The Derivative Project

VaR and the Stupidity Defense: Here is Obama’s “Duh” List for Immediate Job Creation

VaR and the Stupidity Defense: Here is Obama’s “Duh” List for Immediate Job Creation

Reuter’s columnist, Felix Salmon, alluded to the genius behind J.P. Morgan’s $2 billion trading loss in credit default swaps, “VaR”, that darn mathematical model that just seemed to fail the sophisticated risk managers again, as it did in the 2008 financial crisis. 

Once again, Wall Street has an out all set for the Department of Justice (DOJ), as they did in 2008.  The Department of Justice coined the phrase “stupidity defense” in speaking to The Derivative Project concerning Joseph Cassano, CFO of AIG, who personally earned over $300 million dollars, while costing the U.S. taxpayer over $180 billion dollars on his speculative credit default swap positions. Yes, the American people must understand there are going to be times when sophisticated risk models fail and blow up the economy.  Mistakes happen. Whoops, it happened again.
Here is Felix’s Blog Post at Seeking Alpha yesterday, How Dumb Rules Can Mitigate Model Risk.
To quote Felix:
“Your sophisticated platform needs to be built on a foundation of dumb rules: simple limits on how big any one position can get, on how much exposure you can have to any one counterparty, or in general on any trade which is based on the hypothesis that your desk is smarter than anybody else on Wall Street.”
The Derivative Project calls this common sense and a very basic rational thought process. It won’t make you personally rich, but it will protect the economy for the good of society overall. Hello, should the U.S. taxpayer allow any corporation or individual to take a billion dollar or trillion dollar short or unhedged position, a speculative position, with no daily mark to market collateral to back that position?  It is just that simple.  That is what AIG did.  That is what M.F. Global did. That is what Berkshire Hathaway is doing currently.
It is the Emperor’s New Clothes and once again Congress and the SEC will give Wall Street free rein to continue speculation with no regard to the detriment and havoc it is creating on the U.S. economy and financial markets overall.
The Derivative Project received an email this morning from President Obama with his “To Do List for Congress that focuses on job creation.
The Derivative Project presents President Obama and Congress with their “Duh” List to move to jump start the economy, restore confidence in the financial markets and create more jobs.
  • President Obama asks the Department of Justice to investigate if the “London Whale’s” trading losses are being funded by U.S. farmer’s segregated funds moved to J.P. Morgan London, minutes before the M.F. Global bankruptcy.  The amounts are close enough.
  • Congress requests that Congressman Paul Ryan research if the London Whale’s trading strategies could be used to shore up the solvency of Social Security and Medicare or perhaps VaR modeling could be used to determine new risk parameter inputs which might shed new light on the  Social Security and Medicare solvency outlooks.
  • President Obama appoints a special task force headed by Harvard Economist and former AIG Board Member, Martin Feldstein and former Senator Jon Corzine to examine the role of over-the-counter derivatives and mathematical models to increase trading revenues on Goldman Sachs Proposed Electronic Credit Default Swap Platform as a key job creation strategy.
“Goldman Sachs may extend its new bond trading platform to cover other fixed income products such as credit derivatives after it starts trading corporate bonds this month, sources close to the firm said on Friday.”
  • Request that American Enterprise Institute spokesman, Peter Wallinson, appear on Meet the Press tomorrow, with J.P. Morgan CEO, Jamie Dimon, to explain how U. S. homeowners were actually the cause of the London whale’s $2 billion losses and contributed to the apparent misapplication of the mathematical model VaR for risk management assessments.
  • President Obama contacts Swiss authorities to ask them to reconsider the renouncing of Congresswoman Michelle Bachman’s Swiss citizenship to delay the repeal of Dodd- Frank, in the interest of global capital markets.

Take a survey of every American:  

  • Would they prefer to have a fiduciary, as envisioned by Congress in 1940, after the Great Depression, to advise them on their retirement savings or would they prefer a salesmen operating in the best interests of their brokerage firm, with no training in global capital markets, who manages retirement assets based on VaR?  

  • Further, if their retirement savings are improperly taken by Wall Street, would that retirement saver like the option to go to the Judicial Branch, the Federal Courts, for “their day in court” or to the brokerage industry’s tribunal, FINRA, as House Financial Services Committee Chair Repubulican Bachus has proposed in this Bill April 25, 2012?