Reference no: EM133075928

The London Bridge Analogy for what can happen in financial markets because through financial markets is calm at most times, meaning trade is relatively smooth and investors can buy or sell in any quantities they need, if a crisis were to hit, several massive banks would be agitated. Once there have been many of us on the bridge, the bridge began to wobble and cause damage, this is equivalent for the financial markets. Because they aren't very predictable in the short run but could be in the long run, if all at once so many of us are on the bridge it will show how easily it could collapse.

Use the London Bridge example to explain the following:

-The upper tranches of the CDOs were not safe even though investors thought they would be protected by the lower tranches.

-The sub-prime loans caused much more damage to the economy than most people (including the FED) originally thought.

-Many people on Wall Street wrongly trusted VAR (value at risk) models that were based on small samples, normal distributions, and historical correlations between assets.