Is this why so many games have some muscle-bound guy/gal in near skin-tight clothing be the lead? I never knew cloth simulation was such a difficult problem. I remember Lucas talking about this stuff when he was making the prequels, but I assumed everything has been long solved by now.
That said, I was pleasantly surprised in GTAV that when your character gets wet, his clothing and hair look wet and stay wet for a bit. I don't think I've seen that before.
You don't need cloth simulation to do have characters with clothes - you can animate it manually or simulate it offline - the problem with "baking" cloth animations is that they can't interact with the world (no collision, no wind interaction unless you bake/blend that, etc.)
Wet clothes in GTA V is actually a shader effect rather than a geometry effect: It's just adding a specular shader to the normally diffusion-shaded surface so it looks like your suit, hoodie, or wife beater is soaked with water. I'm pretty sure the geometry stays the same.
I don't know about games, but in movies, at least, a common trick to make simulations look wet is to simply increase the mass of the wet object. This causes hair and clothing to drape.
It is interesting that they refer to the simulation system as 'Verlet Physics' -- that sort of constraint satisfaction system is called 'Position Based Dynamics' in most of the graphics lit. This type of system is also used in Maya's Nucleus and NVIDIA's PhysX. [1] is a nice overview.
They're calling it Verlet physics because they're using a Verlet scheme for integration - which is a relatively elegant approach if you don't ever need velocities.
But it isn't really verlet, I don't think it will converge like a 'standard' verlet implementation with constraints (like molecular dynamics cats use) - the effective stiffness of the objects here is dependent on the time step.
That said, I was pleasantly surprised in GTAV that when your character gets wet, his clothing and hair look wet and stay wet for a bit. I don't think I've seen that before.