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The Scam That is Value At Risk (VaR)

Posted By Barry Ritholtz On October 17, 2012 @ 7:00 am In Derivatives,Really, really bad calls,Regulation | Comments Disabled

Fascinating quote from Nick Dunbar, author of The Devils Derivatives [1]:

“What would happen if VaR was taken out of bank regulation? Immediately, the intellectual crutch for highly-leveraged complex banks would disappear. Deprived of their fancy radar screens, regulators would have break up large banks that they could no longer pretend to understand, while increasing their capital to the level of a typical hedge fund.”

In other words, VaR’s sole purpose was not to actual help with risk management, but to fool the regulators that banks could rely on their own models to (wait for it) manage their own risk.

Make them smaller, reduce their leverage, and do, as FDIC vice Chair Thomas Hoenig suggested, turn them into utilities.

Congress missed a once in a generation opportunity to halt the egregious bank lobbying. They appropriately halted the GSEs lobbying efforts when they rescued their bond holders, but failed to do the same to Citi, Bank of America, AIG, Goldman Sachs, etc. It was a terrible missed opportunity.

If I’d have my way, I npot only would have put strict limits in lobbying activity on all banks and investment firms, I’d make the penalty for lobbying on behalf of those financial institution a capital offense punishable by death . . .



What JP Morgan’s release of VaR has in common with sex and computer viruses [2]
Nick Dunbar
Devils Derivatives October 15th, 2012  

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/10/the-scam-that-is-value-at-risk-var/

URLs in this post:

[1] The Devils Derivatives: http://www.amazon.com/exec/obidos/ASIN/1422177815/thebigpictu09-20

[2] What JP Morgan’s release of VaR has in common with sex and computer viruses: http://www.nickdunbar.net/articles/what-jp-morgans-release-of-var-has-in-common-with-sex-and-computer-viruses/

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