<TABLE id=msgUN cellSpacing=3 cellPadding=0 width="100%" border=0><TBODY><TR><TD id=msgUNsubj vAlign=top>
Coffeeshop Chit Chat - subprime mess blame on china </TD><TD id=msgunetc noWrap align=right>
Subscribe </TD></TR></TBODY></TABLE><TABLE class=msgtable cellSpacing=0 cellPadding=0 width="96%"><TBODY><TR><TD class=msg vAlign=top><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR class=msghead><TD class=msgbfr1 width="1%"> </TD><TD><TABLE cellSpacing=0 cellPadding=0 border=0><TBODY><TR class=msghead><TD class=msgF noWrap align=right width="1%">From: </TD><TD class=msgFname noWrap width="68%">madmansg <NOBR></NOBR> </TD><TD class=msgDate noWrap align=right width="30%">7:33 am </TD></TR><TR class=msghead><TD class=msgT noWrap align=right width="1%" height=20>To: </TD><TD class=msgTname noWrap width="68%">ALL <NOBR></NOBR></TD><TD class=msgNum noWrap align=right> (1 of 2) </TD></TR></TBODY></TABLE></TD></TR><TR><TD class=msgleft width="1%" rowSpan=4> </TD><TD class=wintiny noWrap align=right>8663.1 </TD></TR><TR><TD height=8></TD></TR><TR><TD class=msgtxt>ow we fast forward to the year 2000. Enter David X Li from rural China, after he earned advanced degrees in mathematics. He took a job at JP Morgan Chase, and instead of working with only two variables, Li worked with groups of variables called Gaussian copulas. These copulas produced a single number. Li was working on CDSs and CDOs, and his one number was used to trade these securities on Wall Street.
Wall Street had found Nirvana -- a single number on which to bet billions of dollars (CDOs are bundles of mortgages traded as a single unit). Li made his calculations on past values of CDSs (a CDS is made up of an underlying mortgage bond and the counter party insuring company). Using past prices is like trading from a chart. It tells you what happened in the past, but will not tell what will happen next.
We all know the rest. Wall Street went merrily on its way, onward and upward. The housing boom was underway, and Li's formula was tied to ever rising prices. Trading managers didn't have a clue what Li's formula was all about and never took the time to try and understand it. They just went ahead and bet billions of dollars on his formula.
Then came the Black Swan. Foreclosures rose, house prices fell and like LTCM, the house of cards fell apart. Now they say Li went back to China and Wall Street may or may not recover. Estimates run as high as $7 trillion in losses that have yet to be unwound. Good luck America.
And a final note. JP Morgan Chase is now the dominant player in the CDS market with $87.7 trillion of OTC (over the counter) contracts outstanding. Perhaps we could guess that Mr. Li's formula helped in this regard
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<!--PostMsgHTML--><SCRIPT language=JavaScript> <!-- if (adPosition == 1){ GA_googleFillSlot("DF_ROS_inline_BTF_1"); } //--> </SCRIPT><!--/PostMsgHTML--><!--PreMsgHTML--><!--/PreMsgHTML--><TABLE class=msgtablealt cellSpacing=0 cellPadding=0 width="96%"><TBODY><TR><TD class=msg vAlign=top><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR class=msghead><TD class=msgbfr1 width="1%"> </TD><TD><TABLE cellSpacing=0 cellPadding=0 border=0><TBODY><TR class=msghead><TD class=msgF noWrap align=right width="1%">From: </TD><TD class=msgFname noWrap width="68%">madmansg <NOBR></NOBR> </TD><TD class=msgDate noWrap align=right width="30%">7:38 am </TD></TR><TR class=msghead><TD class=msgT noWrap align=right width="1%" height=20>To: </TD><TD class=msgTname noWrap width="68%">madmansg <NOBR></NOBR></TD><TD class=msgNum noWrap align=right> (2 of 2) </TD></TR></TBODY></TABLE></TD></TR><TR><TD class=msgleft width="1%" rowSpan=4> </TD><TD class=wintiny noWrap align=right>8663.2 in reply to 8663.1 </TD></TR><TR><TD height=8></TD></TR><TR><TD class=msgtxt>David X. Li
From Wikipedia, the free encyclopedia
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David X. Li is a quantitative analyst and a qualified actuary who pioneered the use of Gaussian copula models for the pricing of collateralized debt obligations (CDOs).[1][2]
Li was born and raised in a rural part of China during the 1960's.[1] He received a master's degree in economics from Nankai University. After leaving China he earned an MBA from Laval University in Quebec.[1] His financial career began in 1997 at Canadian Imperial Bank of Commerce.[1] In 2004 he moved to Barclays Capital and headed up the quantitative analytics team.[1]
Li's paper "On Default Correlation: A Copula Function Approach"[2] was the first appearance of the Gaussian copula applied to CDO's, which quickly became a tool for financial institutions to correlate associations between multiple securities.[1] This allowed for CDOs to be accurately priced for a wide range of investments that were previously too complex to price, such as mortgages. However in the aftermath of the Global financial crisis of 2008–2009 the model has been seen as fundamentally flawed and a "recipe for disaster".[1] According to Nassim Nicholas Taleb, "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked. Co-association between securities is not measurable using correlation," in other words because past history is not predictive of the future. "Anything that relies on correlation is charlatanism."[1] Li himself always understood the limitation of his model, in 2005 saying "Very few people understand the essence of the model."[3] Kai Gilkes of CreditSights says "Li can't be blamed", although he invented the model, it was the bankers who misinterpreted it.[1]
In 2008 Li moved to Bejing where he works for China International Capital Corporation as head of the risk-management department.[1]
[edit] References
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Wall Street had found Nirvana -- a single number on which to bet billions of dollars (CDOs are bundles of mortgages traded as a single unit). Li made his calculations on past values of CDSs (a CDS is made up of an underlying mortgage bond and the counter party insuring company). Using past prices is like trading from a chart. It tells you what happened in the past, but will not tell what will happen next.
