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Finance Geeks Behind Crisis Hard at Work on a Fix

The inventors of the CDO turn their math minds to better valuations of assets

By Clay Dillow, Newser Staff

Posted Feb 23, 2009 11:04 AM CST

(Newser) – The finance-desk math wizards who created the securities behind the market meltdown are now betting they can think their way out of the mess, the Wall Street Journal reports, working to design new systems for pricing bad assets fairly so governments can buy them off of banks’ balance sheets. “Airplanes fail, too,” one such whiz says. “That doesn’t mean you don’t fix them.”

The models most banks use are “superficial,” as one engineer says, and “often spit out prices that don’t capture the underlying value of the assets.” Firms are devising pricing strategies that dig deeper using a variety of data, and by examining slices of derivatives with various maturities. Others are creating real-time loan-performance evaluations, making it easier to value institutions holding these securities.

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The very math wizards who created the collateralized-debt obligation, and in turn the financial crisis, are working to value them more accurately so governments can buy them off of banks. (AP Photo)

Brokers and traders can't accurately value banks and their holdings without real-time loan-performance data. The financial engineers who brought on the market meltdown are working to correct this. (AP Photo)

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Without real time transparency on which to base independent valuations, the market can't determine if the banks are adequately capitalized.
- Richard Field, managing director of structured-finance firm TYI

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Finance Geeks Behind Crisis Hard at Work on a Fix