Comments on: Chart of the day: Goldman VaR http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/ A slice of lime in the soda Sat, 18 May 2013 23:43:55 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: RBH http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-5418 RBH Thu, 13 Aug 2009 00:56:49 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-5418 As a currency trader named DeRosa said back in the '90s, VAR is a lighthouse for the soon to be shipwrecked. It gives me the jim-jams to believe that major-league trading operations are still depending on it to estimate market risk. As a currency trader named DeRosa said back in the ’90s, VAR is a lighthouse for the soon to be shipwrecked. It gives me the jim-jams to believe that major-league trading operations are still depending on it to estimate market risk.

]]> By: M http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4243 M Thu, 16 Jul 2009 06:04:56 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4243 It just annoys me how you are discussing things as if you know exactly what it means and then come to the completely wrong conclusion, just following the screaming Zero Hedge boys who do the same. As some others have pointed out, VAR is not a leverage ratio, but it uses the last x-days of trading data to calculate the possible 1 day loss on your portfolio. Anyone who had the slightest notion of the markets the last two years would have noticed the huge increase in volatility. That is the explanation of an increase in VAR, far more than anything else. VAR in 2006 would have consisted of market data of very calm markets, only moving a few basispoints a day. You can double your risk in such markets without much impact on VAR. Now you can reduce risk a lot and still have large increases in VAR. Learn your basics, mr Salmon It just annoys me how you are discussing things as if you know exactly what it means and then come to the completely wrong conclusion, just following the screaming Zero Hedge boys who do the same. As some others have pointed out, VAR is not a leverage ratio, but it uses the last x-days of trading data to calculate the possible 1 day loss on your portfolio. Anyone who had the slightest notion of the markets the last two years would have noticed the huge increase in volatility. That is the explanation of an increase in VAR, far more than anything else. VAR in 2006 would have consisted of market data of very calm markets, only moving a few basispoints a day. You can double your risk in such markets without much impact on VAR. Now you can reduce risk a lot and still have large increases in VAR.
Learn your basics, mr Salmon

]]> By: bill http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4239 bill Thu, 16 Jul 2009 03:36:34 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4239 What on earth is this supposed to be? VaR is not leverage. GS's leverage ratio has gone from 27 to 14 over the course of a year. That is a remarkable change, and it doesn't have anything to do with VaR. What on earth is this supposed to be? VaR is not leverage.

GS’s leverage ratio has gone from 27 to 14 over the course of a year. That is a remarkable change, and it doesn’t have anything to do with VaR.

]]> By: silly things http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4234 silly things Thu, 16 Jul 2009 00:46:43 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4234 Ab, your view of the over all banking system is now in the minority. Amusingly, my view was in the minority a few months ago. At any rate, you should research the percentage of the banks that are in trouble. The question than becomes are there sufficient number of healthy banks to take over the businesses of the weak banks. One data source is the FDIC web site. Another is the result of the stress test for the big banks. Yeah, I know there were a lot of noise in the media and in blogs. However, the evidence is now quite clear. Ab, your view of the over all banking system is now in the minority. Amusingly, my view was in the minority a few months ago.

At any rate, you should research the percentage of the banks that are in trouble. The question than becomes are there sufficient number of healthy banks to take over the businesses of the weak banks.

One data source is the FDIC web site. Another is the result of the stress test for the big banks. Yeah, I know there were a lot of noise in the media and in blogs. However, the evidence is now quite clear.

]]> By: mcnet http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4230 mcnet Wed, 15 Jul 2009 22:32:14 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4230 The time series historical data reflects increasing volatities over the graph's time line. Var would naturally increase even with no change in risk profile. Impossible to tell much var analysis. For example program trading would have extremely low var, but contributed significantly to the bottom line. Liqudity risk is not captured by the var and drawing the optimal use of its capital conclusion based on var is just silly. The time series historical data reflects increasing volatities over the graph’s time line. Var would naturally increase even with no change in risk profile.
Impossible to tell much var analysis.
For example program trading would have extremely low var, but contributed significantly to the bottom line.
Liqudity risk is not captured by the var and drawing the optimal use of its capital conclusion based on var is just silly.

]]> By: Dave http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4218 Dave Wed, 15 Jul 2009 19:20:03 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4218 VaR assumes a normal distribution of asset returns; relying on the VaR measure as indicative of anything is a bad idea. VaR assumes a normal distribution of asset returns; relying on the VaR measure as indicative of anything is a bad idea.

