Finally, finally…a free and intelligent explanation of the credit crisis

Posted on 20 January 2009

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http://hbswk.hbs.edu/item/5939.html

Research & Ideas

Risky Business with Structured Finance

Full-text PDF of the working paper here.

An excerpt: Yet the paper presents a modeling exercise (using the same computer tools employed by the ratings agencies) that demonstrates that the challenge of rating structured products lies in their extreme sensitivity to estimation errors—that even modest imprecision in estimating underlying risks is magnified disproportionately when securities are pooled and tranched…The exercise clearly shows how the sensitivity of tranches to error in the estimate of default probability is determined by their seniority.

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Posted in: Business, Management