair, folded his hands over his stomach, and looked at Dr. Lin An.

"Dr. Lin An, where are you from?"

"China."

"I know China, but where in China?"

"A third or fourth-tier city in the south. You wouldn't have heard of it."

Dr. Lin An said with a smile.

"Just like how I haven't heard of the place where you were born."

Morales paused for a moment, then laughed.

"The place I was born is Brooklyn, Bushwick. You definitely haven't heard of that."

"I have heard of it."

Dr. Lin An said.

"Bushwick used to be an industrial area, but in recent years, a lot of artists have moved there because the rent is cheap."

Morales raised an eyebrow.

"You just arrived in New York, and you already know about Bushwick?"

"I spent several days riding around New York on a bicycle."

Dr. Lin An said.

"Jamaica, Bushwick, Williamsburg, Greenpoint, Long Island City—I went to all of them."

"Riding a bicycle?"

"My friend rode, I sat on the back."

Morales looked at him for two seconds, then burst out laughing.

"You sat on the back?"

"Yes."

"A PhD student from Columbia, riding on the back of a bike to tour New York?"

"Is there a problem with that?"

Dr. Lin An asked, his expression very serious.

Morales opened his mouth, then closed it again.

He wanted to say, "Yes, there is a huge problem," but he remembered what his daughter Caitlyn had said... Chinese people would ride the ferry back and forth four times just to see the Statue of Liberty, or go all the way to the Bronx just to photograph graffiti walls.

Sitting on the back of a bicycle to tour New York didn't seem that strange after all.

"No problem."

Morales said.

"I just didn't expect it."

The mango juices were brought over. Morales picked up his glass, took a sip, and set it down.

He was just about to continue speaking when the wind chimes at the restaurant entrance rang.

A woman of twenty-seven or twenty-eight pushed the door open and walked in. Her dark brown hair was tied in a low ponytail, and she was wearing a dark gray blazer and black flats, carrying a tote bag with an expression that said, "I finally made it."

She scanned the restaurant, her gaze landing on Morales, and she walked over quickly.

"Dad."

She put down her bag, pulled out a chair, sat down, and caught her breath.

"I happened to be at the courthouse delivering documents when you called, so I just swung by."

Morales glanced at her, then at Lin An, the corners of his mouth curling up slightly.

"Caitlyn, this is Dr. Lin An, the one I told you about. He's a doctoral student in the Department of Mathematical Finance at Columbia, working under Professor Jero."

He then turned to Lin An.

"Dr. Lin An, this is my daughter, Caitlyn Morales. She's studying for her master's in public policy at the City University of New York and is graduating this year."

Caitlyn reached out her hand, and Lin An shook it briefly.

"Caitlyn, Dr. Lin An helped my team resolve some tax issues. He's here at the Precinct today specifically to report his passport as lost."

Caitlyn sized Lin An up, her eyes filled with unconcealed curiosity.

"You study under Professor Jero—did you transfer over with him from MIT?"

Transfer over from MIT?

[233]

[Streamer, remember this piece of information; she's helping you flesh out your backstory.]

Lin An nodded.

"You could say that."

"You could say that?"

"The paperwork is still being processed, but I arrived ahead of it."

Caitlyn picked up Morales's mango juice from the table, took a sip, and set it back down.

"What kind of research were you doing with Professor Jero at MIT?"

"Structural models for credit derivatives pricing."

Lin An said, his tone calm and confident as he followed the prompt from the Bullet Screen.

"Professor Jero's structural credit model treats corporate default intensity as a function of state variables, fitting credit spreads using affine jump-diffusion processes within a continuous-time framework."

Caitlyn's eyebrows arched. She swallowed hard, suddenly realizing that this single sentence was like a compressed file; if she were to unpack it, it would contain at least five thousand words of information.

"How long were you at MIT?"

"Not long."

Lin An said.

"But long enough to learn a few things."

Morales sat to the side, listening to the conversation, his expression shifting from relaxed to subtly bewildered... he knew the pronunciation of every word, but when strung together, he had no idea what they meant.

He picked up his mango juice for another sip and decided not to interrupt.

The waiter brought over two plates of roast pork with black bean rice. The skin was golden brown, and when sliced, it revealed tender white meat inside, served with black bean rice and fried Banana slices, with a small dish of garlic-lime sauce on the side of the plate.

Morales picked up his fork and looked at Caitlyn.

"Have you eaten?"

"I have. I grabbed a hot dog from a food truck by the courthouse."

