History Of VaR (JP Morgan Strikes Again)

The quants from JP Morgan have (inadvertently?) done more to ruin Wall Street than anyone, perhaps, than Bernie Madoff. But they were not the long gunmen.

The recent autopsy performed on AIG revealed that for all the sophisticated modeling, the jokers running the company's Financial Products division did not take into account the ramifications of losing AIG's AAA credit rating - a downgrade would require them to post more collateral on CDS contracts they had written, and the end was brutal, and swift.

I have often seen smart people do dumb things on the Street, and the over-reliance on Value at Risk models was certainly one of them. A little common sense on Wall Street can go a long way; too bad it is underappreciated.

I have been largely underwhelmed with Joe Nocera's work but he earns a gold star for his historical account in the New York Times of VaR models - another debacle in many ways similar to the CDS nightmare.