Recipe for Disaster: The Formula That Killed Wall Street

Discussion in 'Educational Resources' started by ASusilovic, Feb 24, 2009.

  1. dont

    dont

    I remember a Guy had a PhD from Yale and was working on this new interest rate derivative for the bank.

    Wrote this whole heck tit model, when he resigned, I looked at the model and yes underlying it was nothing.

    He told me that he quickly realized that common sense was good enough, so basically the "model" was all front end, no real calculations behind it.

    I also remember attending a seminar on credit derivatives where this mathematician took two days to show us his great discovery, you could express the credit risk as a spread to the risk free rate.

    Did I laugh!
     
    #11     Feb 24, 2009
  2. Maybe it's not a dumb comment but a little too straightforward for you.

    Read how the model is designed. It's a fairy tale.
     
    #12     Feb 24, 2009
  3. It's akin to blaming Merton for Niederhoffer's blowup.
     
    #13     Feb 24, 2009
  4. LOL exactly.

    Maybe the quants/modellers only fault is deceitful (or ignorant) marketing?? Leading to users' over-confidence in the models?
     
    #14     Feb 24, 2009
  5. jaley

    jaley

    nobody really cares what crap you make up as long as everyone is getting rich :cool:
     
    #15     Feb 24, 2009
  6. Exactly, in the banks no one cares if a model is good or not, as long as it generates sales, and everyone collects his bonuses all is good.
     
    #16     Feb 24, 2009
  7. As I responded in the other thread, Tavakoli has been a consistent critic of the models, but says that while the models were flawed, the key problem was malfeasance.

    Yep. Definitely a white hat with the evidence to prove it. Her book DEAR MR. BUFFETT gives dates and articles of her criticism going back to a presentation she gave to the IMF in April 2005 as the bubble started expanding.

    She said the ABS CDOs were overrated (an excerpted clip is on her web site). She wrote about problems with credit derivatives, problem models and hidden leverage in her 1999 credit derivatives book. Her 2003 book on CDOs talked about fraud and her Sept 2008 book on structured products is more explicit. In her 2003 book she talked about overrated "AAA" products. Over the years the problem got worse, so she escalated in very specific ways. She was the first one to say the "AAA" ratings were a joke. There are scads of articles going back several years in THE JOURNAL OF STURCTURED FINANCE, GARP and more basically calling the correlation models a load. In Feb 2007, the SEC posted her letter on its site. She said Congress should revoke the NRSRO designation for the rating agencies with respect to structured products. She was the first person (in early 2007) to put it in writing that she thought the whole thing met the definition of a Ponzi scheme and showed how. You shoudl check her work on Merrill and AIG, too. There's a lot more and it's all documented in her book. It is very specific and it was all accurate.
     
    #17     Feb 24, 2009
  8. This is the link to this weekend's FT article on her new book. I read the book; it's the best explanation I've read of the meltdown:

    http://www.ft.com/cms/s/2/caf27fa0-fedf-11dd-b19a-000077b07658.html

    Dear Mr Buffett
    Review by Paul J Davies

    Published: February 23 2009 04:58 | Last updated: February 23 2009 04:58

    Dear Mr Buffett: What an Investor Learns 1,269 Miles from Wall Street
    By Janet Tavakoli
    John Wiley £15.99, 282 pages
    FT Bookshop price: £12.79

    In late 19th-century California, Charles E Boles enjoyed almost a decade of robbing the stage coaches of Wells Fargo on the dusty highways before he was caught. Legend has it that “Black Bart”, as he was known, was always well-dressed, unfailingly courteous and never fired a shot.

    For Janet Tavakoli, his activities are a fitting emblem for the “bloodless robbery” committed by bankers and mortgage brokers in the grip of a credit fever that ultimately led to America’s – and the world’s – financial meltdown.

    Her new book, Dear Mr Buffett: What an Investor Learns 1,269 Miles from Wall Street, is a clear and pacy run through the multitude of sins and sinners in the modern financial world.

    Tavakoli is the president of a Chicago-based financial consultancy and an expert in the confusing world of securitisation, credit derivatives and collateralised debt obligations. But she also finds time to rail against regulators, central bankers and politicians, stock options, statistical models and hedge funds.

    In 2003, after 18 years working at some of America’s biggest banks, Tavakoli wrote a book on finance that so impressed revered investor Warren Buffett, he invited her to lunch. So began a friendship out of which this book grew.

    Dear Mr Buffett is that occasionally grating mixture of autobiography, witness testimony, analysis and polemic common to many books by finance professionals, including Nassim Nicholas Taleb’s Fooled by Randomness (2007) or George Soros’s recent The Credit Crisis of 2008.

    However, Tavakoli’s writing is full of anecdotes, details and character sketches that add depth and colour to even the best known episodes of the past two years. She also covers events only a few years before the current crisis that should have been big warning signs. The correspondence between Buffett and Tavakoli over the past three years reinforced her existing views on the dangers of complex finance. And with Buffett’s blessing, this book will find a ready-made fan base with little marketing effort.

    Their exchange is most enlightening in the middle chapters where they discuss the subprime mortgage machine, collateralised debt obligations and rating agencies. A shared base principle is revealed, the seemingly obvious: “Do not lend money to people who cannot pay you back.”

    This maxim is repeated again and again in a superb and unforgiving critique of the expansion of home ownership, mortgage lending and securitisation. Those who made money out of the crisis propound this sentiment, as do those who stopped buying mortgage bonds before the height of the boom. It only illustrates the short memories of many caught up in the bubble.

    In this telling, however, only the poor escape without blame: “Housing speculators and over-reaching homeowners took risk with ‘eyes wide shut’ ... predatory lenders targeted minorities and lower income people who were intellectually and financially mugged, then dumped on the side of the road.”

    A fundamental message of the book is that a mixture of greed, stupidity and outright fraud drove the US house-price and mortgage-credit “Ponzi scheme”, while a total lack of regard for basic cash-flow evidence and analysis allowed banks to flog dodgy deals to sleepwalking investors.

    Tavakoli makes for an attractive pundit – she knows her stuff, has strong opinions and turns a colourful quote. And though she’s no enemy of modern financial technology of itself, she convincingly decries its recent handlers and uses.

    This is hardly the first time Tavakoli has made such arguments. The book is littered with references to her many cameos in both print and broadcast media – including in the Financial Times and a couple of times in my own articles.

    There is a healthy dose of “I told you so” about this volume – but, to be fair, Tavakoli is one of the few who did.

    Paul J Davies is the FT’s deputy capital markets editor
     
    #18     Feb 24, 2009