Caitlyn said, her gaze still fixed on Lin An.

"Dr. Lin An, where did you do your undergraduate studies?"

"China."

Lin An said.

"A school you've likely never heard of."

Caitlyn smiled.

"Then when you applied to MIT, what was your GRE score?"

"Perfect score in math, six hundred in verbal reasoning."

Lin An said, spearing a piece of pork and dipping it into the lime sauce.

Caitlyn's eyebrows arched again, a flash of surprise crossing her eyes.

"Six hundred in verbal? Not bad. That's a very high score for an international student. Your English logic and vocabulary must be quite solid."

"It's enough."

Lin An said, popping the pork into his mouth.

Caitlyn leaned back in her chair, crossing her arms over her chest, and watched Lin An eat for a moment.

"I've had a question I've been wanting to ask someone."

She said.

"Go ahead."

"I read an article in my Public Policy Course about the securitization of subprime mortgages, and it mentioned a concept called the Gaussian Copula, claiming it was one of the causes of the 2008 financial crisis.

I've looked up a lot of information, but I still don't quite understand what it actually is."

She paused.

"Could you explain it to me?"

Morales speared a piece of pork and slowed his chewing... he understood this topic even less, but he wanted to try hard to remember the words of Dr. Lin An, as they might come in handy later.

Lin An put down his fork, picked up a napkin, and wiped the corner of his mouth. He lifted his gaze slightly, looking toward the top of Caitlyn's head, where a long Bullet Screen was scrolling by.

"The Gaussian Copula."

He said.

"Simply put, it is a mathematical tool used to measure the default correlation between different assets."

He looked at Caitlyn.

"Suppose you have two loans, one in Florida and one in California. If the Florida loan defaults, what is the probability that the California loan will also default?

These two events are not independent because they are both influenced by the same macroeconomic factors... such as housing prices, unemployment rates, and interest rates."

The function of the Gaussian Copula is to map the default time of each loan onto a standard normal distribution and then link them together using a correlation matrix.

This model is computationally efficient, but it has a fatal flaw... it underestimates the correlation during extreme situations.

In a normal market, it looks fine, but once the market crashes, all correlations tend toward 1 simultaneously, and the model fails completely."

Caitlyn listened very attentively.

"Then why does everyone still use it?"

"Because it's convenient."

Lin An said.

"Besides, those who used this model earned bonuses, while those who didn't lost their jobs. Before the financial crisis, no one would be fired for using the industry-standard model."

Caitlyn nodded, looking thoughtful.

"What if we switched to a different model? Is there a better one?"

"Yes."

Lin An said.

"For example, the t-Copula, which characterizes tail dependence more accurately, but it has high computational costs, unstable parameter estimation, and it doesn't allow you to get results by pressing a few keys in Excel."

He paused.

"Wall Street doesn't like things that are too troublesome."

Caitlyn smiled.

"You speak very directly."

"Mathematics is very direct."

Lin An said.

"It won't change its answer just because you want to make money."

Caitlyn looked at him, and there was something more in her eyes.

"Then let me ask you another one."

She said.

"In the Black-Scholes model, where does the Volatility Smile come from?"

As soon as this question was asked, Morales stopped his fork, looked at Caitlyn, and then at Lin An.

He didn't understand the conversation, but there seemed to be a hint of seeking advice in his daughter's tone.

Lin An did not hesitate.

"The Black-Scholes model assumes that volatility is constant, but the implied volatility of market data presents a smile shape... the implied volatility of Out-of-the-money Options and In-the-money Options is higher than that of At-the-money Options.

This shows that the market believes the probability of extreme events occurring is higher than what the Lognormal Distribution predicts."

He stopped for a moment, then speared a piece of fried Banana to give himself a break and to allow time for the Bullet Screen to refresh.

"Essentially, the Volatility Smile is the market's correction of the model's errors. Black-Scholes assumes that asset prices change continuously, volatility is constant, and returns are normally distributed... none of these hold true in the real world.

Market participants know this, so they use implied volatility to 'calibrate' the model, reflecting the model's errors in a single parameter."

Caitlyn's lips moved as if she wanted to say something, but she didn't.

Lin An continued.

"After the 1987 stock market crash, the smile turned into a 'skew' because the market began to distinguish between rising and falling; the implied volatility for a drop is higher than for a rise, indicating that the market fears a crash more than a surge."

He glanced at Caitlyn.

"Your professor should have taught you these things."

