Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 1
Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 2
Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 3
Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 4
Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 2
Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 3
Nazish Lutfi's Analysis on US Financial Crisis on Geo Part - 4
These videos are surely not recent as gold price, for example, has breached $1100.
ReplyDeleteSub-prime was an interesting phenomenon as those institutions making the loans knew full well the borrowers could not repay even the interest. But the loans were being securitised, vetted by rating agencies, and then sold (as mortgage-based securities) to unwitting investors. Indeed, operations like Goldman Sachs were shorting the MBS they were selling to institutional investors, knowing clearly what rubbish they were selling.
so then rightly said by Warren Buffet: "Collateralized Debt Obligations & Credit Default Swaps are the Financial Weapons of Mass Destruction".
ReplyDeleteYes, Buffet was correct. I'm a mathematician by training and many of my friends work as quants in NYC. I know that quant formualas (e.g., the Gaussian copula) have been used to lend credibility to MBS, to CDOs. It's a classic case of the emperor without any clothes. More fundamentally, however, the US-based system of finance capitalism is flawed and irrational at its core. This system of finance works hand-in-glove with US military dominance: both finance and military dominance need each other. As a whole it is unsustainable. Let us see what takes its place (I have no idea).
ReplyDeleteI was just looking at the figures from the Bank for International Settlements. For June 2009, the notional outstanding in over-the-counter derivatives was $604,622,000,000,000. The gross market value was $25,372,000,000,000. The bulk was in interest rate contracts.
ReplyDeletehttp://www.bis.org/statistics/otcder/dt1920a.pdf
its incredible to see a simultaneous mass default in amortized securities like MBS when we have always been studying in courses that amortized securities have minimum default risk. may be this is why three sigma market events are likely. because there are so so so many other factors also which cant all be accounted beforehand.
ReplyDeletecredit rating agencies and regulators are culprits also.
on the contrary i dont understand why most of the quants guys and statisticians still use all these SMLs and CAPMs in their pricing models. personally i think this is ridiculous.
As Naseem Taleb had been pointing out for some time, so-called five-sigma events were being misjudged and the probability they would occur was greater than so-called experts (i.e., quants with doctoral degrees) were assigning them. And that is what happened. The mathematical models that assigned the probabilities were bogus at their core (whether using the Gaussian copula or anything else).
ReplyDeleteIt's important to understand that quants do not have tools to measure and assign risk in the financial world. This cannot be overstressed. Taleb has been saying this for years. As John Gray says, "The central flaw of the economic orthodoxy against which Keynes fought in the 1930s was to imagine that an insoluble problem – human ignorance of the future – had been solved. The error was repeated in the 1990s, when economists came to believe that complex mathematical formulae could tame uncertainty in the murky world of derivatives.... Keynes and the classical economists before him knew that there is no realm of market exchange that obeys laws of the kind that can be formulated in the natural sciences."