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Edwynn -> RE: An Inside Job (3/16/2011 3:30:49 AM)
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quote:
ORIGINAL: Hippiekinkster
Does it mention David Li's Gaussian copula formula?
...
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril."
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
READ THE WHOLE ARTICLE - IT'S VERY INFORMATIVE.
Sorry, but I smell 'red herring' here.
The article attempts to confine the whole morass into a single math formula of one Chinese quantitative analyst. Everybody else is magically off the hook now.
The Commodity Futures Modernization Act which allowed any sort of derivative the investment banks cared to conjure, with no oversight whatsoever, the credit default swaps (which were actually mentioned in the article, but only as another "victim" of that pernicious math formula, though the author failed to inform us how that formula instructed AIG et al. to seek out and aggressively sell swaps to people who did not even own the underlying CDOs), and a host of other players and causes were effectively swept under the rug with this canard.
We are to have it then, that this magic formula instructed the largest lobby in DC to go forth and dispel all state's efforts to reign in the rampant abuse and fraud in the predatory subprime market, selling widows in poor neighborhoods refinancing packages that they never even asked for, at rates higher than their good credit would have properly priced?
Looking at this investigation on predatory lending,
http://www.law.fsu.edu/journals/lawreview/downloads/334/reiss.pdf
I don't see anything about Li's formula here, but certainly lots of other interesting tidbits, not the least of which:
Finally, Standard & Poor’s, Moody’s Investors Services and Fitch
Ratings, the three major bond and securities rating agencies (collectively,
the “privileged raters”), indicated that they will not rate securities
backed by pools of residential mortgages if any of those mortgages
violate their rating guidelines relating to acceptable liability risk
stemming from state predatory lending laws.
Read the whole item carefully, and understand that the last part informs that if a state attempts to pass any law that protects their own citizens against the fraudsters, the rating agencies will not rate the bonds.
That's called racketeering in any other book.
Then we have the banks taking these loans and falsifying paper work to have them classified in a tax exempt pool, whereupon they were collected and sent to the slice and dice of the investment banks' CDO mill, rated AAA by the ratings agencies, even as the underlying loan quality progressively worsened.
What happened then is that the push for subprimes, however could be gotten, were desperately needed to fulfill these CDOs that were selling like hotcakes, to such extent that some CDO sales occurred even with a few last loans or refinancings yet to be obtained to complete the security. Guess what happens to loan quality now? No matter, still AAA by Moody's or Standard & Poors, getting fees for structuring the package, and then the ratings fees, which they guaranteed for themselves by the invariant AAA ratings.
All that is a relatively simplified relation of events. It's more complicated and actually nastier than that. And that is before we get to the fraud in many of the foreclosures, the "rocket docket" courts, etc.
OK, I'm ticked off enough now.
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