On the Response to Irene...

I loved this post a buddy of mine (and long-time trader), Dave Nadeau, made over Facebook (reprinted with his permission) regarding the response ahead of Irene.

I personally think the administration did a great job.

Much like Y2K, the preparedness leads to the letdown. Lack of preparedness leads to panic if things go wrong. Lower Manhattan dodged this by mere inches. Loads of coastal areas did get sacked.

Among those of us who price risk for a living there is a saying: "buy 'em when you can, not when you have to." Bear-runs and short-squeezes are actions of the well capitalized trying to beat the ever-loving-shit out of the unprepared. No one is more well capitalized than Mother Nature.

Well done.

Value at Risk vs. Actual Writedowns

Value at Risk "VaR", as defined by the amount at risk at a 99% confidence level over one trading day, means that a VaR of $1 indicates a trading loss of greater than $1 should only occur once every 100 trading days under "normal" market conditions.

Not sure what defines normal, but the past year has been far from normal. Comparing the average VaR of three banks for 2007, as detailed by the Treasury, to the average daily value these banks have written down over the past year (I'm assuming the writedowns are from positions on their books during 2007), one can see just how far off these estimates were.

Citigroup hasn't just lost more than $142 million (their average VaR) on a few occasions. They had $220 million in writedowns on average EACH TRADING DAY.

Source: Treasury