Dig this- maybe old hat for some.

http://www.thestar.com/business/article/604033

Former University of Waterloo statistician David X. Li didn't burn down the American economy. He just supplied the matches.

As economists and market watchers cast about for people to blame for the U.S. market meltdown, Li has surfaced as a scapegoat. Recently, Wired magazine ran an article on Li's work subtitled, "The Formula That Killed Wall Street."

The formula in question is the so-called Gaussian copula function. On the most basic level, the formula allows statisticians to model the behaviour of several correlated risks at once.

In a scholarly paper published in 2000, Li proposed the theorem be applied to credit risks, encompassing everything from bonds to mortgages. This particular copula was not new, but the financial application Li proposed for it was.

Disastrously, it was just simple enough for untrained financial analysts to use, but too complex for them to properly understand. It appeared to allow them to definitively determine risk, effectively eliminating it. The result was an orgy of misspending that sent the U.S. banking system over a cliff.

"To say David brought down the market is like blaming Einstein for Hiroshima," says Prof. Harry Panjer, Li's mentor at the University of Waterloo. "He wasn't in charge of the financial world. He just wrote an article."

When David X. Li first arrived from China in 1987, he was known as Xiang Lin Li. He already held a masters in economics from Tianjin's Nankai University. He was one of a group of the faculty there who won a scholarship to study business in Canada through CIDA. In order to claim his prize at Montreal's Laval University, Li was given four months to master French.

"We were all highly motivated," says Jie Dai, who was in the program with Li. "He was from a small town in the south of China. A small family, very ordinary, not poor or rich. There wasn't anything distinguished about his personality."

Li graduated with an MBA in 1991. Most of his Chinese classmates were bound for academia. Li saw a more worldly future. Says Dai: "I clearly remember him mention that if you are an actuarial guy, you can earn a lot more money."

Li had recently married a colleague from Nankai when he decided to study at Waterloo's department of statistics and actuarial sciences. He was drawn by the work of Panjer, a world leader in the study of loss modelling, especially as it applies to the world of insurance.

"He had the ability to take ideas from different fields and synthesize them," Panjer says.

In Waterloo, Li lived the hand-to-mouth life of a grad student. He anglicized his name. He and Panjer became close, and still correspond. Over six years, he earned his third masters and a PhD.

After graduation in 1997, Li taught briefly. He worked for CIBC World Markets. But his ambition quickly drove him to New York. He tore up the corporate ladder. By 2000, he was a partner in J.P. Morgan's RiskMetrics unit, trying to find ways to leverage a new generation of risk-based financial assets.

His breakthrough was an article published that year entitled, "On Default Correlation: A Copula Function Approach."

Many of the ideas contained within it were drawn from statistics research Li had observed firsthand at Waterloo. His insight was to transfer the work to financial models.

Li's model sidestepped the problem of trying to correlate all the variables that determine risk. Instead, it based its assumptions on the historical dips and swells of the market itself. In essence, Li used the past to map the future.

"It was a very simple mathematical answer almost anyone could use," Panjer says "And when you've got a hammer, everything suddenly looks like a nail. They jumped on it."

Through the lens of Li's theorem, even the shakiest investments suddenly looked viable. The Gaussian cupola created the sort of financial alchemy that made high-risk mortgages and credit card debt look like triple-A rated gold.

Money poured into CDSs (credit default swaps), a financial device that acts as an insurance policy against defaults. By the end of 2007, the total investment in credit default swaps had swelled to $62 trillion (U.S.), a 6,700 per cent increase in only six years.

Li didn't make money directly off the idea, but it made him famous.

Maybe he sensed the danger inherent in the system he'd help establish. By 2005, Li was among those warning about the limitations of his model. "The most dangerous part is when people believe everything coming out of (the model)," he told The Wall Street Journal.

What Li's theorem could not do was predict what might happen in extreme economic environments, what experts call "tail dependency." And one was arriving.

The 2008 collapse of the U.S. housing bubble rendered Li's model useless. Defaults that the model had not predicted piled up, rippling through U.S. banks and wiping out trillions of dollars in investment.