Caitlyn nodded, her expression becoming serious.

"I've been taught it, but not as clearly as you explained."

She thought for a moment.

"Then do you think this skew has changed since the 2008 financial crisis?"

"Yes."

Lin An said.

"The skew has become steeper. The market prices tail risk much higher than before; you can see this in the implied volatility curve of S&P 500 index options... the slope of the left tail is much steeper than the right."

He paused.

"This means the market believes the probability of another event like 2008 is many times higher than the probability of an equivalent upward surge."

Caitlyn fell silent.

She looked at Lin An, as if re-evaluating the person sitting across from her.

Then she gave a "I surrender" smile.

"Fine."

She said.

"If I keep asking, my academic credentials are going to be exposed."

Lin An looked at her.

"Then let me ask you one."

Caitlyn was stunned for a moment.

"You're asking me?"

"Yes."

Lin An said, putting down his fork and crossing his hands on the table.

"You asked me two questions, and I answered both. Now it's my turn to ask you."

Caitlyn's smile stiffened for a second, then she nodded.

"Go ahead."

"In the field of Public Policy, after the 2008 financial crisis, the Federal Reserve introduced a 'macroprudential regulation' framework.

My question is... what is the basis for calculating the core indicators of this framework, such as the additional capital requirements for a Systemically Important Financial Institution?

In other words, how do you determine if a bank is 'too big to fail'? What mathematical standard do you use?"

Caitlyn opened her mouth.

Her fingers tapped the table twice, then stopped.

"I..."

She thought about it.

"I know some qualitative criteria, like asset size, interconnectedness, complexity... but the specific mathematical standards..."

She stopped, and fine beads of sweat began to seep from her forehead.

Lin An watched her quietly, neither urging her on nor mocking her.

Caitlyn took a deep breath.

"I need to look it up."

She said, her voice two decibels lower than before.

"I remember there are some indicators, like CoVaR and SRISK... but I can't tell you exactly how they are calculated."

She picked up her mango juice and took a large gulp; the cold liquid slid down her throat, but the heat on her face did not subside.

Morales watched all of this from the side, shaking his head slightly, knowing that his competitive daughter had lost.

She was sitting across from a Chinese boy several years younger than her, sweating profusely from a single question; there was no doubt she had lost completely.

Morales put down his fork and took a sip of his mango juice to hide the curve of his lips.

"It's okay."

Lin An said, his tone as gentle as if he were comforting a student who hadn't done well on an exam.

"CoVaR and SRISK were only proposed after 2008, so your textbook might not have been updated yet. The calculation of these indicators involves quantile regression and tail dependence modeling, which aren't the focus of a Public Policy Course."

He paused.

"I just wanted to know how much you knew."

Caitlyn looked at him, her expression complex.

"How much do you know?"

"All of it."

Lin An said, his eyes flicking upward to glance at the Bullet Screen, and he smiled.

"But this is my specialty, not yours; you don't need to feel embarrassed about not knowing these things."

Caitlyn set down her glass of mango juice, leaned back in her chair, took a deep breath, and then slowly exhaled.

"Fine."

She said.

"You've stumped me; I concede."

After finishing their meal, Morales paid the bill, and the three of them walked back to the Precinct.

Caitlyn followed behind them, her tote bag hanging from her shoulder, her pace a bit slower than when they arrived, as if she were still pondering that question from earlier.

When they reached the entrance, Morales paused for a moment.

"Dr. Lin An, you mentioned in the conference room earlier that you could take a look at my tax returns?"

"I can."

Lin An said.

"Do you have the documents with you?"

"They're in my office, follow me."

Morales's office was on the first floor, at the end of the hallway, with a nameplate on the door reading... "Lieutenant Morales."

He pushed the door open and let Lin An inside.

Caitlyn followed him in as well, sitting in a guest chair and placing her tote bag at her feet.

The office was small, containing a desk, a chair, two guest chairs, a filing cabinet, and a dying pothos plant on the windowsill; the edges of its leaves were yellow and curled, looking like a piece of forgotten evidence.

Morales took a folder out of the filing cabinet and placed it on the desk.

"My 2008 taxes were filed by my wife; she said there weren't any issues, but I've always felt uneasy about it."

Lin An opened the folder, took out the documents inside, and spread them across the desk.

W-2 forms, 1099 Form, Form 1040, as well as some bank statements and receipts for charitable donations.

