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The Formula That Killed Wall Street

This is the title of an article in Wired Magazine. Not a typical place to look for financial articles, but it came to my attention and I found it an interesting read. Turns out this is the formula (actually the proper word is “equation”):

wired

While the explanation of this equation is beyond the scope of this blog, a read of the full Wired article makes one thing clear, the failure of the market had to have an origin, and to me, it started with the rating agencies basing their ratings on historical data. They had no ability to understand that subprime loan were being given to anyone with a pulse and the ability to write their name. Securitization itself was not to blame, but it certainly got a black eye in the process. The public radio program Marketplace offers an interview discussing this same topic in an article titled “Did math formula cause financial crisis“?

  • The Weakonomist April 15, 2009, 7:27 am

    I’m no financial engineer so I can’t say if this is the same formula I’ve read about. There was one formula for real estate that assumed values would always increase. When you plug in a negative number the formula shatters. One of those hedge fund types learned about it and immediately started shorting the market. He’s made billions in the last 2 years.

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