Monday, February 23, 2009


From Math Wizards Working on Spells to 'Cure' by Scott Patterson:

The financial engineers are at it again.

Critics may complain that these math wizards started the trouble in the first place by designing securities that couldn't withstand the market's turbulence. But they also may have the expertise to help fix the problem.

"Airplanes fail, too," says Peter Cotton, founder of Julius Finance, a structured-finance firm in New York. "That doesn't mean you don't fix them."

Mr. Cotton is one of many such engineers trying to solve a seemingly intractable problem before the government: how to design a system for buying up assets shunted into a massive "bad bank." The government doesn't want to pay too much and banks don't want to sell for too little.
Mr. Cotton says the models most banks and ratings firms used to price CDOs were poorly designed. "They are superficial," he says, and "often spit out prices that don't capture the underlying value of the assets."

Using those same failed models now, says Mr. Cotton, most banks are "essentially just making up numbers."

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