Why Is the VaR Debate Being Ignored?

Last September 10th several men and women assembled in a sober Washington DC room to discuss one of the key issues (if not the key issue) behind the terrible economic and financial crisis that has caused so much misery. Among the gatherees were top politicians and top financial pros. A world-renowned bestselling author was there too. You would think that the media would have, globally, devoted endless broadcast hours and inundating amounts of ink to such an important event. After all, this crisis is the only thing that seems to have occupied people´s minds, globally, for the past two years. Surely journalists wouldn´t want to miss the opportunity to report on a roundtable of policymakers and experts that promised to tackle the true factors behind the mayhem, right?

Wrong. The historic hearing convened by the US Congress' Committee on Science and Technology on the responsibility of mathematical model Value at Risk for the meltdown has received essentially no attention from the punditocracy. A couple of informed bloggers here and there have shared the news with their e-readers, but the silence from the mainstream behemoths has been deafening. This is simply outrageous. It´s not only that the first congressional hearing ever on the real-life (negative) impact of financial models should naturally deserve some media cuddling, but VaR was, without a doubt and for the umpteenth time, a decisive malign force behind this crisis.

Bluntly stated, you can´t talk about this crisis without talking about VaR. Just like you couldn´t talk about WWII without mentioning Hitler. If you want to be properly informed and, most crucially, properly inform others about this crisis you can´t hide when it comes to debating VaR, you can´t ignore it. Just like you couldn´t ignore the guy with the funny moustache when discussing the Big War. Can you imagine a reporter covering the fraudulent accounting crisis that afflicted America a few years back and not attending the Enron hearings on Capitol Hill? Or a reporter covering the OJ Simpson case and not attending Mark Fuhrman´s testimony? Or a reporter covering WWII and not attending the Nuremberg trials?

I don´t need to tell you that this crisis involved financial fraud, murder, and annihilation of the worst kind. Shouldn´t media people want to dig in and truly get what happened? Some may say, come on be fair, journalists should not be expected to be aware of the existence of obstruse models like VaR, let alone comprehend them. Really? VaR has for the past twenty years been the risk radar of choice for Wall Street, religiously detailed under regulatory filings and annual reports. And, certainly, VaR has been for the past fifteen years the tool of choice when it came to determining the capital charges to impose on banks' trading activities. You are telling me that those covering the economic and business landscapes should not know this? Should not be aware of VaR? You must be kidding.

Many of the main forces behind the chaos are of a decidedly technical nature. CDOs, CDSs, SIVs, Gaussian Copula, VaR. Even those journalists who understand those things may want to shy away from reporting on them, fearing that their quick fix-seeking audience may hopelessly be at loss and change the channel, log out of the site, or put down the paper. To be fair, some in the media (including mainstream) have covered those themes in some detail, but generally speaking not overwhelmingly so and much less than was required. To the vast majority of folks out there all that matters when it comes to this recession are subprime loans, Greenspan´s too-easy policies, Wall Street´s remuneration structure, greed, and loosely-stated regulatory mishaps. All of the above did of course contribute to igniting the fuse, and it is only normal that they be talked about in spades. But that should be no excuse to neglect other, less straightforward perhaps, factors that played an even more clearly direct role. Covering D-Day and the Battle of the Bulge should not compensate for failure to mention Hitler.

By not covering the VaR hearing and keeping their audience in the dark as to such an impacting and eye-opening development, the mediatocracy makes sure that the truth is not unveiled, going a long way towards contributing to a repeat of the cataclysm down the road.