>Their models made the assumption that debt ratings were accurate, and they were substituting leveraged mortgage backed securities with AA ratings for risk-free debt. They also underestimated the effects that a liquidity crunch would have - any asset model backed by volatile assets assumes liquidity, but doesn't tell you what will happen in a period of non-liquidity.

Do you think all these guys with fancy degrees did not think about this? Come on, of course they did. You don't even need to know about any model in particular to understand that models rest on assumptions. It's a high school concept they teach you in any TOK class.

The reason GS was able to react is IMO they have a great network. The culture is geared towards finding out what other people are thinking. They're the only firm I've been out to dinner with where the guys cared to hear my opinion, in depth. The same salesguy at another shop reverted back to type.

So they found out through their feedback that many, many people did not think the models were correct and acted on it.