Jinjuku... you are a worthy advisary. You're like Bizarro Chris... then again... maybe I'm Bizarro Jinjuku.
I think we're both smarter than the average bear, but I swear we couldn't think more differently about things. It's good though... life would blow if everyone walked in lockstep with one another 24/7
Thanks Chris. I think and try to trend toward open and mutually beneficial discussion. That is almost always my target. I can get embittered and trend away from that however (then you guys see my public apology).
There is one reason why you and I are on different sides of causation of this entire mess.
The early/mid 2000's the Gaussian copula was a defacto formula used by derivative traders to value CDS. CDS for the lay person are credit default swaps, it is for all intents insurance against a default. Kind of like PMI on a mortgage.
The problem with the formula: It wasn't using historical data. It was using recent pricing as a basis for assessing risk/benefit structures. Every one used this model.
The
real issue is this: you had financial gurus that had been at it before all the quantitative (math wiz's) got involved. They are looking at these algorithms and scratching their head.
Now if you are an old dog at this and are more qualitative vs quant. You are getting your brains beat out by the quant competition. Your customers are leaving you in droves because 6-11% variable returns aren't good enough any longer. Even though you were CONSISTENT. People wanted to ride the quickly rising rocket that the quant types offered and that the qual people couldn't wrap their minds around. No one listened to the old dogs and they and their sage advice were quickly put to pasture. My mother in law is a retired stock broker. She actually ran series 7 and 63(?) classes. She is one of those that seriously questioned some of this quant theory and was shown the door when she balked at being told how to invest her clients money. History proved her correct in her assumptions.
Let's put the blame where this current crisis rests: With the investment community. They saw themselves as the smartest guys in the room. Hubris.
Food for thought:
In 2001 there was a 901 billion market cap for CDS, in 2007 that number was... Drum roll please: 62 TRILLION. Do you see the problem with insurance that is hedging it's bet against that much money. Our government has nothing to do with this. What one should be scratching their head over (just like the qual guys): 62 Trillion of what? Money? You see, there was 62 trillion of NOTHING. Over valued. A cloud of smoke, a house of cards.
