I appeared on a Canadian business show with structured finance expert Janet Tavakoli on March 31. Janet and I don’t completely agree about the role of the quants in the meltdown — she fingers fraudulent behavior in the structuring of the billions of structured products (all those complex deals packed with subprime mortgages). I completely agree that there probably was a great deal of fraud — or something very close to it — although I also believe that the bad actors used the complexity of these products to mask their actions.

I also believe that the credit crisis was much bigger than toxic CDO (collateralized debt obligations). Banks were overlevered using overnight “repo” markets. Hedge funds were overlevered using faulty risk models. There was a popular delusion that the global economy was in a period of low volatility, which Ben Bernanke, in 2004, called the Great Moderation. Wall Street was collectively congratulating itself that, due to the great innovations of the quants, the entire system was more efficient.

As we all know, that was dead wrong.

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