One former colleague remembers Pandit as “a thoughtful, conscientious, understated guy.” He was “easy to work with, and there was no standout thing about him,” the colleague says. “It’s kind of interesting that he’s gotten to this position because usually people who ­do that are much more self-promoting and political.”

But Pandit’s ascendance—he pitched himself as a numbers guy who could handle the M.B.A.-speak—was perfectly timed. Wall Street was in the process of becoming increasingly recondite and concept-driven. Pandit was instrumental in creating the first options on the Nikkei stock index in Japan and the XMI index, which tracked the Dow Jones industrial average. It was an ­innovative instrument, because at the time, investors couldn’t buy options outside the exchange.

Then, in the mid-to-late-’80s, new and sometimes esoteric hedging strategies became all the rage, some using Pandit’s three-year options and others using portfolio insurance, which would soon become notorious. The strategy employed computerized trading to sell stocks swiftly in market declines, a tactic later widely blamed for contributing to the market crash of October 1987.

Pandit sees parallels between the 1980s portfolio-insurance craze and the recent excesses involving mortgage securities. “People felt protected because they had portfolio insurance and the program trading behind it,” he says. “They felt they could take on more risk, and if the markets started going down, they could hedge out. But a lot of people took that same approach, and when the market started going down, everybody converged and the system was overloaded.” So, ironically, “what was right for an individual investor or company created a systemic issue for the entire market,” he says.

Similarly, Pandit notes, the big banks hedged the risk of their subprime loans by securitizing and selling mortgage-backed securities, thereby turning a risk-reduction strategy into a problem.

For helping flag portfolio insurance as a problem, Pandit was named a managing director of Morgan Stanley in 1989. A year later, he became head of equity capital markets and occasionally got his name in the trade press by creating new and improved financial instruments. By 2000, he was one of the top-earning executives at the firm, snagging a then-impressive bonus of $8.4 million and, in September, an even more impressive set of titles. He and Stephan Newhouse were named co-presidents and co-chief operating officers of Morgan’s institutional-securities group. John Havens, one of Pandit’s closest friends, replaced Pandit as head of worldwide institutional equities.

Not long afterward, Morgan Stanley’s internal politics boiled over, and Pandit and his protégés became involved in a boardroom putsch. They joined a group of top traders and bankers at the firm who sought to oust C.E.O. Philip Purcell, a former Dean Witter executive whom they saw as destroying the Morgan Stanley culture. The Dean Witter and Morgan Stanley sides of the company never jelled, and internally, Purcell was made out to be the reason.

The details of the fight were chronicled in dozens of articles and even a book—Patricia Beard’s Blue Blood and Mutiny. The outcome for Pandit was that his palace coup didn’t work, and by March 2005, he was gone. Havens stayed at Pandit’s side, quitting Morgan at the same time. A top risk-management official, Brian Leach, quit a few weeks later, and so did two other heavy-hitting bankers, Joseph Perella and Terry Meguid.

As Havens describes it, he and Pandit planned their future as a kind of intellectual exercise: “We got together and started thinking about our future, and because we had worked together for 20 years and had a level of respect for each other, we did a lot of this thinking and planning together at that point.”

As so often happens when like-minded Wall Streeters engage in intellectual exercises, a hedge fund emerged: “We had thought for quite some time that there were great opportunities in building a multi-strategy fund if you could go out and find a group of people who just were excellent at what they did,” Havens says. “So that’s what we ended up doing.”

While Purcell, their old boss, was slowly spit-roasted in the media, Pandit and Havens started their hedge fund, Old Lane Partners. From the start, it was overflowing with institutional capital and eventually had $4.5 billion under management.

Old Lane was a comfy perch for the corporate exiles—and the 20 percent share of profits and 2 percent management fee the fund charged investors certainly helped—but it was not a successful fund, despite Pandit’s reputation as an expert in managing money and sidestepping risk. Multi-strategy funds, by definition, can engage in any kind of investment strategy, and such funds are supposed to outperform less risky investments in good times and bad. Old Lane did not. From its inception in April 2006 to this past April, the fund was flat, according to a Citi official. In 2007, it returned just 2.8 percent after fees, half of what Standard & Poor’s 500-stock index returned with dividends reinvested.