You've always wondered, I know. So here's Sam Jones's nicely nuanced account (link) of how Moody's and Standard and Poor's came to incorporate the fatal Gaussian copula default function formula devised by David Li (aka Xiang Lin) into their methodology for rating collateralised debt obligations. Hornswoggled by Li's "riot of equations, mathematical lemmas, arching curves and matrices of numbers" at a presentation "not a million miles from some kind of science fiction convention" into believing that they could gauge the interrelatedness of risks with mathematical certainty, the Masters of the Universe threw traditional prudence to the winds: "No need to spread your eggs across baskets if you knew the exact odds of your one basket being dropped. . . . CDOs built solely out of subprime mortgage debt became the rage. . . . using the magic of the Gaussian copula correlation model, and some clever off-balance-sheet architecture, high-risk mortgages were re-packaged into triple-A-rated investor gold. The CDO market exploded."
And the rest is history, as they say.
In 2007, David Li apparently moved back to China. His present whereabouts seem to be unknown.
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le 8 Floréal, An 217
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