Posted on 03/05/2009 10:05:45 AM PST by PhilosopherStones
Can't publish content from Wired. Please see link in first comment below.
Utterly fascinating look at the business of risk-assessment in CDO creation during the run up to the current disaster.
Can't wait to getreactions from the quants here.
This should be required FR reading.
“before common sense is restored”
You are a greater optimist than I, Gungha Din!
The title is misleading.
If one were to believe the idea delivered by the title then the mathematical formulas for risk-assessment of CDOs was a)foundational and b)singularly responsible for what befell “Wall Street”, yet both ideas are false.
At the foundation is the fact that there would have been not enough expansion of “liquidity” from which to “profit”, in the way “Wall Street” attempted, without the fiat-money policies of the Fed over the last fifteen to twenty years having so cheapened the dollar and dollar denominated “risk”.
Lastly, economics is always one-half today’s values and one-half trust and it only takes the creation of enough negative-economic-mass to create a tipping point in an economic system; a tipping point large enough for that negative mass to help lower the trust in what was heretofore good and stable.
The CRA, Freddie & Fannie, Acorn and FranknDodd, along with a culpable cast of thousands created the toxic assets that were inconsistent with the normal risk-assessments that the risk-sharing ideas were built on.
Minus the Fed’s funny money or the massive, artificial volume of subprime toxic assets, the risk-assessment math would probably still be working without a mass systemic downside.
By that, should those same risk assessment equations continue to hold up? Maybe not, maybe a weakness in them has been exposed; but that’s not the point. The point is they were not foundational or primary in the “downfall of Wall Street”.
Wow. That article is very instructive. Thank you very much for pointing me to this information.
The man who created the formula now works for the Chinese Government!!!
The Junk was all Triple AAA rated by Credit Rating Agencies!!
Ping
Good post.
One of the events in the markets that got buried because its descriptor terms do not sensationalize a buzz such as ‘subprime’ or ‘toxic mortgages’ etc., is the event of requiring hedge funds to disclose their short positions in the final quarter of 2008.
The buzz term of ‘redemption’ does not connect with the average Joe in the same way that ‘subprime borrower’ got more house than deserved.
“Remember that massive drop-off in the markets back in October and November? Yea, part of the reason for the massive selling in certain equities was funds “front running” each other. When you ‘front run,’ you are basically shorting the long positions of other struggling funds that you figure they will be forced to sell. Initially, funds were forced to sell positions due to the fact that they were struggling due to weak performance and/or redemption requests. This situation was further amplified when the lions started to attack the wounded wildebeest. At the time, many funds were liquidating and/or seeing a large amount of redemptions.”
Read on.
The calculus is dependent on the input data. The formula was (is) a breakthrough, a tangible method to quantify a “fuzzy” system of valuation. I wonder if that Chinese dude recommended 50 to 1 leverage ratios. I think not. I think it was the good ole white American ivy league boys who saw to that. To what ends? Point: they all have I.Q.’s over 140. A lot of them are of genius intelligence. They saw and knew what the outcome would be. They cared only to see how thick they could line their pockets before the inevitable. Well the inevitable is here. I wonder if they considered the magnitude?
The missing piece of data: could an entity which knew the details of the models that were being used, and had a couple of trillion dollars to game the system, wreck the economy of the US and Western Europe? I'm guessing yes.
Tom Clancy made this scenario part of one of his books ("Debt of Honor"). In the book, Japan crashes Wall Street by using knowledge of our financial models. The purpose is to keep us too preoccupied to deal with them going on a war of conquest in the Pacific and Asia. Substitute China for Japan in that scenario...
Funny you should mention Clancy. On 9/11 I was working in Monaco and got my news by refreshing cnn.com. The FIRST thing that came to mind was “Debt of Honor” where the guy flys a loaded 747 into the Capitol.
Dang. Doesn’t ANYONE at the FBI or CIA read Tom Clancy?
I get the feeling that somebody at Al Queda reads Tom Clancy, and perhaps other thriller writers, in order to get ideas.
Ping!
Consider yourself *highly* commended, sir.
Cheers!
.
Correct you are.
Wall Street saying --- "Oh we were duped by our mathematicians. Blame them"
This "formula" is secondary
Was really just the Wall Street's cover for writing and selling toxic garbage
And taking home billions in bonuses while doing so
If I were some 28 year old Ivy League snot on Wall Street I'll go along with what everyone else is doing that brings home a few million each year for me. These young ones were mostly liberals too. 0bomo voters
A most excellent find!
Exactly. There is not nearly the level of intellect of leadership among these folks that others imagine. I doubt a Teddy Roosevelt or even an FDR could get in to Harvard any more. These are folks who have won the great academic game of going along to get along, which to get into Harvard you start plaing at age two. These are the sons and daughters of soccer moms and dads. Havard can take immense pride that they managed to get almost exclusive “branding” on this collapse.
Funny that one of their premier liberal economists, John Kenneth Galbraith wrote all about it in “The Great Crash.” I guess they stopped teaching that book.
Wow!
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