Recipe for Disaster: The Formula That Killed Wall Street

This month's Wired has an article, Recipe for Disaster: The Formula That Killed Wall Street that goes into some of the math of the financial crisis. In particular the model used the convinced people that complex housing backed derivatives could be rated AAA because there were so credit default swaps to mitigate the risk. It seems the fundamental problem was that instead of assessing risk based on the underlying securities (how many people would default on their mortgage) they based on the CDSs and how the market valued them. One step removed was one step too many.

The New York Times Magazine had a similar and longer article on Jan 2nd, Risk Mismanagement. It mostly talks about bad data being fed into the models (mostly VaR) and how important it is to deal with that 1% that everyone ignores when you see something is 99% safe.

Wired also has another article, Road Map for Financial Recovery: Radical Transparency Now! that describes ways to make Wall Street far more transparent. It's the first I've heard of XBRL, an XML dialect for business reporting.