yup, hey whats the link, thanks
- Skinny 2-24-2009 2:16 pm [add a comment]

youtube link
- jim 2-24-2009 2:20 pm [add a comment]

Another good article, this one from Felix Salmon. A little more meat than usual. It's an interesting follow up to the Michael Lewis Portfolio piece I linked to a while back but can't find now. Salmon gets into some of the math behind the hocus-pocus that Lewis talked about whereby high risk securities can be tranched (re-tranched?) and magically some of it comes out rated AAA:

The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

cant we just start over
- Skinny 2-25-2009 4:47 pm [add a comment]

Could we start again, please?
- alex 2-26-2009 1:32 am [add a comment]