If I'm reading this properly, the root of AIG's problems is that its models didn't measure the risks that it would be required to post collateral and to take writedowns. Sounds like the models didn't break down. They just weren't designed to address the proper issues.
I had a few heated arguments about this item at work yesterday. I was trying to defend the quant team that did the modeling.
The model is as good as the assumptions and more importantly the data that you feed. Any credit evaluation needs to be based on some historical or rating data at least for some parameters (correlations, recovery rate etc). We know that this data was misleading in the wake of credit crisis. So how can only the model be blamed?
It is the job of the entire company from risk-management to back-testing.
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