]]> By: ab http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4208 ab Wed, 15 Jul 2009 17:21:27 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4208 Agree they have the cash. My point is that they're holding that cash mainly to protect themselves from further losses on their loan books (your point #1). I'd disagree that some populist conspiracy is overstating likely CRE defaults. From what I've seen, there's a lot of debt coming due in the next couple of years, and much of that was funded by the regional banks. Agree they have the cash. My point is that they’re holding that cash mainly to protect themselves from further losses on their loan books (your point #1).

I’d disagree that some populist conspiracy is overstating likely CRE defaults. From what I’ve seen, there’s a lot of debt coming due in the next couple of years, and much of that was funded by the regional banks.

]]> By: silly things http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4207 silly things Wed, 15 Jul 2009 16:41:04 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4207 Ab - banks are sitting on a huge pile of capital. Bank capital ratio as measure by Tier 1 and by common equity are near all time high. Furthermore, the country's savings rate went from around 0% to above 7%. Just imagine how much money that is flowing into the bank. You are right that there are still problem asset on the books. The media is all over this and the populists have been wiped up into a frenzy. The public has overshot on the downside significantly. Banks aren't lending more for 2 reasons: 1. The economic outlook is still murky. Default always rises during every previous recession. 2. Banks also follow the herd. This is also why so many banks got into trouble in the first place. Anyway, if you deep dive into large banks, you'll find that they are just sitting on a pile on cash. Ab – banks are sitting on a huge pile of capital. Bank capital ratio as measure by Tier 1 and by common equity are near all time high. Furthermore, the country’s savings rate went from around 0% to above 7%. Just imagine how much money that is flowing into the bank.

You are right that there are still problem asset on the books. The media is all over this and the populists have been wiped up into a frenzy. The public has overshot on the downside significantly.

Banks aren’t lending more for 2 reasons:
1. The economic outlook is still murky. Default always rises during every previous recession.
2. Banks also follow the herd. This is also why so many banks got into trouble in the first place.

Anyway, if you deep dive into large banks, you’ll find that they are just sitting on a pile on cash.

]]> By: ab http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4206 ab Wed, 15 Jul 2009 16:18:33 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4206 Silly - you need capital in order to lend. Commercial banks facing a tidal wave of CRE defaults are struggling to preserve what they have. Silly – you need capital in order to lend. Commercial banks facing a tidal wave of CRE defaults are struggling to preserve what they have.

]]> By: silly things http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4205 silly things Wed, 15 Jul 2009 16:03:47 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4205 I think the GS approach is exactly correct. The right mindset is to think in counter cyclical terms. The crash has already happened. The environment now is probabilistic wise significantly less risky on the downside compare to the years prior to the crash. GS is putting more value at risk but the probability of downside risk is significantly lower. The product of this two measurement is likely to show GS is really not taking more risk. VaR is simplistic and easy to measure. I would be interested in insights on measuring the probabilistic downside risk I've described. On a side note, commercial banks should really crank up lending. The borrowers that are still standing are way better quality than a few years ago. This on top of the unprecedented interest spread means banks are well compensated for the risk they take by lending. I think the GS approach is exactly correct. The right mindset is to think in counter cyclical terms.

The crash has already happened. The environment now is probabilistic wise significantly less risky on the downside compare to the years prior to the crash.

GS is putting more value at risk but the probability of downside risk is significantly lower. The product of this two measurement is likely to show GS is really not taking more risk.

VaR is simplistic and easy to measure. I would be interested in insights on measuring the probabilistic downside risk I’ve described.

On a side note, commercial banks should really crank up lending. The borrowers that are still standing are way better quality than a few years ago. This on top of the unprecedented interest spread means banks are well compensated for the risk they take by lending.

]]> By: Dan http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/comment-page-1/#comment-4202 Dan Wed, 15 Jul 2009 15:32:30 +0000 http://blogs.reuters.com/felix-salmon/2009/07/15/chart-of-the-day-goldman-var/#comment-4202 Just because VaR has gone up does not mean that the capital being put at risk has gone up. It could just be greater volatility on the same capital employed. Just because VaR has gone up does not mean that the capital being put at risk has gone up. It could just be greater volatility on the same capital employed.

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