Thursday, April 22, 2010

Goldman in my mind

Xianhua Peng spoke about default clustering and CDO valuation in the visitors seminar talk this week. I was able to follow the part of the presentation in which he reviewed the key literature on the subject, pointing out the main disadvantages of many approaches, in particular the problem of providing a good fit for both marginal default rates for each name in a CDO while at the same time having sufficiently strong correlations to fit the observed tranche prices. He then introduced his own model, in collaboration with Steve Kou, who was his PhD advisor at Columbia, based on cumulative default intensities.

At the point the talk got a bit too technical for me, so when he mentioned Goldman Sachs I let my mind drift. For the record, I think the SEC is weak and was pushed in a hurry to create momentum for FinReg reform. While not necessarily a bad thing if it achieves the purpose of passing reform, I think this strategy creates the wrong type of outrage.  

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