Yet another post on the credit crisis

billmon has written a not-so-simple take on what lead to the credit crisis.

I do not understand it all yet, but a longer list of assumptions made on the investment vehicles:

1. Housing prices rarely go down, at least nationally.
2. Default losses on large mortgage pools are not only low but relatively stable.
3. People don’t walk away from their homes, even when they’re under water.
4. Regional housing markets are largely uncorrelated.

This was one of the hard hitting lines from the article:

Thanks to the embedded leverage these “legacy” assets contain, a 20% (housing) price decline has resulted in 80% or 90% or even 100% losses on many of them.

Should read the article better when I get the time …

How Wall Street Lied to Its Computers – another nyt aritcle

Another nyt article. This time in the Bits Blog section of all places. Anyway, more reasons why the models failed:

• The models looked at years of history instead of a few previous months. This makes no sense to me: “There is no data like more data” and all that.
• The products were so complex that no one knew how to assign risk to them.

The article concludes that the blame also falls on the experienced non-quants in these investement banks for improper supervision.