SERVING THE QUANTITATIVE FINANCE COMMUNITY

quantmeh
Posts: 5974
Joined: April 6th, 2007, 1:39 pm

### Quantitative Analysts witch hunt

QuoteOriginally posted by: Traden4AlphaExactly! And if the molecules thought they could make a profit from the hurricane (and get out of the way at the last minute), then they create a category umpteen-sigma hurricane.it's a great idea. i was thinking of something along this way in conjunction with "walk, don't run!" signs in cinemasit's probably true that if all people in the theatre walked out orderly in event of emergency, they'd - in some kind of average metrics - get out quicker than if they ran like crazy. on the other hand, i'm pretty sure that if everybody walks, and I RUN, I'LL get out faster. the problem's that everybody may think that they'd better run, and we have a stampede. similar thing's with voting. "every vote counts" they say. well, it doesn't. one vote dosnt matter, but if everyone thinks his/her vote doesnt matter and dont go to vote, then we have an issue

ppauper
Posts: 70239
Joined: November 15th, 2001, 1:29 pm

### Quantitative Analysts witch hunt

QuoteOriginally posted by: gardener3QuoteOriginally posted by: ppauperQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: ppauperQuoteOriginally posted by: jawabeanQuoteOriginally posted by: JohnLeMintimating that Mathematicians, Scientist, would be the people to blame for the current crisis.if not them, then who else? the social engineers of the BJ Clinton administration.It has been much publicized that BJ Clinton forced banks to lend money to people they would rather not have lent money too and forced Fannie&Freddie to insure those loans. That led to the subprime crisisOn the other hand, everyone was for it at the time? No they weren'tWe've been posting all NYTimes editorials from the era where folks were saying how stupid it was and disaster would ensue !This CRA thing is nonsense. A policy is put in place 15 years ago, and nothing happens until 2003-2004 when we start seeing large increases in sub-prime lending. Here are some facts:"* More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.* Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.* Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;* Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.* Mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans. "more half-truths from gardenerYou don't mention that Fannie and Freddie, the Federal Home Loan Mortgage Corp. were forced to purchase loans from the private lenders you mention and that HUD set targets for Fannie and Freddie to purchase low-income loans for sale into the secondary market with that target eventually reaching 52 percent of loans.Even if a private lender is, as per your claim, not forced to follow CRA rules, the fact that Fannie and Freddie were forced to buy those loans meant that private lenders would be generate themCharles Krauthammer, NYT on the CRA:"it led to tremendous pressure on Fannie Mae and Freddie Mac  who in turn pressured banks and other lenders  to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."Do the math: the percentage of subprime loans purchased by Fannie and Freddie had to increase.You mention New Century and Ameriquest>>The biggest suppliers of the securities to Fannie and Freddie included Countrywide Financial Corp. of Calabasas, California, >>as well as Irvine-California-based New Century Financial Corp. and Ameriquest Mortgage Co., >>lenders that either went bankrupt or were forced to sell themselves. >>Fannie and Freddie were the biggest buyers of loans from Countrywide, according to the company.Again, Freddie and Fannie buying because of the targetsDavid Stevens, a former head of Freddie's single- family mortgage business:The targets were significant enough to force them to go down the credit curve to meet them, which meant participating in some way or form in the higher-risk areas of the mortgage market,'' including the subprime business.''Fannie and Freddie were the chief and primary enablers of subprime loans

Cuchulainn
Posts: 62602
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
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### Quantitative Analysts witch hunt

