There's enough blame in this situation to cover everyone involved.<p>On the level of modeling, the fundamental flaw was assuming that stock prices could be equated to <i>independent</i>, normalized, random variables. When these assumptions break down, you can still <i>"make money most of the time"</i> but you're downside becomes <i>unlimited</i>. Ponzi schemes make money most of the time too...<p>But on the level of the banks, investment houses and large investors, the problem was not realizing that an investment model is a <i>leaky abstraction</i>. You can't leave your investing to people who only see random variables. <i>Prudence</i>, the watch-word of traditional investing, encompasses more than probabilistic expectation (just as causation is more than correlation). Leaving fundamental decisions about investing to the quants is <i>imprudent</i>. Anyone not blinded by the shine of the new models realized this but that was a minority.<p>Of course, along with quant-investing in particular, one must include the whole Alan Greenspan school of "Market Rationality", including the move to "fair value" accounting. And that's a big elephant.