Saturday, November 24, 2007

Quants at Work

"Since the bottom has fallen out of the market for structured credit, Washington Square Investment Management Ltd., for example, has seen wide variations in the few quotes available from banks, mostly one-sided quotes at that--bids at extremely low levels aimed at forced sellers, but no offers. ... 'Every time there is a crisis, people realize that valuation needs to be more accurate,' said David Gershon, chief executive of pricing service SuperDerivatives. 'People are becoming impatient about not knowing where they are.' ... Institutions with hundreds of millions of euros invested in CDOs of whatever type may find it worth spending a million or two to get a pricing model of their own when the see bid/offer spreads of, say, 16 to 95 --or no prices at all. ... 'Lots of people are building models,' said Jeff Gooch, Markit executive vice president for valuations. 'You can argue the merits of different models, but however good your model, the hard part is getting access to inputs and then testing them'. Auditors say that before allowing these independent numbers, they look in the detail at the price inputs that went into them", Jane Baird at, 23 November.

It's good CPAs look at these models now. What did they do before? What were the rating services doing, as if we don't know? Why is accurate valuation important in a crisis? Why not all the time? The wide bid/ask spreads show why Hank Paulson is pushing MLEC, the banks don't want to mark their assets to the market.

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