QuoteOriginally posted by: ppauperQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: ppauperQuoteOriginally posted by: jawabeanQuoteOriginally posted by: JohnLeMintimating that Mathematicians, Scientist, would be the people to blame for the current crisis.if not them, then who else? the social engineers of the BJ Clinton administration.It has been much publicized that BJ Clinton forced banks to lend money to people they would rather not have lent money too and forced Fannie&Freddie to insure those loans. That led to the subprime crisisOn the other hand, everyone was for it at the time? No they weren'tWe've been posting all NYTimes editorials from the era where folks were saying how stupid it was and disaster would ensue !Who is 'we'? Could you give a link to show how you arrived at this.
Last edited by Cuchulainn on November 1st, 2008, 11:00 pm, edited 1 time in total.
Step over the gap, not into it. Watch the space between platform and train.
http://www.datasimfinancial.com
http://www.datasim.nl

quantmeh
Posts: 5974
Joined: April 6th, 2007, 1:39 pm

### Quantitative Analysts witch hunt

QuoteOriginally posted by: ppauperFannie and Freddie were the chief and primary enablers of subprime loansthat's quite a ridiculous statement to me. their subprime portfolios were very small, and started growing only when this market was already huge.GSEs' problem was a very low capitalization.

gardener3
Posts: 1496
Joined: April 5th, 2004, 3:25 pm

### Quantitative Analysts witch hunt

QuoteOriginally posted by: ppauperQuoteOriginally posted by: gardener3QuoteOriginally posted by: ppauperQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: ppauperQuoteOriginally posted by: jawabeanQuoteOriginally posted by: JohnLeMintimating that Mathematicians, Scientist, would be the people to blame for the current crisis.if not them, then who else? the social engineers of the BJ Clinton administration.It has been much publicized that BJ Clinton forced banks to lend money to people they would rather not have lent money too and forced Fannie&Freddie to insure those loans. That led to the subprime crisisOn the other hand, everyone was for it at the time? No they weren'tWe've been posting all NYTimes editorials from the era where folks were saying how stupid it was and disaster would ensue !This CRA thing is nonsense. A policy is put in place 15 years ago, and nothing happens until 2003-2004 when we start seeing large increases in sub-prime lending. Here are some facts:"* More than 84% of the subprime mortgages in 2006 were issued by private lending institutions.* Private firms made nearly 83% of the subprime loans to low- and moderate-income borrowers that year.* Only one of the top 25 subprime lenders in 2006 was directly subject to the CRA;* Only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.* Mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans. "more half-truths from gardenerYou don't mention that Fannie and Freddie, the Federal Home Loan Mortgage Corp. were forced to purchase loans from the private lenders you mention and that HUD set targets for Fannie and Freddie to purchase low-income loans for sale into the secondary market with that target eventually reaching 52 percent of loans.Even if a private lender is, as per your claim, not forced to follow CRA rules, the fact that Fannie and Freddie were forced to buy those loans meant that private lenders would be generate themCharles Krauthammer, NYT on the CRA:"it led to tremendous pressure on Fannie Mae and Freddie Mac  who in turn pressured banks and other lenders  to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."Do the math: the percentage of subprime loans purchased by Fannie and Freddie had to increase.You mention New Century and Ameriquest>>The biggest suppliers of the securities to Fannie and Freddie included Countrywide Financial Corp. of Calabasas, California, >>as well as Irvine-California-based New Century Financial Corp. and Ameriquest Mortgage Co., >>lenders that either went bankrupt or were forced to sell themselves. >>Fannie and Freddie were the biggest buyers of loans from Countrywide, according to the company.Again, Freddie and Fannie buying because of the targetsDavid Stevens, a former head of Freddie's single- family mortgage business:The targets were significant enough to force them to go down the credit curve to meet them, which meant participating in some way or form in the higher-risk areas of the mortgage market,'' including the subprime business.''Fannie and Freddie were the chief and primary enablers of subprime loansYou are conflating two issues, and clearly confused about the role played by GSEs and the impact of CRA in the non-conforming secondary market. The argument is that Clinton does something in 1994, nothing happens for 9 yrs and then there is a huge explosion in subrime mkt starting in 2003. If you look at the data, there is a big difference in default rates of 04-07 subprime vintages compared with the earlier loans, and most of the problems are with ARMs. And the default problem is not contained to sub-prime. Btw, if you follow your logic, it would have been Bush's plan in 2002 to increase minority ownership by 5.5 million and the Fannie and Freddie commitment at that time that would have caused this mess (which btw I also think is non-sense).

quantmeh
Posts: 5974
Joined: April 6th, 2007, 1:39 pm

### Quantitative Analysts witch hunt

Last edited by quantmeh on November 2nd, 2008, 11:00 pm, edited 1 time in total.

