Gary Gorton

  • Economist
  • Yale
  • AIGFP
  • 2009 - AP - Securitized Banking and the Run on Repo, Gary Gorton - 65p
  • 2010 0227 - FCIC - Forum to Explore the Causes of the Financial Crisis, American University Washington College of Law, Washington, DC
  • 2010 0511- FCIC - Gary Gorton Interview - 173p
  • 2015 - Book Review - Stress for Success: A Review of Timothy Geithner's Financial Crisis Memoir Gary Gorton, JOURNAL OF ECONOMIC LITERATURE, VOL. 53, NO. 4, DECEMBER 2015, (pp. 975-95) -
  • AP - The Federal Reserve and Panic Prevention: The Roles of Financial Regulation and Lender of Last Resort
    • https://pubs.aeaweb.org/doi/pdf/10.1257/jep.27.4.45
  • The Panic of 2007, Gary Gorton - 132p
  • 2018 0511 - WSJ - Yale Professor Who Had Controversial Role in the Crisis Now Teaches About It After his work on AIG’s risk models came to light, Gary Gorton received death threats - [link]
  • FCIC - Financial Crisis Inquiry Commission 
  • 2011 0104 - D Heyl Letter re Use of Gorton Quotes - 2p
  • 2010 0511- FCIC - Gary Gorton Interview - 173p
  • 2010-05-11 FCIC staff audiotape of interview with Gary Gorton, Yale University (Part 1)_1.wma
  • 2010-05-11 FCIC staff audiotape of interview with Gary Gorton, Yale University (Part 2)_1.wma
  • 2010-05-11 FCIC staff audiotape of interview with Gary Gorton, Yale University (Part 3)_1.wma
  • 2010-05-11 FCIC staff audiotape of interview with Gary Gorton, Yale University (Part 4)_1.wma
  •  (p33) - Gary GORTON: No. I mean, I basically, you know, from roughly 2002 or 2003 to the end, I didn’t really work on this anymore. 
  • MR. GORTON:  And there –- there are descriptions of, you know, what the model does, basically. And I didn’t write all of them. Sometimes there was somebody I was working with who wrote part of  it.
  • MS. HEYL: So as far the CDO modeling, when would you have written a memo about that?
  • (p53) - MR. GORTON: I don’t think -- I’m not sure I ever wrote a memo about CDO modeling.  
  • Dixie NOONAN: So, let’s step back a little bit. If you  developed the model for CDOs around 2002, 2003, ....What was your involvement after building the model when the deals came in?
  • (p58-59) - MR. GORTON: I typically wasn’t really involved.
    • And there would be all this discussion about it, and there’d be this intense focus on transactions that looked like there’d been a little deterioration, and, so I would go to that.
    • But, you know, by this time, you know, Adam Frost -- Al Frost and Adam Budnick -- Adam Budnick had been hired at some point -- and they worked on this. 
    • They -- you know, I didn’t really -- they didn’t need me.
    • So I didn’t have any input on it.  
  • Mr. Gorton: I mean, the company had a loss in Maiden Lane III, I’m told, because of the way the accounting worked, how they priced it or something.
    • I don’t really know the details. But a few months ago is the last time I asked.
    • And I said, “Do any of our positions have any realized losses?” And the answer was no.
    • So, you know, and I was curious about that, because, you know, the model had been predicated upon: Could you survive exactly what’s happened?
      • And at least so far, the answer appears to be yes. I mean, there’s no -- no dollar has been paid out to a counterparty under one of these swaps.
  • MS. NOONAN: Not under the actual terms of the swap as opposed to the collateral --
  • MR. GORTON: Yes, the collateral was something --
  • MS. NOONAN: -- provisions.
  • MR. GORTON: -- completely separate (p62-63)

2010 0511- FCIC - Gary Gorton Interview - 173p

  • 2014 - SOA - Model Validation for Insurance Enterprise Risk and Capital Models - 47p
  • (p26) - A Case Study of AIG’s Model of Credit Default Swaps
    • [AIGFP, Gorton Model,  Gary Gorton]
    • An October 31, 2008, article in the Wall Street Journal [16] included this observation:
      • AIG didn’t anticipate how market forces and contract terms not weighed by the models would turn the swaps, over the short term, into huge financial liabilities.
      • AIG didn’t assign Mr. Gorton to assess those threats, and knew that his models didn’t consider them.
    • Another observation from the same article:
      • Mr. Gorton’s models harnessed mounds of historical data to focus on the likelihood of default, and his work may indeed prove accurate on that front.
      • But as AIG was aware, his models didn’t attempt to measure the risk of future collateral calls or write-downs, which have devastated AIG’s finances.
    • These statements make it clear that any validation of AIG’s CDS model was done with reference only to potential claims, and not as a model of the full financial operation of the CDS business.
    • The CDS contracts required AIG to post collateral if the value of the insured loans fell.
    • The model did not include this collateral requirement, nor did it reflect the way that fluctuations in loan value could dramatically increase the short-term cost of meeting that requirement.
    • The model used to run the business was incomplete because it did not simulate all of the material risks of the business.
    • As a result, management did not maintain either the liquidity or the capital required to post collateral when the need arose. 

[16] Carrick Mollenkamp, Serena Ng, Liam Pleven, and Randall Smith, Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test, Wall Street Journal, October 31, 2008. <and/or 1103 2008>  - [link]

  • Gary Gorton, a 57-year-old finance professor and jazz buff, is emerging as an unlikely central figure in the near-collapse of American International Group Inc.