Credit [Default] Swaps Thwart Fed's Ease as Debt Costs Surge
Bloomberg News March 6, 2008 (New York)
By Abigail Moses, Hamish Risk and Neil Unmack

March 6 (Bloomberg) -- Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates.

``The banks that have been using correlation to calculate their risk will have to go back to scratch,'' said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance. ``By using correlation models as the main means of risk management, the engineers threw out sound banking practices.''

JT Note: For more debunking of correlation models, see also my article in the Journal of Structured Finance (Winter 2006 – January 2006): “The Elusive Income of Synthetic CDOs.”

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