Phorgy Phynance

“Mark to model”

with one comment

Just stumbled on this Reuters article via Jus some thoughts:

Can Wall Street be trusted to value risky CDOs?

There are some extremely high-powered minds on Wall Street after having drained the brain bank from mathematics, physics, and engineering. In fact many such departments at universities now offer specializations in finance. But with all that brain power, there is still no decent quantitative model that can appropriately price CDOs. In fact, I had a discussion over dinner once with one of my favorite “quant” authors who is now head of quantitative research at a major bank about the “model-ability” of CDOs. He admitted quite frankly to me, “Regardless of whether I think CDOs are model-able, it is my job to provide a model. If I don’t, I’m out of a job.”

An excerpt from the article:

“‘Mark to model’ is a joke,” said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. “What you need to do now is vet the underlying collateral” in CDOs instead of just modeling, which wasn’t done earlier, she said. “It’s grubby, roll-up-your-sleeves kind of work.”

I don’t think it is necessarily a matter of “trust”. I don’t think these quants are intentionally misleading investors. It is more a matter of asking for the impossible. Just because someone has a PhD from a top university does not mean they can perform the impossible and I believe that is exactly what has been going on. With so much money sloshing around, there seems to be an attitude that if you throw enough money at a problem, then you will get a solution. Not so.

You know, it is kind of ironic that I even make this argument because the logical conclusion of people taking my opinion seriously would be that these quants (like myself) would become unemployed 😮

Maybe it’s a good thing nobody takes me seriously 🙂

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Written by Eric

July 14, 2007 at 5:09 pm

Posted in CDO, Modeling

One Response

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  1. […] CDOs and Risk Management […]


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