The Formula That Killed Wall Street

[open4]

See link,

David X. Li's Gaussian copula function

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all


An initial result of this formula would be that the cost of CDS insurance would fall as implied asset risk would appear to diminish as accelerating new credit inflated underlying asset prices thereby providing intrinsic loop dependent liquidity to service the borrowing quite detached from the stabilizing necessity of providing solvency extrinsic to the credit loop itself, and by the way extremely destructive and unfairly competitive to people trying to work within real world economics without the short term advantage of fraudulent accelerating fiat credit money,

Just prior to the collapse as one might expect the cost of CDS insurance was very low implying insignificant lending risk biasing the formula towards easier and cheaper credit,

future credit stability became critically dependent on ever accelerating credit induced asset inflation, then at the point of exponential credit expansion, the system collapsed
To my mind it is not remotely credible that the banks implementing this formula were unaware of its limitation but found it a convenient tool to absolve their implied responsibility of good judgment and get rich by providing unsustainable credit, also banks must have for some time been aware that they were committed to powering a merry-go-round that must continue to accelerate or immediately collapse while knowing that their actions would eventually lead to much greater collapse and destruction,

[gwynedd1]

Re: The Formula That Killed Wall Street

See link,

David X. Li's Gaussian copula function

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all


An initial result of this formula would be that the cost of CDS insurance would fall as implied asset risk would appear to diminish as accelerating new credit inflated underlying asset prices thereby providing intrinsic loop dependent liquidity to service the borrowing quite detached from the stabilizing necessity of providing solvency extrinsic to the credit loop itself, and by the way extremely destructive and unfairly competitive to people trying to work within real world economics without the short term advantage of fraudulent accelerating fiat credit money,

Just prior to the collapse as one might expect the cost of CDS insurance was very low implying insignificant lending risk biasing the formula towards easier and cheaper credit,

future credit stability became critically dependent on ever accelerating credit induced asset inflation, then at the point of exponential credit expansion, the system collapsed:p:p

To my mind it is not remotely credible that the banks implementing this formula were unaware of its limitation but found it a convenient tool to absolve their implied responsibility of good judgment and get rich by providing unsustainable credit, also banks must have for some time been aware that they were committed to powering a merry-go-round that must continue to accelerate or immediately collapse while knowing that their actions would eventually lead to much greater collapse and destruction,

When I plugged into the copula function the arrival of benevolent aliens around 2007 the numbers looked great. Looks like their saucer was a repo before they got here.

[Supercilious]

Re: The Formula That Killed Wall Street

To my mind it is not remotely credible that the banks implementing this formula were unaware of its limitation but found it a convenient tool to absolve their implied responsibility of good judgment and get rich by providing unsustainable credit, also banks must have for some time been aware that they were committed to powering a merry-go-round that must continue to accelerate or immediately collapse while knowing that their actions would eventually lead to much greater collapse and destruction,

You are correct. Most of the people who started the mathematical worship of this formula (I'm talking here about Paulson when he was on top of GS, not about latecomer idiots) knew very well that Li's Miracle was actually nothing else than an instrument to misrepresent risk. It was just another case of Black-Scholes disaster waiting to happen.

The problem was generated by the huge demand for an inflation hedged substitutes of treasuries from those footing the bill for the American twin deficit.

The roots of this debacle are much deeper and are anchored in the unrealistic and unsustainable model of WTO globalization we had pursued for the last 15-20 years. Basically, this version of globalization was nothing else than a method for allowing a high level of corporate profitability (far above the global GDP growth) while creating the illusion of GDP growth for the masses that were ripped off.

For example, if the Chinese export surplus were kept in (plain) dollars, soon the accumulation of dollars would trigger the rising of the yuan and the globalist-WTO export growth engine collapses. Therefore, they were (and still are) forced to recycle their dollar surplus into treasuries, putting the dollars back into the system and perpetuating the demand for their exports. But the yields offered by the treasuries were not attractive ( there were too many other players involved into the recycling business, and the Fed was keeping the rates too low). They were losing money, therefore they went into agencies for higher yields.

The cupola based CDO's allowed for the creation of a new class of high yield securities with misrepresented risk in the assumed environment frame (inflation, credit expansion and continuous rise in housing prices). That led to a positive feed back loop and we got the mortgage credit bubble that, in turn, created the housing bubble and the subprime bubble. Add on top of that the false insurance, provided by the CDS instruments, and you have the complete picture.

The losses sustained by Wall Street banks are staggering, but those are just the losses of the inventory that went bad before they were able to sell it to gullible recyclers of US deficit. The question is where the rest (the bulk) of the losses are netted.

The interesting part is that the recyclers (being them state entities as in China or private banks intermediaries such as in Europe) cannot aknowledge the true magnitude of their losses, because this would destroy their own unsustainable recycling schemes, and destroy the illusion of wealth created for their own citizens/investors (See what is happening now in Britain, Ireland, Hungary, Baltics, Russia etc). This is what happened in Iceland, where the Icelandic banks were not able anymore to hide the losses from the miraculous beating of the dead red herring and the resident vikings are now throughly pissed off.