Caitlyn leaned in to take a look, but quickly shifted her gaze away... her interest in tax forms was not as great as her interest in Lin An, and she couldn't understand them anyway.

The Chinese often say that different professions are like mountains apart; in the United States, different professions are indeed like mountains, and the specialized English terminology is one mountain after another.

Lin An spread the documents out on the desktop, pretending to examine them while actually showing them to the other audience members; after three minutes, he looked up.

"Lieutenant Morales, there aren't any major issues with your tax return, but there are a few areas that could be optimized."

"What do you mean?"

"First, you have a Schedule K-1 from a limited liability company, which shows a loss of twelve hundred dollars. This loss can be used to offset your other income, but your wife didn't utilize this loss when she filed the taxes."

Morales frowned slightly.

"K-1? What K-1?"

"You don't know about this company?"

"I... wait a second."

Morales took the K-1 from Lin An's hand, glanced at it, and then his expression changed.

"This is a small company I invested in with my brother; we have a few rental properties in Jamaica. After the 2008 financial crisis, we couldn't collect the rent and lost money.

My wife didn't know about this, and I forgot to tell her."

"That explains it."

Lin An said.

"This loss can save you about three hundred dollars in taxes."

"Three hundred?"

"Yes."

Lin An said.

"Also, regarding your charitable donations of twelve hundred dollars, that amount is fine.

But your wife might not have noticed when filling out the form that there is a cap on the deduction ratio for charitable donations, though at your income level, the twelve hundred dollars should be fully deductible."

He paused.

"Overall, the tax return your wife filed wasn't calculated incorrectly; she just missed this loss.

If you file an amended return with the IRS using Schedule E and add in this twelve-hundred-dollar loss, the IRS will refund you about three hundred dollars."

Morales leaned back in his chair, crossed his hands behind his head, and stared at the ceiling for a while.

"Three hundred dollars."

He said.

"That's enough for my wife to buy groceries for a month at BJ's Wholesale Club."

He lowered his hand and looked at Dr. Lin An.

"Then what do I need to do?"

"You need to fill out a 1040X amended tax return, attach a Schedule E, and include the loss from that K-1."

"Can you help me fill it out?"

"I can."

Dr. Lin An said.

"But you need to verify the information on the K-1 to make sure that loss is indeed your share."

Morales nodded.

"I'll go back and confirm with my brother, then give you an answer tomorrow."

He took a sticky note from his drawer, wrote down a string of numbers, and handed it to Dr. Lin An.

"This is my cell number, save it. What's your number?"

Dr. Lin An took it, glanced at it, and put it in his pocket.

"Alright, my number is..."

"One more thing."

Morales said.

"You live at 90-41 108th Street, Apartment 2B. That place isn't far from the Precinct, so I'll have them keep an extra eye on it during their patrols."

[This counts as a quid pro quo.]

[The Lieutenant is saying he will have officers pay more attention to 108th Street, meaning he will keep a closer watch on that area to protect Dr. Lin An.]

[In the United States, police attention is the best form of insurance.]

[Furthermore, when the Lieutenant says this, he is telling Dr. Lin An that since you helped us, we will help you too.]

[This is the way of the world.]

Dr. Lin An stood up and reached out his hand.

"Thank you, Lieutenant Morales."

Morales stood up and shook his hand.

"Call me Morales."

He said.

"Just call me Morales."

Dr. Lin An stepped out of the office and walked down the hallway. When he passed the conference room, the door was open, and Patrick and O'Brien were still inside.

Patrick was standing in front of the whiteboard, erasing the lines he had just written, while O'Brien sat in a chair with his arms crossed, looking as if he were deep in thought.

Patrick saw Dr. Lin An and put down the eraser.

"Dr. Lin An, what did the Lieutenant want with you?"

"He asked me to take a look at his tax return."

"He has tax problems too?"

"Small ones. He underreported a loss, so he can get three hundred dollars back."

Patrick and O'Brien exchanged a look.

"By the way."

Dr. Lin An stood at the doorway.

"Do any others at the Precinct have tax-related questions? I don't have much going on these next two days, so I can take a look for everyone."

Patrick opened his mouth, but before he could speak, O'Brien had already stood up and walked to the door. He poked his head out to check the hallway, then turned back and lowered his voice.

"A lot of people do."

He said.

"But not everyone brought their documents."

"That's fine."

Dr. Lin An said.

"I'll be coming back tomorrow, tomorrow afternoon. I live at 90-41 108th Street, Apartment 2B. You can have everyone bring their documents over, and I'll look at them all at once."

