Abnormal Returns has a great roundup of posts on the "quant bloodbath."  Quantitative models aren't much better at accounting for unusual market moves than they were in the pre-LTCM days.  The killer quote from Lehman's Matthew Rothman in a WSJ article:

"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."

Of course, like it or not, quants are here to stay.  More quants will try to come up with models to deal with (and capitalize on) unusual market moves, and perhaps the next quant bloodbath won't be as severe. 

I wonder if the quants are hindered by the human element that goes into predicting risk?  It's only a small part of the credit market shakeout, but I suspect some blame will fall on the rating agencies, which once again have proved to be not very good at predicting default risk.  One of the reasons credit spreads were so artificially small before the shakeout was that many still-quite-risky pools of securities were rated as investment grade.  USC's Jonathan Barnett has a great paper coming out this fall that helps explain why so many certification intermediaries fail to do their jobs in the way we would expect them to.

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