This is what Nassim Taleb said more than a decade ago that qualifies him, in my eyes, as the true and only visionary: “I believe that Value at Risk is the alibi bankers will give shareholders and the bailing-out taxpayer to show documented due diligence, and will express that their blow-up came from truly unforeseeable circumstances and events with low probability, not from taking large risks they did not understand…I maintain that the due diligence VaR tool encouraged untrained people to take misdirected risk with shareholders´, and ultimately the taxpayers´, money”.
In the midst of the credit nightmare, such pearls could not appear any more prescient. For VaR did ultimately cause the crisis (and the Taleb-predicted bail-out), precisely by providing reckless bankers with an iron-clad, scientifically-smelling, regulatory-sanctioned alibi to monstrously leverage their balance sheets with the most toxic and illiquid of financial wares. Since those gigantic toxic positions are what truly sank Wall Street, and since the sinkage of the latter is what truly unleashed what is known as the credit crisis, it follows that without VaR the pain would have been much more diluted.
This crisis was not really a “housing crisis”, but a “trading crisis”. Mortgage defaults on their own would have never created this kind of tremors. The melting into oblivion of complex securities based on those mortgages is what did unleash hell. VaR unseemly allowed banks to afford the complexity feast, and that´s why I declare it guilty numero uno. Only Taleb saw this coming, more than ten years ago. If only we had listened to him more attentively.