JohnLeM
Topic Author
Posts: 380
Joined: September 16th, 2008, 7:15 pm

### Quantitative Analysts witch hunt

Obscurantists strikes again ! And it takes place in the New York Times now !See this very serious artcile. I reacted to this article, and wrote to the NYT. Here is the text sent, as a letter to the editors of NYT, with copy to the columnist."As a mathematician, I would like to react to the above mentioned article.This article intimates that mathematical finance is at heart of the actualcrisis. This is enough ! Stop this obscurantist witch hunt now ! Bubbleformation is a natural effect in economy. There is no rational reason for thisphenomena not be quantified and forecast, except the human limitation knowledge. It would be more constructive to set on an efficient research program to try understand economical bubble formation. I do not mean an economical understanding, but a mathematical one. The actual context showed that crisis are a true risk. So why not consider a "bubble risk". Predicting the probability of formation of a crash at a future date, or making precise the dynamic of prices at crash formations: these are the tools that would be surely found very useful by regulators, rating agencies, risk managers overall the world. It will surely not avoid the next crisis, that are probably inherent to human activities, but may help smoothening their effects."

Cuchulainn
Posts: 62602
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
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### Quantitative Analysts witch hunt

QuoteBubble formation is a natural effect in economy. What's natural about them? I tend to agree with the article to some extent. Human behaviour will destroy the best of models IMHO. The property market (superset of subprime) crash was clear because 1) it happened before, 2) there are limits to collateral, 3) common sense.Scenario modelling or Bayesian belief network analysis is an alternative to your probability models? To be honest, I think your response ignores the 'human factor'.
Last edited by Cuchulainn on November 6th, 2008, 11:00 pm, edited 1 time in total.
Step over the gap, not into it. Watch the space between platform and train.
http://www.datasimfinancial.com
http://www.datasim.nl

JohnLeM
Topic Author
Posts: 380
Joined: September 16th, 2008, 7:15 pm

### Quantitative Analysts witch hunt

Cuchulain,Hello QuoteWhat's natural about them? I believe that crisis are mechanical effects, not human ones. See my postI discovered a wide litterature devoted to bubble formation in economical systems. See this Wilmott threadNow I have a question.Is there exists a pertinent mahtematical analysis forecasting bubbles formation. ?And an alternative.1) If Yes, why regulators, rating agencies, risk managers did not use it ?2) If no, what is the reason for which mathematicians failed ? Limitation of knowledge ? (most probable) inherent impossibility ? (proove it)

Anthis
Posts: 4313
Joined: October 22nd, 2001, 10:06 am

### Quantitative Analysts witch hunt

Cuch: Human behaviour will destroy the best of models IMHO.The above doesnt make sense to me. Or am I missing something? Supposedly economic/financial models try to model, or at least approach, either at macroscopic level or microscopic level human or both, human behavior. Not the other way around. The behaviour of economic agents or market participans is the reality, one tries to represent and study with a model. One cant fit reality to a model, but possibly can build a model that approaches satisfactorily reality.Its a suit and body analogy. The tailor has to fit a suit to your body. He cant force you become taller/shorter/bigger/slimmer, to fit you in a particular suit.

