How did the credit crisis of a few months ago affect the Quantitative Analysis division in an investment bank?

Question

I'd also appreciate it if anybody knew of any other major developments in the Quant industry and how the industry is affected by them. Thank you!

Answer 1

It showed that the models that were commonly used to price Mortgage Backed Obligations in the secondary market were wrong.

The biggest error was that the models focused almost totally on the credit score of the borrower. They ignored the down payment and treated two borrowers the same if they had a 650 credit score, even if one put down 25% and the other put down 0%. It is intuitively obvious to the casual observer that it would be very expensive for someone with 25% equity to just walk away and thus would be unlikely, while a person with no equity would suffer no such difficulty. Yet, this was not reflected in the models.