Something wrong with CDO models?

The meltdown inspired by the subprime loan mess has been covered pretty thoroughly by the major media. You may be getting sick of it. At least one outlet, Wall Street & Technology, raises a new point by wondering about the complex models that Wall Street firms and hedge funds use to price these securities and gauge their risk. Well, the meltdown came with surprising speed. My sense is that CDO managers and the rating agencies are the primary entities when it comes to establishing the relative likelihood of default. The managers essentially tailor risk level of each CDO tranche and get agencies to sign off. Of course many securities are now being re-graded, and that may be something of a mini-scandal in itself. Doesn't that act essentially admit that their earlier assessments were off base? I mean mass downgrades are fairly unusual. The bigger issue will be in marking these securities to market. That will have to happen sometime, and it could be ugly for fund investors.

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