For calibration there are three big problems on the current brand of housing derivatives:
First in history means zero relevant observations, there is no magic model here.
What is really out the window, is the probability models that were used to predict the risk of such a market turnover (the 25-sigma probability, which was actually a +30%/year probability as common sense could have told 2 years ago). These models were based on the coincidental fact that optimistic market spreads ex ante from about 2000, did in fact match the exceptionnally low default rates observed ex post in 2005. When actually these low default rates were only due to the refi credit bubble.
Most senior bankers involved knew, but they chose to pretend not, so they could cash in and pack in time. And guess what ? most won't be liable to prosecution: regulations don't require bankers to hedge systemic risk (it's written in the law, I have it on my desk: "Règlement N°95-02 du 21/7/1995 relatif à la surveillance prudentielle des risques de marché", thick booklet). The systemic risk is explicitly of the responsibility of the market authorities and central banks (talk about bail out).
Because these authorities are highly politicized, whatever the claims of the contrary, it seems governments have chosen ratings agencies as a better scapegoat... Pierre
The issue isn't that the models are wrong, it's that the process should never have happened in the first place.
No one should be trying to model crap like this. It's madness even trying to get a sensible market value out of 'assets' that by any sane standard are either worthless, or close to worthless.
But as you say, it has happened for political reasons. This is one big political scam, and should be acknowledged as such.
It's been as much about social engineering, giving a sputtering economy the illusion of bouyancy so that approval ratings remain high among the peasants, and the have-mores can maintain their culture of entitlement, as about the specifics of risk modelling.
As the ARMs reset and the US starts to see an astonishing new wave of homeless bankrupts, it needs to be remembered that this was as much a political feint as a financial pyramid.
