MUST READ: Wired has the best article I've read on CDO's, CDS's, the interworkings of the bond market, and especially on how the financial markets tanked. The current crisis has a lot to do with the Gaussan Copula Function (formula above) created by mathematician David X. Li. The formula, designed to calculate the risk of complex CDO's, was used by everyone on Wall Street. Unfortunately, the formula is deeply flawed because there's no way to assign a quantum of risk to the correlation between all the hodgepodge bonds in a CDO (read the article, you'll get it) - but the formula made making money easy, and made assessing mortgage-backed securities easy - so the market exploded .... until the bubble burst, and everyone realized they had no idea how much risk they were exposed to or how much their securities were really worth. And here we are.
No comments:
Post a Comment