Light Friday: Top 3 Rants of the Financial Crisis (So Far)

Plus: The Math Formula that Ruined Our Economy, the Short and Simple Story of the Credit Crisis, Offshoring Childcare and MORE.

The Short and Simple Story of the Credit Crisis

In two parts, by Jonathan Jarvis as a thesis project at the Art Center College of Design in Pasadena, Calif.:

(7:32 min.)

(3:44 min.)

See also: a $1.5 million condominium on a $20k income.

The Math Formula that Ruined Our Economy

Wired has published an article that traces the current economic nightmare back to a formula published in 2000 by David X. Li, a mathematician working for JPMorgan Chase.

Basically, Wired posits (via The Consumerist), bankers adored the formula for its simplicity but they completely misused it — despite warnings from academics that it was flawed — to turn pretty much every security into a triple-A, no-risk fabrication.

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations.

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. ... During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial.

But banks kept following it because times were good, and because they didn't understand the flaws in the formula in the first place.

Lots of blame going around. Should formulas or mathematical models be punished?

Top 3 Freak-outs of the Econopocalypse

Some folks are dealing with the financial crisis by getting by, while others are passionately erupting as if Bernie Madoff were throwing a party in the name of Charles Ponzi while swimming in his money vault and having adventures with his great-nephews. And they're doing it on national television.

Rep. Gary Ackerman (D-NY) addressing the SEC on Madoff Fraud:

CNBC Mad Money host Jim Cramer on Federal Reserve and the market meltdown:

(Longer version here)

CNBC correspondent Rick Santelli on President Barack Obama's mortgage bailout plan:

Exactly How Much is $787 Billion?

The government is taking steps to breathe life into the nation's failing economy. President Obama signed into law one of the most costly pieces of legislation in United States history, an economic stimulus package to the tune of $787 billion.

Boston.com has compiled a list of 10 things the stimulus package could buy. Five among them:

What would you spend $787 billion on?

U.S. Parents Offshoring Child Care

From The Onion:

::Uncomfortable chuckle::

Help NASA Name New Space Station Room

NASA wants people to help name a new room in the International Space Station. The new station room is slated to launch toward the space station aboard a NASA shuttle in late 2009.

To help name the new Node 3 module, the public can choose from four NASA suggestions — Serenity, Legacy, Earthrise and Venture — by voting in an online ballot. Write-in votes will be accepted, as well.

The polls close on March 20, and the winning name will be announced in April 2009.

What suggestions do you have? Vote here.


Cheers.

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