Subscribe to this blog's feedThe losses are massive - see here. US banks alone lost $9.97 billion on cash and derivatives trading in Q4 2007, the first quarterly loss ever - and writedowns now total a colossal $232 billion. The investments, points out Calculated Risk, are also massive: a total of $136 billion raised by selling stakes to governments, sovereign wealth funds or private investors.
Alea quotes the OCC on the failure of VAR:
Concentrations in highly rated but illiquid ABS CDOs, as well as non-normal market conditions, caused several large dealer institutions (both bank and non-bank) to incur very significant trading losses in the fourth quarter.
Historically, these [super senior] ABS CDOs had not exhibited significant price variability given their “super senior” position in the capital structure, so measured risk in VaR models was very low. However, rapidly increasing default and loss estimates for subprime mortgages have caused an abrupt and significant reassessment of potential losses in these super senior ABS CDOs. Because VaR models rely on historical price movements and assume normal market conditions, this particular risk measurement tool may not fully capture the effect of severe market dislocations.
