Another Tale of Suits and Geeks

When I read the article, I had the impression that the risk of CDOs was determined from credit default swaps.

To me, this assumes that the those writings the credit default swaps must be able to dig into the CDOs and determine their "true" risk, and then price the credit default swaps properly.

Then, those seeking to determine the risk of the CDO's can free ride on the work done by those sellng the credit default swaps.

But it didn't work that way, did it? Tell me that I am wrong. That credit default swaps were not sold based upon risk assessments on securities that were determined by the prices of credit default swaps?

Please explain.

I think this Suits v. Geeks narrative goes too soft on the "geeks" as you call them. Sure, the managers wen't along with all that, either because they understood it or not, but it's the geeks who created models that in many cases bore no relation to reality, as was shown by their failure to take into account the possibility that house prices might one day fall.

This just goes to show the danger of Economics and Finance graduate programs churning out people with great math skills, but zero economic intuition or understanding of the underlying theory. Don't get me wrong, I'm not an Austrian who thinks math has no place in economics, but the current situation goes too far in the other direction, especially at mid-rank schools who have trouble attracting good economists but can get mathematicians well enough.

As an addendum to my last comment, it's worth pointing out that not only were many economics and finance graduates working as quants more or less ignorant of the underlying theory, a lot of these quants weren't even economics or finance graduates, but were from Physics or pure Mathematics. Is there and wonder at how this happened? This would be like putting an economist in charge of the CERN.

Astonishing how you can read an article on how the quants fucked up as supporting your narrative about how it's all the managers' fault.