We all know the rest. Wall Street went merrily on its way, onward and upward. The housing boom was underway, and Li's formula was tied to ever rising prices. Trading managers didn't have a clue what Li's formula was all about and never took the time to try and understand it. They just went ahead and bet billions of dollars on his formula.
Then came the Black Swan. Foreclosures rose, house prices fell and like LTCM, the house of cards fell apart. Now they say Li went back to China and Wall Street may or may not recover. Estimates run as high as $7 trillion in losses that have yet to be unwound. Good luck America.
And a final note. JP Morgan Chase is now the dominant player in the CDS market with $87.7 trillion of OTC (over the counter) contracts outstanding. Perhaps we could guess that Mr. Li's formula helped in this regard
</TD></TR><TR><TD> </TD></TR></TBODY></TABLE><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD class=msgleft width="1%"> </TD><TD class=msgopt noWrap width="24%">
<!--PostMsgHTML--><SCRIPT language=JavaScript> <!-- if (adPosition == 1){ GA_googleFillSlot("DF_ROS_inline_BTF_1"); } //--> </SCRIPT><!--/PostMsgHTML--><!--PreMsgHTML--><!--/PreMsgHTML--><TABLE class=msgtablealt cellSpacing=0 cellPadding=0 width="96%"><TBODY><TR><TD class=msg vAlign=top><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR class=msghead><TD class=msgbfr1 width="1%"> </TD><TD><TABLE cellSpacing=0 cellPadding=0 border=0><TBODY><TR class=msghead><TD class=msgF noWrap align=right width="1%">From: </TD><TD class=msgFname noWrap width="68%">madmansg <NOBR></NOBR> </TD><TD class=msgDate noWrap align=right width="30%">7:38 am </TD></TR><TR class=msghead><TD class=msgT noWrap align=right width="1%" height=20>To: </TD><TD class=msgTname noWrap width="68%">madmansg <NOBR></NOBR></TD><TD class=msgNum noWrap align=right> (2 of 2) </TD></TR></TBODY></TABLE></TD></TR><TR><TD class=msgleft width="1%" rowSpan=4> </TD><TD class=wintiny noWrap align=right>8663.2 in reply to 8663.1 </TD></TR><TR><TD height=8></TD></TR><TR><TD class=msgtxt>David X. Li
From Wikipedia, the free encyclopedia
Jump to: navigation, search
David X. Li is a quantitative analyst and a qualified actuary who pioneered the use of Gaussian copula models for the pricing of collateralized debt obligations (CDOs).[1][2]
Li was born and raised in a rural part of China during the 1960's.[1] He received a master's degree in economics from Nankai University. After leaving China he earned an MBA from Laval University in Quebec.[1] His financial career began in 1997 at Canadian Imperial Bank of Commerce.[1] In 2004 he moved to Barclays Capital and headed up the quantitative analytics team.[1]
Li's paper "On Default Correlation: A Copula Function Approach"[2] was the first appearance of the Gaussian copula applied to CDO's, which quickly became a tool for financial institutions to correlate associations between multiple securities.[1] This allowed for CDOs to be accurately priced for a wide range of investments that were previously too complex to price, such as mortgages. However in the aftermath of the Global financial crisis of 2008–2009 the model has been seen as fundamentally flawed and a "recipe for disaster".[1] According to Nassim Nicholas Taleb, "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked. Co-association between securities is not measurable using correlation," in other words because past history is not predictive of the future. "Anything that relies on correlation is charlatanism."[1] Li himself always understood the limitation of his model, in 2005 saying "Very few people understand the essence of the model."[3] Kai Gilkes of CreditSights says "Li can't be blamed", although he invented the model, it was the bankers who misinterpreted it.[1]
In 2008 Li moved to Bejing where he works for China International Capital Corporation as head of the risk-management department.[1]
[edit] References
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