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Monday, July 16, 2007

Which Is Not What the Big Bucks Are Paid For

by Tanta on 7/16/2007 08:26:00 AM

I like Janet Tavakoli:

Hedge funds instead use mathematical models of their own to estimate and report the value of their CDO holdings to investors -- a practice known as "marking to model."

Recent troubles at hedge funds run by Bear Stearns, Braddock Financial Corp. and United Capital Markets have highlighted the problems inherent in that approach. Even so, fund managers are resisting market views on the value of subprime assets and continuing to "mark to model," claiming declines represent short-term volatility.

"'Mark to model' is a joke," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "What you need to do now is vet the underlying collateral" in CDOs instead of just modeling, which wasn't done earlier, she said. "It's grubby, roll-up-your-sleeves kind of work."

Oh, now we find out that we should have skipped the install of Mathematica 6.0.1 and just handed some of those grubby loan files off to Euelna in the Collateral Review Department . . .

We seem to be on the verge of the revelation that pricing models and rating models and value-at-risk models and Excel spreadsheets and 10-key calculators only work when all of the relevant data inputs are collected and verified. Sit down, folks. If this keeps up, we will learn that those fancy automated underwriting systems that have been using the borrower's unverified assertions about income and the broker's bald-faced lies about the sales contract and the appraiser's idle musings about the market appetite for more granite countertops are producting unreliable estimates of default probability . . .

They shoot fund managers, don't they?