Comments on: Beware of Geeks Bearing Formulas

By: Beware of Greeks Bearing Formulas | Simoleon Sense

Beware of Greeks Bearing Formulas | Simoleon Sense — Sat, 08 Nov 2008 21:31:31 +0000

[...] wrote an excellent post on the complexity of risk models and their recent spectacular failure (which can be found here). In addition to linking to Peter’s post, I would like to present a New York Time’s [...]

By: Rafe Champion

Rafe Champion — Tue, 04 Nov 2008 05:31:04 +0000

A nice point and one that can probably be extended to the role of regulations and regulators and especially their failure in the sub-prime collapse. Because there was so much regulation going on, there was quite likely a false sense of security but, like the engineer who was only checking for wind hazard, the more important hazards were overlooked.
But how did that happen. Heaps of people must have known what was happening, and the outcome was predicted in the New York Times in 1999.

By: spostrel

spostrel — Tue, 04 Nov 2008 03:08:35 +0000

I thought the article about AIG was pretty fair to Gorton. It mentioned repeatedly that his models were only designed to predict actual security defaults, which so far they seem to have done OK at. The problem was that the default swaps had provisions for collateral calls when the underlying assets dropped in value, and they never modeled that at all. If you call in an engineer to model the effects of wind on a bridge and it collapses because a heavy truck goes over it, I don’t think the engineer should be on the hook.