When TBTF prevails, is there any value at risk?

Value at risk

In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.

For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 5% probability that the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal and there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20.

VaR has five main uses in finance: risk management, risk measurement, financial control, financial reporting and computing regulatory capital.

It was the last use that brought together Nassim Taleb and Rick Bookstaber.

While many of VaR’s failings are due to the fact that the measure largely relies on banks’ own inputs, leverage ratios, we imagine, are prone to the same sort of manipulation. In fact, Bookstaber points out in his statement that off-balance sheet positions, and even CDOs, weren’t included in some banks’ VaR calculations.

So, here we come again to notions of off-balance sheet problems and mark to market issues. Guambat believes that if we simply solve these two practical problems, all the other theoretical issues, like leverage ratios and VaR, will fade to black. White, whatever.

All these notions have their genesis in theoretical modeling. Guambat is more of a realist; an ignorant realist, admittedly, so proceed with caution. Realistically, it is power that shapes events, not models. So long as the power elite can do what they want, the models of capitalism, socialism, prudence, democracy, and whatever ideal you want to label it, all fall and fail at some point. Models, dependent as they are on base-less assumptions, never get past greed and privilege. For Guambat, these last two factors are always base-line assumptions.

The way to get rid of cockroaches and rats is to shine bright lights on them. No more off-balance sheet sh@t; no more mark to whatever. All debtors should be treated with the same disdain as consumer debtors. Like most addiction therapies, it will take a while to get over it. Is it worth the trouble?

"A Lever Long Enough... and a Place to Stand"

When speaking of diplomacy, of the work that I do, one often thinks of hypocrisy. Indeed, diplomacy is a word full of meaning. The popular notion is that which comes from Machiavelli when he said: “Diplomacy is the art of getting what you want at any cost and by any means.” How can the Holy See accept this concept of diplomacy, this vision of things?

My time in the diplomatic service has taught me that what changes the world is not might, but the truth. The truth is not simply reporting facts and verifying the accuracy of words and figures without distortion; rather, it is a natural law that cannot contradict itself and which takes precedence over the laws of any state and deliberations of international institutions.

The Catholic Church is convinced that real democracy cannot be based simply upon the majority opinion of any given moment in time. A viable democracy recognizes the authority it has comes from a set of universally accepted principles upon which every political society is founded. These principles can be found in the national constitutions and in the great international declarations—which merge together in recognizing natural law, a healthy philosophical and religious spirit, and the principles and experiences that have established a national community. For this reason, the subsequent laws voted upon by a particular majority must always be in accord with fundamental, objective values. These values, once acknowledged as true, may be updated and expressed in contemporary ways, but never abrogated.