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Interesting point. Certainly, the people who put the products together didn't do the math correctly. I think the major problem there is the assumption that home

Interesting point. Certainly, the people who put the products together didn't do the math correctly. I think the major problem there is the assumption that homeowner defaults are independent random variables. In such a case, the high credit ratings for derivatives of subprime debt contracts would make total sense. However, if home prices decrease simultaneously and people go underwater on their loans, then suddenly there can be a massive correlation event where even the really highly rated derivative tranches are in danger.

sgt101 10y ago
Assumption is a key word. It's hard for people to spot and test assumptions, and it didn't happen in the run up to 2007. Also I think group think is a killer - people go along with the pack, there is often no diversity of opinion or approach. If I ran an investment bank I'd run separate analysis teams, geographically separated and organisationally partitioned. Could save the odd $10billion...