In February 2007, a year before Bear Stearns collapsed, credit specialist Janet Tavakoli wrote about the rise of investment products like CDOs. She was particularly unimpressed with the models used to estimate correlations between mortgages. By making assumptions that were so far removed from reality, these models had in effect created a mathematical illusion, a way of making high-risk loans look like low-risk investments.[8] ‘Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus,’ Tavakoli noted. ‘So far, there have been few
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