Wall Street's cosmic cube

When I'm not busy peddling half-informed liberal vitriol, I like to think that I'm helping y'all learn a little something about the world around ya. In that spirit, please read Felix Salmon's cover story from this month's Wired. It's about David Li's Gaussian copula function, the formula that, simply put, allowed Wall Street to easily quantify the risk inherent in heretofore unquantifiably complex pools of securities. Money quote:

As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.

Salmon's lede references the Nobel prize that, had things played out differently, Li might have been eligible for. This allusion can't be accidental. Alfred Nobel, plagued by the guilt of inventing an instrument of both great utility and great destruction (dynamite, in this case), famously willed the majority of the fortune he earned to fund the Nobel prizes, which would reward great achievements in science, literature, and the furtherance of peace. It's actually refreshing that in this time of tremendous crisis, with heaps of blame to be divvied up on a great many guilty parties, Li's name hasn't really come up much. After all, it's not his fault that his creation was turned into an engine of devastation.