The Impact Of The Current Situation On Vital Portfolio Management Tools

I received the following from Dr. Colin Burke, one of the most gifted risk modellers and practitioners I have ever known. Rather than place his remarks as a “Comment”, I believe that the issue that he raises deserves to be highlighted in its own posting. Cassandra
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Our IT security policy prevents me from posting a comment and so I'll put an initial one below . Would you please post it for me? CB.

I agree with many of your observations. One thing that I think is noteworthy for portfolio managers past, present and future is the role of CDO's in the current situation. It has been pointed out that model based valuations have been found wanting and that the risks and value in these are not transparent. I don't disagree. However they are pretty much an essential tool for loan portfolio managers and it would be unfortunate if their use for portfolio management is severely effected.

Interestingly, it can be argued that the occurrence of sub-prime losses in unexpected places like Germany and the Netherlands could be seen as the originating banks using portfolio tools effectively by spreading the risks (or losses in this case).

Obviously many of the current troubles can be put down to questionable underwriting standards at some institutions, nevertheless I worry that risk management tools like CDO's and syndications may be tarnished.

Colin Burke