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November 05, 2008 – Comments (6)

Financial Armageddon has a post about Gary Gorton, who teaches at Yale.

"Mr. Gorton, who teaches at Yale School of Management, is best known for his influential academic papers, which have been cited in speeches by Federal Reserve Chairman Ben Bernanke. But he also has a lucrative part-time gig: devising computer models used by the giant insurer to gauge risk in more than $400 billion of devilishly complicated deals called credit-default swaps."

Well, Aristotle put scientific beliefs backwards for thousands of years due to his popularity and mistaken beliefs that were popularly adopted.

There needs to accountability and the prestige needs to be replaced with disgrace.

6 Comments – Post Your Own

#1) On November 05, 2008 at 9:06 PM, MarketBottom (29.36) wrote:

Amen

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#2) On November 05, 2008 at 9:53 PM, btown819 (96.47) wrote:

Gary Gorton was paid to do mathematical models and he probably did them well.  Application of these models to reality is an entirely different issue.  In this case, using these computer models to serve as the sole basis for measuring risk was AIG's idea.  I can't really blame a guy for continuing to generate models for $250/hour when AIG was ready and willing to pay him for it.  It is ultimately AIG's responsibility for determining their own risk and managing it.  Trying to pin the blame solely on this guy is the disgrace.   

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#3) On November 05, 2008 at 10:32 PM, starbucks4ever (98.59) wrote:

A model is just a model. It can predict your risk under a certain set of assumptions, but it cannot tell you if the assumptions employed as inputs have anything to do with reality.

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#4) On November 06, 2008 at 10:55 PM, usmilitiadude (32.26) wrote:

Nice article. Why are the mental elite losing sight of pay as you go; no debt. The highly leveraged, when everything falls apart, is the lenders slave....... Unless Bernanke is your buddy.

 We need those TV comercials back. Instead of "just say no to drugs", they would say "Finacial solvency is so hot" or . Thanks Paris for that public service announcement .

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#5) On November 07, 2008 at 3:31 PM, MadRussianHobbit (93.89) wrote:

First, you should link to the permalink hyperlink, not the blog.  Otherwise the entry you're talking about will scroll into the archives and your readers will have no clue what you're talking about.

But more importantly, the article said:

"AIG didn't assign Mr. Gorton to assess those threats, and knew that his models didn't consider them. Those risks have cost AIG tens of billions of dollars and pushed the federal government to rescue the company in September."

In other words, AIG relied on a model that THEY KNEW wasn't complete, and its incompleteness was at THEIR REQUEST.  You're still going to blame the academic because it's fun to blame the "pointy headed academics"?  If I buy a bb gun to hunt elk, I don't get to blame the gun manufacturer for the lack of range.  My choice of weapon; my failure.

AIG knew what they were buying and its limitations.  Their choice; their failure.

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#6) On November 07, 2008 at 4:31 PM, player23m (< 20) wrote:

It's true, the models seem to be reverse. I found this out first hand when I cancelled some credit cards I didn't need anymore. My credit score dropped like a rock, then when I paid down my other cards, they followed by dropping my credit line down to my balance, even though I haven't had a late payment in years, have never only paid the minimum, and nearly doubled my income since I got the cards. My autopayments were then charged at the end of the month, pushing my cards over the limit, adding fees further lowing my score, I had to follow by applying for new cards, dropping it even lower. Now I have to max out several cards every month then completely pay them off before the next to avoid overcharge fees on my autopayments rather than just pay down more than I spend, which for some reason also hurts my credit, worse than making partial payments. Being a programmer myself, to me it seems like he purposely made it work backwards as a joke, knowing the facilities he worked for were too dumb to understand his coding, and too pompus to admit they were were wrong for putting all their confidence in a computer in an attempt to save money through avoiding personal evaluations of a credit history. After all the hassle, I'm very angry, even considering making use of my new image, maxing out everything then going bankrupt just to take my revenge out on the cards but at least there's good news, most of this bad debt isn't really bad, lots of people like me, with lots of money, just laughing at how screwed up the system is. I get the joke, it will be a great time to invest if wall street could just understood the punch.

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