A Mind Made Up. One of the heroes of the near-meltdown of 2008 is Phil Angelides. A two-term former treasurer of California with a reputation for integrity, he was hired while the sense of peril was still fresh to chair a Federal blue-ribbon commission (six Democratic legislators, four Republican, fifty staffers). Its mission: examine the causes of the financial crisis and help policy makers and the public better understand “how this calamity came to be.”
Instead, the Financial Crisis Inquiry Commission Report , which came out in January last year, is the best narrative account of the crisis, and likely to remain so for many years. Rather than simply round up the usual suspects – caricatures of greedy bankers, conniving legislators, suborned ratings agencies, overconfident regulators, the Community Reinvestment Act – the FCIC Report adduced necessary background information on all these characters, and then concentrated on explaining the main event, the panic. Yes, we had a housing bubble. . xxxx. Four Years After the Meltdown: The Global Economy and Financial System Still At Risk. Models. Behaving. Badly.: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life. Derman on Theories, Models, and Science. The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis.
The credit crisis that erupted in 2007 has shaken the world to its knees. Many have tried to explain the causes, but the main culprit has so far been left unaddressed. What was truly, truly, behind the wreckage? According to Pablo Triana, derivatives expert and author of Lecturing Birds on Flying (Wiley; June 2009) - it all comes down to a number. Otherwise known as Vale at Risk or VaR, this metric is used by financial institutions and regulators to measure market risk and determine bank capital requirements. It allows firms to leverage up their speculative, and often toxic, bets to unimaginable levels. This is a sure recipe for blowing up. According to Triana, the financial crisis will simply repeat itself if the problems behind the numbers are not unmasked. Pablo Triana takes a critical look at VaR in his latest book, The Number that Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis (Wiley, ISBN: 978-0-470-52973-7; December 2011; Hardcover).
Wall Street's Grand Deception: Risk Modeling - By Pam Martens: September 27, 2010 Thanks to an ever growing influx of Ph.D.s from the Ivies and an insatiable demand for an algorithmic trading edge by secretive hedge funds and proprietary trading desks at the largest firms, Wall Street has become part physics lab, part casino, part black hole. What Wall Street bears no relationship to any longer is its primary mission in the U.S. economy: to be a fair and efficient allocator of capital to worthy businesses and innovators to propel job growth while also providing a medium for allowing investors to buy or sell stocks and bonds of those businesses at a fair price. Stock brokers who previously scoured over annual reports and price to earnings multiples and bond prospectuses to build individualized portfolios for clients based on the client’s investment time horizon and comfort level with risk are so yesterday.
“In late September and early October 2007, Crittenden, the chief financial officer (‘CFO’) of Citigroup Inc. Dr. Dr. James Montier: More Realistic Financial Models Incorporating Illiquidity and Leverage Are Needed | CFA Institute Annual Conference. Mark Harrison, CFA Opening the CFA Institute 65th Annual Conference in Chicago, behavioral investor James Montier condemned theorists, policymakers, and practitioners for creating the financial crisis with “bad models, bad policies, bad incentives, and bad behavior.”
Worse still, Montier contended, nothing much has been learned from the disaster — setting us up for yet another calamity. Montier began his talk by attacking key financial models. “In finance, we forget we have made abstractions and take the models as if they were reality,” he said. Value at Risk (VaR), a popular measure of downside risk and potential loss, “cuts off the very part of the probability distribution (the extremes) that you most need to worry about.” VaR — combined with leverage and naïve calculations about volatility based on overly recent data — has escalated institutional risk to the point that it has become systematic risk.
“You are introducing an enormous amplifying device into global markets,” he added. A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. "A risk-management maven who's been on Wall Street for decades…Bookstaber's book shows us some complex strategies that very smart people followed to seemingly reduce risk—but that led to huge losses.
" (Newsweek) "Mr. Bookstaber is one of Wall Street's 'rocket scientists'--mathematicians lured from academia to help create both complex financial instruments and new computer models for making investing decisions. In the book, he makes a simple point: The turmoil in the financial markets today comes less from changes in the economy--economic growth, for example, is half as volatile as it was 50 years ago--and more from some of the financial instruments (derivatives) that were designed to control risk. " (The New York Times) "Bright sparks like Mr Bookstaber ushered in a revolution that fuelled the boom in financial derivatives and Byzantine 'structured products.' "He understands the inner workings of financial markets...A liberal sparkling of juicy stories from the trading floor... "