Exellent article.
.....
"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead,
we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did.
In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust."
Warrent Buffet says:
http://money.cnn.com/2008/04/11/news/newsmakers/varchaver_buffett.fortune/
Do you find it striking that banks keep looking into their investments and not knowing what they have?
I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done.
When you start buying tranches of other instruments, nobody knows what the hell they're doing. It's ridiculous. And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska,
but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything. It's a bunch of juniors all put together. And the juniors all correlate. 
