Too often, the quantitative methods used in creating structured finance securities fail to reflect the real world when it matters most, during times of stress. Models and their underlying assumptions drawn from "normal" conditions should not be expected to perform well during unusual and extreme conditions. But, in the structured finance context, the primary purpose for elaborate and sophisticated models is often to predict the performance of securitized assets during unusual and extreme conditions. Ironically, the structured finance community expects the most from its quantitative models when they are inherently at their weakest.
No quantitative models predicted the attack on the World Trade Center or its consequences for structured financings. This is hardly a shortcoming of the models. Rather, it illustrates the need for professionals to fully acknowledge the limitations of their models and to think beyond the pat answers that models supply. Although the attack was unpredictable, it was really just an example of the class of events called "catastrophes." Specific catastrophes are always surprises when they happen. Otherwise, people would take action beforehand to prevent them or to protect against them.