JohnLeM
Topic Author
Posts: 380
Joined: September 16th, 2008, 7:15 pm

### Quantitative Analysts witch hunt

Guys, think a little bit.You are modeling credit default swap risk, delta, gamma, rho, epsilon, theta risks, liquidity risks, volatility risks, collateral risk, and so on. Thousands of brilliant spirits have worked their entire life to give you these tools.And you are just saying in this thread that your job is useless, because human behavior just destroys all your analysis. Are you kidding ?The bubble risk is measurable, as all of these risks.Let allow me to be now more explicit : I am asking to the ghost of Von Neumann, to the living genius of Jarrow and Protter, and to hundreds of very prestigious researchers among the world if they have fallen measuring this risk. And, if yes, I would like to try understanding and analyzing this failure.
Last edited by JohnLeM on November 6th, 2008, 11:00 pm, edited 1 time in total.

croot
Posts: 104
Joined: July 23rd, 2006, 8:30 pm

### Quantitative Analysts witch hunt

1)My feeling, John, is the guys are not saying "human behavior just destroys all your analysis": the way I interpret it is " we used to make good easy money selling this pseudo knowledge to banks funds etc, but now it looks like this stream of easy income is drying up," effectively leaving the spoofy pseudo knowledge useless for now. They are just like you, trying to make money from concepts they can understand, only most people go to the big companies with big money instead of staying a human sized entity.My 2c. 2)About modelling bubble risk, imho it's about as useful as modelling crash risk: say your model predicts a crash, now what: spend lots of money today to avoid a potential crash forecast by the model for tomorrow? Most people bulding forecasting models prefer to devote energy to capturing the upside..
Last edited by croot on November 6th, 2008, 11:00 pm, edited 1 time in total.

JohnLeM
Topic Author
Posts: 380
Joined: September 16th, 2008, 7:15 pm

### Quantitative Analysts witch hunt

1) Croot. Should you be an operational Manager working in Big sized Investment Bank, you would certainly have a better insight of the role of Financial Engineering. BTW, I work in a human sized company just because it is the only way to put the finger where it hurts.2) I agree, most of people do. Except Regulators, and political leaders that now have to explain to their people that they have to make sacrifices, after having made huge last minute safety plans.
Last edited by JohnLeM on November 6th, 2008, 11:00 pm, edited 1 time in total.

psholtz
Posts: 101
Joined: May 5th, 2007, 4:07 am

### Quantitative Analysts witch hunt

QuoteOriginally posted by: Paulspacemonkey is perfectly correct. The mathematics and the models are irrelevant. All they are needed for is to justtify trading stupidly risky instruments in ridiculous amounts so that everyone gets an obscene bonus. This explans why quants are always using bad models when there are good models available. In this sense quants play the same role in getting us into this financial mess as lawyers and intelligence did in getting us into the Iraq mess.That's true as far as it goes, but I would argue that the word "mess" is relative here.There are people and organizations out there who are profiting ENORMOUSLY from both these "messes".. If people were *not* profiting of these "messes", then the "mess" would not be permitted to continue or perpetuate itself. In the case of Iraq, it's corporations like Halliburton, Dyncorp and the other defense contractors.. in the case of the financial meltdown, it's the big Wall Street banks who are using taxpayer financed "bailouts" to give themselves even bigger bonuses and even more capital to acquire the smaller banks and financial service institutions.So in this sense, yes quants *do* play the same role that lawyers/intelligence did in Iraq: they are the unwitting (and often well-meaning) dupes/pawns of those who are running things from behind the scenes. But that doens't mean they should bear the brunt of the blame for the "mess" itself.

JohnLeM
Topic Author
Posts: 380
Joined: September 16th, 2008, 7:15 pm

### Quantitative Analysts witch hunt

Well, I partially agree. I also believe that a clever strategy could benefit from this crisis. This is called arbitrage. Arbitrage is good, it tends to equilibrate the Markets. If these organizations use pawn quants to benefit of a crisis, so that their quant deliver them a precious information (what is the price in a "Risk neutral" world), in order to place clever orders, I do not see any objection here. Go and equilibrate the Markets, this is good.Obviously, the link to Iraq seems to me very hazardous.What I am trying to say to political leaders , regulators, rating agencies, risks Managers is the following : you are about to set on laws to regulate markets against a crisis. But, at my knowledge, nobody have a quantified tool to help you. So, develop a research program that will build a tool able to measure your crisis risk. This is exactly what I try to set on.
Last edited by JohnLeM on November 7th, 2008, 11:00 pm, edited 1 time in total.