Tracking the source of the Meltdown...

A couple of good articles over the weekend as the journos continue their efforts to find the origins of the Global Financial Crisis. In "Risk Mismanagement" Joe Nocera of the New York Times does a good job of shining a light on Value at Risk ("VaR") and its role in the crisis. He takes the reader through VaR's origins at JP Morgan in the late 80's under Dennis Weatherstone, through Wall Streets's adoption of VaR as the standard in risk measurement, up to the present day and the blistering criticism of VaR led by "The Black Swan" author Nassim Nicholas Taleb. The article is largely a debate on the value of VaR, and whether the overreliance on it during the leverage bubble was a central cause of the current crisis. Does VaR have value? Is it worthless? Is it a tool that that is useful in the proper context? Experts like Taleb, David Viniar of Goldman Sachs, Aaron Brown of AQR, Marc Groz of Topos, Gregg Berman and Ethan Berman of RiskMetrics, Till Guldimann of SunGard, author and investor Rick Bookstaber, and Chris Donohue of GARP discuss the uses and misuses of VaR in determining the risk of a financial entity. The article seems to conclude that risk models ultimately have value, but that remote events do indeed happen so risk managers must remain aware of factors that are not accounted for in the models.

Also in the New York Times, the Sunday Opinion section contains a piece co-written by Michael Lewis and David Einhorn titled "The End of the Financial World as We Know It" which cites greed (naturally), short-term thinking, regulatory failings and self interest as major drivers of the current situation. In the first part of the piece the authors discuss what the believe to be the causes of the crisis, and in a second part they present ideas about what might be done to prevent such a meltdown in the future. Some of the ideas proposed include making it more difficult for SEC personnel to be hired on Wall Street, ending the official status of Rating Agencies and regulating Credit Default Swaps.

Quality articles dissecting the crisis will come more frequently in 2009 so stay tuned to this space for links and discussion. GlobalRiskJobs understands that all of the debate will have far reaching impact on careers in risk and compliance, so we aim to keep compliance and risk professionals informed about what is being discussed.