(Li)took a notoriously tough nut-determining correlation, or how seemingly disparate events are related-and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of financial legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched-and was making people so much money-that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008-when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
....Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
-Felix Salmon
Dr. Li, after publishing his formula, returned to China in 2008 and has been curiously silent during the debate over the causes and culprits behind the crash. But in the ultimate twist to the story, he has returned to Beijing where he is in charge of the risk management department of China International Capital Corporation.
-Farrell
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