Patrick nodded, then glanced at his watch.

"I'll drive you back."

"No need."

Dr. Lin An said.

"I'll walk back, and take the opportunity to see what the Jamaica Community looks like during the day."

Patrick thought for a moment, then shook his head.

"You are a guest; how could a guest possibly walk back?"

"Alright then."

Lin An turned and walked away, Patrick followed him, and the two figures disappeared at the end of the corridor.

O'Brien walked over to his side, also looking in that direction.

Inside the office, Caitlyn was still sitting in the guest chair, looking toward the direction where Lin An had left, the door already closed.

Morales stood by the window, holding the half-finished glass of mango juice in his hand.

"Dad."

Caitlyn spoke up.

Morales did not turn around.

"Hmm."

"Let me tell you something."

Caitlyn's voice was not loud, but it was very serious.

"This person is a genius."

Morales turned around and looked at her.

Caitlyn leaned back against the chair, her hands crossed over her stomach... a posture that was identical to Morales's.

"Did you hear just now? The two questions I asked him, the Gaussian Copula and the Volatility Smile.

For the first question, it took me two weeks in my Public Policy Course to figure out roughly what it was about, and he explained it clearly in two minutes, and better than my professor did."

She paused.

"The second question, the Volatility Smile, that's something I heard from a friend in the Department of Finance, and even I haven't fully grasped it myself.

What he said was... flawless. Every word was used correctly, the logical chain was complete, and he even added things I didn't know."

Morales walked back behind his desk and sat down.

"And then?"

"And then, the question he asked me."

The corner of Caitlyn's mouth twitched.

"The basis for calculating capital requirements for a Systemically Important Financial Institution—I couldn't answer it."

She looked at Morales.

"Dad, do you know how long it's been since I was stumped by someone?"

Morales thought for a moment.

"A long time."

"Exactly," Caitlyn said.

"A long time, so long that I thought it would never happen again."

She leaned forward.

"Student IDs can be faked, passports can be faked, visas can be faked, Social Security numbers can be faked... but math cannot be faked. If you don't know math, you just don't know it."

She emphasized the word "don't" heavily.

"The fact that he could stump me means he knows far more than I do. A con artist might be able to memorize a few terms and chat pretentiously for a while, but he couldn't possibly find my blind spot in a field I'm unfamiliar with and then leave me speechless with one precise question."

She paused again.

"Because to do that, you need to truly understand the field. Not just memorizing a few formulas—it's understanding, the kind of... understanding where you can close your eyes and see the entire framework, knowing exactly where every single screw is located."

Morales was silent for a few seconds, then asked.

"So, what is your conclusion?"

"My conclusion is..."

Caitlyn took a deep breath.

"He is indeed Professor Jero's student. Maybe his name isn't in the system, maybe his visa is still being processed, maybe he's staying at a Black friend's house in Jamaica, and maybe everything looks wrong... but his brain is right."

She tapped her temple with her index finger.

"That cannot be faked."

Morales leaned back in his chair, crossed his hands behind his head, and looked at the ceiling.

After a while, he let out a soft laugh.

"The look on your face when he stumped you just now..."

"Dad."

Caitlyn's voice suddenly rose.

"Stop it."

"I'm just saying..."

"Stop it."

Morales swallowed the rest of his words, but the curve of his mouth remained.

He picked up the phone on the desk and dialed a number.

"Dispatch Center? This is Sergeant Morales... Yes, from the 103rd Precinct... Starting today, keep a closer eye on 108th Street, near 90-41, during your patrols...

Yes, a priority area... No, it's not a high-crime area; it's just that a very important person lives there... What kind of important person? A good friend of our 103rd Police Department, someone who can help us with our tax filings.

Right, so this friend is very important."

He hung up the phone and glanced out the window again.

The police car carrying Lin An had already driven off, merging into the traffic on Jamaica Avenue.

Morales set down his mango juice, picked up the K-1 form, and looked it over once more.

"Negative twelve hundred."

He muttered to himself.

"Three hundred dollars."

He put the K-1 back into the folder, leaned back in his chair, and closed his eyes.

"Dad."

"Hmm."

"Next time he comes to the precinct, call me."

"Why?"

"I want to ask him a few more questions."

Caitlyn said.

"About that macroprudential regulation—I'm going to look up some research and talk to him about it."

Morales nodded.

"Alright."

Caitlyn pushed the door open and walked out.