I believe the bulk of the losses are netted on the balance sheets of the financial institutions of countries that experienced the mirage of accelerated growth during this stage of globalization scam.

The question is how much longer the governments and the banking sectors of these countries can keep the losses hidden? Because any delay in acknowledging these losses while perpetuating the old mechanisms of illusory growth, is going to make the correction tougher.

[Starving Steve]

Re: The Formula That Killed Wall Street

So, when every Joe 6-pack, every cab driver, every barber, every moron like me knew that the U.S. real estate market was getting more risky by the day, Sir Alan Greenspan would go before the U.S. Congress, speak in his incomprehensible Greenspanese, and basically babble that all risks had been properly priced through sound mathematics and Li's copula formula, so the economy could grow on forever. There was no need to worry about anything more than a garden variety mild recession.

Now that the entire world has entered into the mother of all depressions, we see that the mathematics behind Greenspan's thinking was questionable at best, and Li's copula formula was a joke. Yet, Greenspan chaired the FMOC and became the darling of Wall Street and the Republicans.

[cjppjc]

Re: The Formula That Killed Wall Street

So, when every Joe 6-pack, every cab driver, every barber, every moron like me knew that the U.S. real estate market was getting more risky by the day,

That is a bit of revisinist history. Every j6p, cab driver, barber was buying real estate. People were saying you never lose money in real estate.

[open4]

Re: The Formula That Killed Wall Street

That is a bit of revisinist history. Every j6p, cab driver, barber was buying real estate. People were saying you never lose money in real estate.

The master card that banks believe they hold is that the majority by accepting unserviceable credit are implicated in the crime and thereby rendered inert as far as threat to bank bailouts and continued outrageous bonus payments or fraudulently acquired wealth.

[Rajiv]

Re: The Formula That Killed Wall Street

This was posted here a few days ago here and there was some discussion around it

[Starving Steve]

Re: The Formula That Killed Wall Street

How could one statistical formula, Li's cupola function, cause the trainwreck of all the world's markets, the loss of over 30% of the world's wealth, and the dashing of the retirement hopes of tens of millions?

The answer lies in the way economics is being taught at our major universities. If the hyper-inflation now in Zimbabwe has not made that clear, maybe this ongoing trainwreck in the world's markets will make this clear.

[pwcmba]

Re: The Formula That Killed Wall Street

http://www.youtube.com/watch?v=SRqSX...eature=related

our banksters philosophy - instead of pawning the car though they go to the gubment.

[gwynedd1]

Re: The Formula That Killed Wall Street

The good Christian should beware the mathematician and all those who make empty prophecies. The danger already exists that the mathematicians have made a covenant with the devil to darken the spirit and to confine man in the bonds of hell. -Augustine

[cjppjc]

Re: The Formula That Killed Wall Street

The good Christian should beware the mathematician and all those who make empty prophecies. The danger already exists that the mathematicians have made a covenant with the devil to darken the spirit and to confine man in the bonds of hell. -Augustine

For now we see through a glass darkly - Corinthians

[open4]

Re: The Formula That Killed Wall Street

When I plugged into the copula function the arrival of benevolent aliens around 2007 the numbers looked great. Looks like their saucer was a repo before they got here.

Beware of Geeks Bering gifts !!!

[Shakespear]

Re: The Formula That Killed Wall Street

The formula is smoke. This guy was certainly told what were the dangers of this formula.

http://www.nytimes.com/2007/02/23/business/23hedge.html

plenty of info here warning that something is not right

http://www.frbatlanta.org/news/CONFE...C_Weithers.pdf

Remember the phrase "Moral Hazard" ?

[Chris]

Re: The Formula That Killed Wall Street

There was a time when one could make a healthy profit (probably still can) from brokerage firms who were (mis-)pricing their options using Black-Scholes. I doubt it would be so easy with Li.

JP Morgan have made their CDS model available to examine though if any iTulipers are at a loose end for a couple of years.

[c1ue]

Re: The Formula That Killed Wall Street

You are correct. Most of the people who started the mathematical worship of this formula (I'm talking here about Paulson when he was on top of GS, not about latecomer idiots) knew very well that Li's Miracle was actually nothing else than an instrument to misrepresent risk. It was just another case of Black-Scholes disaster waiting to happen.

Do you have evidence of this, personal knowledge, or this came to you in your mother's basement while wearing the salad colander?

Certainly Hank benefitted from it, but being a beneficiary and being a perpetrator are not the same thing.

For one thing - complex mathematical formulas can be used exactly as mortgage brokers with Option ARMs: so long as banksters are making money, knowing the details isn't that important.

And I fail to see how goofy addled mathematical risk scenarios have anything to do with foreign government accounting schemes. The Chinese government doesn't do FASB. They haven't bought any CDS' that I have ever seen evidence of. For that matter, even MBS purchases were very limited.

Your pet theories are interesting, but it would be nice to see some actual proof.