The Gaussian copula was, in hindsight, a disaster. The simplicity of the model hypnotized traders into thinking that it was a reflection of reality. In fact, the model was a jury-rigged formula based on the irrationally exuberant, self-reinforcing, and ultimately false wisdom of the crowd that assigned make-believe prices to an incredibly complex product. For a while it worked, and everyone was using it. But when the slightest bit of volatility hit in early 2007, the whole edifice fell apart. The prices didn’t make sense anymore. Since nearly every CDO manager and trader used the same formula
...more