But Li's colleagues say he's not to blame. "We have a saying in statistics, `All models are wrong, but some are useful,'" says Panjer. "He supplied something, a tool kit, for financial analysts. They took one small part of it and used it in ways he had never intended."

Li since moved to Beijing, where he heads the risk management department for the China International Capital Corp., a major investment bank. He has not commented on the meltdown or his role in it.

Thanks Investpro. Nice stuff.

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Must Listen. 45 mins speech by Peter Schiff and that is called common sense. It will be news for lot of people.

http://www.mises.org/

Why the Meltdown Should Have Surprised No One
3/13/2009 7:51:26 PM by Peter Schiff

Must Watch...

http://www.pbs.org/wgbh/pages/frontline/tentrillion/view/


The journey begins as FRONTLINE correspondent Forrest Sawyer takes viewers to a secret location: the Treasury's debt auction room, where the U.S. government sells securities backed by the "full faith and credit of the United States." On this day, the government is auctioning $67 billion of Treasury securities. The money borrowed will be used to fund services and programs that the government cannot pay for through tax revenues alone.

Observers warn that the United States' reliance on borrowing to fund essential programs is a dangerous gamble. For the first time, investors are beginning to question the ability of federal government to meet its growing financial obligations, and fading confidence can have dire consequences. "You might have a situation where there is one day when the government says we need to sell several billion dollars of bonds, and nobody shows," Economist reporter Greg Ip tells FRONTLINE. "No money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut."

Yet more borrowing is exactly what the Obama administration plans to do: hundreds of billions to bail out the banks and other financial institutions; tens of billions more for the auto industry; $275 billion for homeowners and mortgage lenders; and a giant $787 billion stimulus package to jump-start an economy spiraling downward. Just like the Bush administration before it, Obama and his team are going to borrow big.

"That's the paradox of the situation that we're in now," observes Matt Miller, author of The Tyranny of Dead Ideas. "Government has got to run big deficits to stimulate the economy, deficits that would have been unthinkable ... because government's the only entity with the wherewithal to prop up a demand in the economy when businesses and consumers are all pulling back."

If YOU want to truly effect change, the current system must fail. For that to happen home buyers and sellers must demand change.

http://patrick.net/wp/?p=16245


This is how and why much of the inefficient BS goes on. Frankly, this is why they hate us. It’s consumers vs. Realtors.

Every agent must belong to the NAR. Why? If they don’t:

They can’t call themselves a Realtor. (marginal value)
They can’t join any broker that is a member of the NAR — and that would be literally every broker, and an agent must join a broker to sell real estate and expect to be paid.
An independent non-NAR member is screwed because if they aren’t a Realtor, they can’t be paid the percent of commission that would normally go to the buyer’s agent. Remember, listing agents via their sellers set the commissions. Side note: if a broker/ agent does not co-op (pay the buyers agent) the standard commission (3%) they will literally have the other brokers band against them, meaning show their listings, and worse. There have been many court cases over this sort of thing, and every time the NAR/offending broker has lost.
Can’t put their listings on the MLS.
The NAR makes it so there is lack of transparency by design, for obvious reasons: power/control/attempt at staying relevant. The NAR forces brokers/agents to pay their $700-$1000+ per year. Do the math! 2.1 million x $700-$1000. Add to that the cost the local boards of Realtors charges.

There will never be any real change as long as this model exists. Its like GM and the unions.

I don’t care who comes up with whatever wiz-bang real estate company idea — it will fail. You know about the grave yard. Even Bill Gates tried to launch a real estate portal. DOA.

Consumers deserve change. Hundreds of thousands of Realtors want to provide 2.0+ stuff to them. Dude, Realtors would LOVE to do fee for service and get rid of commissions. LOVE IT. Many tech minded agents would love to evolve the industry…they can’t. Realtors are no different than any other small business owner. 99% of them are great people who are forced to play by crazy rules. The system is simply *ucked.

There it is. And more…

I have had this very conversation with the President/CEO of K/W, RE/MAX, and with many many of the ‘leaders’ in real estate. Guess what, behind closed doors, with no one listening, of course they all agree.

If YOU want to truly effect change, the current system must fail. For that to happen home buyers and sellers must demand change.
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Are we different?