The human factor in models of risk menedzhenta
Calvin Trillin once He explained the recent financial collapse of the influx of smart people on Wall Street. Physicists, mathematicians, programmers and replaced the slow-minded type of country club. And with its incredibly complex models, arrogant smart guys brought the entire economy to the crisis.
Mr. Breit was one of the first scientists who invaded Wall Street. Candidate of Physical Sciences at Columbia University, he worked on his doctorate, when he realized that could never be as good as his classmate Edward Witten, who became a pioneer in the creation of the physical theory of strings.
So in 1986 he joined the Wall Street, but not in the sales area, how many of his colleagues, scientists, and risk management. In 1990, he used his skills in Merrill Lynch, reaching the post of the head of the company’s market risk oversight. A physicist at the end I came to the understanding of the limitations of mathematical models. He realized that his work was largely the work of psychologist, confessor and detective. He became a counterintelligence officer in the field of finance, who is looking for missed clues and hidden dangers in the trading strategies of firms.
At JPMorgan Chase, risk models hide (And were used to conceal) risks, associated with traders and senior managers. Too many indexes and too much data complicates risk management. But ultimately, risk management did not load because of human weakness, risk managers have lost sight of their mission and tried to protect traders and their rates. Like all the failures of spies, counter-intelligence has a chance to prove himself.
Early in his career, Mr. Breit found that the models are not such as to physical markets. They are not built according to the laws of nature. And the math should be used only when it can be used in quantitative analytics. But the figures often mask risks than open it. "I went down the path of the statistical" and built one of the first models of the cost and risk – VaR, a mathematical formula that should determine what level of risk the firm is working at any given point.
The only thing that brought him mathematics in the capital markets is to understand the immutable law of nature: Investors make money on risk. "If it is profitable and it seems risk-free, it is a business that can not be understood"He told me.
Instead of fixing on the models, risk managers need to develop what is called spies "agents"- and receive data from human sources of flesh and blood. They need to build a network of people who will trust them enough to let you know when something goes wrong before you come to the real problem. Mr. Breit attributes this approach to his mentor – Daniel Napoli, the former head of risk management at Merrill Lynch, who often drank with the staff to make them more open.
He cultivates accounting in risk management. “They see things first. Almost every commercial fiasco goes through the table Accountant".
All the time he was in search of bad trades. Most traders who get in trouble are not the bad guys. Poor, who are trying to cover up the wrong bets, relatively easy to detect. The real threat, he said, comes from "crazy"Who really believe that they have found a way to lead into gold. They can bankrupt the firm with the best intentions. But they do not do it all at once. "I hate the whole concept of Black Swans"He said, referring to the notion popularized by Nassim Nicholas Taleb, about what the true risks are unforeseen events that occur with much greater frequency than the mathematical models show. "It requires years of concerted effort to really lose a lot".
Yes, large market moves may reveal deeply wrong rate, but not the reason for the volatility is really a big loss. The problem, Mr. Breit sees that has nothing to do with the current practice of risk management, or that encourage regulators. Regulators have brought risk managers to putting ticks workers who must complete extensive forms. "It just consumes more and more employees, turning them into accountants rotting brains".
Take VaR. According to Mr. Breit, Wall Street firms, under the influence of regulators perform “mission fool” in order to more reliably identify high-risk transactions. Mr. Breit is the VaR, a frequently used indicator, useful only as a reverse indicator. Which means thatif the VaR does not give a warning signal, it may well mean that the market there is a hidden bomb.
He despises the concept of “risk weighted assets” when the banks are investing on the basis of the perceived riskiness of assets. He argues that banks will invest in the same types of supposedly safe investments, creating bubbles that make the risks are much more severe than during the initial perception. paradoxically, But the risk weighting may leave banks without capital, required to cover the really big dangers.
"I can not be more disappointed"He says. "The cynic in me thinks that this is all in the interests of senior management and regulators, all in order to avoid charges. They can not think that they can prevent the next crisis, but then they can blame it on Statistics".
Instead, Mr Breit said that he believes that regulators should encourage firms to achieve different conclusions about what is risky and what is safe. This creates a variety of ecosystems that are more resistant to any contagion.
And regulators should be empowered risk managers report how many times they meet with senior management on what they recently vetoed and judge whether public relations traders are managers. "It’s all quite vague and unquantifiable" he said, adding that the risk manager should be separated from the process by earning money and become "who throws sand in the gearbox".
The cast sand Mr. Breit is over. He resigned his position in mid-2005 (but remained in the firm) during the credit boom. By the summer of 2007, he realized that something was terribly wrong is happening to subprime mortgage securities company Merrill Lynch. He began to find out what was happening and was afraid. In the end, the head of the bank, Mr. O’Neill called him, thinking that Mr. Breit was still his risk manager. But it was too late to save the company billions of dollars of losses.
When he retired from his post at Merrill Lynch, no member of the Board of Directors or a government employee did not call him and ask why he quit his job?
"No one" he tells me.
Government inspectors have to develop human resources.
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