This is part 2 of Monte Carlo Simulation of CDOs

This is part 2 of Monte Carlo Simulation of CDOs. Monte Carlo Simulation Part 1 addressed the question Who's rating the rating companies? Part 2 will address the question Who's the ultimate guarantor of CDOs when the derivative boom collapses? Part 1 Quick Recap BEA 4th Quarter GDP 1st Estimate 0.7% Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming? Ratings programs are based on Monte Carlo Simulation but the initial input assumptions about defaults and recovery rates may be far off the mark Are the Monte Carlo models (or more importantly the assumptions going into the Monte Carlo models) any better? How can anyone even know if the only ' The scariest thing is that we are in a monetary environment that is unprecedented in history. M3 is soaring in nearly every major country on the globe. Asset prices have never been more correlated than now. The amount of derivatives in play is in the hundreds of trillions of dollars all bet on Monte Carlo Simulation. Wow! Let's now turn our attention on who is guaranteeing this stuff. The short answer is simple: MBIA and Ambac. The long answer (No One!) can be found in Note: I will try and clip things relative to Monte Caro simulation but the entire document is extremely well presented and highly recommended reading. Company claims that the appropriate method for recognizing deferred premium revenue is in proportion to “the expiration of related risk” New FASB Proposal, dated 4/18, requires MBIA to recognize revenue in proportion to risk expiration (scheduled payments), not the passage of time Moral Hazard in the Structured Finance process combined with a flawed Rating Agency function has overstated credit quality for hundreds of billions of dollars of guaranteed bonds It sure seems like a hell of a lot is riding on the Monte Carlo Simulation of CDOs as well as the parameters and assumption that feed into the model. If and when a Credit Event occurs that rifles through multiple CDO tranches, the guarantors will be about as well capitalized to handle the The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

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