The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis

The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis


By (author) Pablo Triana

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  • Publisher: John Wiley & Sons Ltd
  • Format: Hardback | 264 pages
  • Dimensions: 155mm x 231mm x 28mm | 454g
  • Publication date: 16 December 2011
  • Publication City/Country: Chichester
  • ISBN 10: 0470529733
  • ISBN 13: 9780470529737
  • Sales rank: 1,132,411

Product description

A critical look at the risk measurement tool that has repeatedly hurt the financial world The Number That Killed Us finally tells the "greatest story never told": how a mysterious financial risk measurement model has ruled the world for the past two decades and how it has repeatedly, and severely, caused market, economic, and social turmoil. This model was the key factor behind the unleashing of the cataclysmic credit crisis that erupted in 2007 and which the effects are still being felt around the world. The Number That Killed Us is the first and only book to thoroughly explain this hitherto-uncovered phenomenon, making it the key reference for truly understanding why the malaise took place. The very number financial institutions and regulators use to measure risk (Vale at Risk/VaR) has masked it, allowing firms to leverage up their speculative bets to unimaginable levels. VaR sanctioned and allowed the monstrously geared toxic punts that sank Wall Street, and the world, during the latest crisis. We can confidently say that VaR was the culprit. In The Number That Killed Us , derivatives expert Pablo Triana takes you through the development of VaR and shows how its inevitable structural flaws allowed banks to take on even greater risks. The precise role of VaR in igniting the latest crisis is thoroughly covered, including in-depth analysis of how and why regulators, by falling in love with the tool, condemned us to chaos. Uncritically embraced worldwide for way too long, VaR is, in the face of such destruction, just starting to be examined as problematic, and in this book Triana (long an open critic of the tool's role in encouraging mayhem) uncovers exactly why it makes our financial world a more dangerous place. If we care for our safety, we should let VaR go. Contains controversial analysis of the hotly debated risk metric Value at Risk (VaR) and its central role in the credit crisis Denounces the role of regulators and academics in forcing the presence of the inevitably malfunctioning in financeland Describes how bonus-hungry traders can use VaR as an alibi to take on the most reckless of bets Reveals how the most recent financial crisis will simply repeat itself if the problems behind VaR are not unmasked Pablo Triana is also the author of Lecturing Birds on Flying The very risk measurement tool that was intended to contain risk allowed financial firms to blindly take on more. The model that was supposed to save us condemned us to misery. The Number That Killed Us reveals how this has happened and what needs to be done to correct the situation.

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Author information

Pablo Triana is a professor at ESADE Business School, and the author of Lecturing Birds On Flying (also by Wiley) and Corporate Derivatives. He has published widely on risk management, derivatives, and banking regulation in many of the world's leading financial and business imprints. He has held various roles in the financial industry.

Review quote

"Pablo Triana, whose previous book was an elliptical trip around the world of risk entitled Lecturing Birds on Flying , knows whereof he speaks. Indeed, he was one of the quants entrusted with the task of gaming VaR...Triana's argument is that it wasn't subprime US mortgages or excessive remuneration or even financial engineering as such that brought the banking system to its knees. It was the hubris of quants who believed that market risk could be encapsulated in a single number, the naivety of regulators who, he implies, did not have the little grey cells to argue with them, and the greed of banker bosses who quickly cottoned on that this 'objective' measure of risk was in fact highly subjective and infinitely manipulable...I hope [the book] prompts a response from VaR's remaining defenders." --Financial World

Back cover copy

An unflinching look at the risk measurement tool that brought about the Great RecessionIt's time to learn the truth about the financial crisis.In "The Number That Killed Us," risk management and derivatives guru Pablo Triana presents a shocking look at Value at Risk (VaR), the mathematical model that encouraged banks to take on toxic assets they should never have touched and that ultimately brought the international financial system to its knees. Examining the myriad problems that went overlooked during the two decades when VaR was the king of financial management--including using the past to predict the future and depending on an algorithm instead of common sense--the book discusses topics such as: the history of VaR, its role in Washington, the role of regulators and academics in a malfunctioning financial world, how bonus-hungry traders used VaR as an alibi to take reckless bets, and much more.Essential reading for individual and professional investors, market professionals, regulators, policymakers, and anyone who wants to really understand where all the money went, "The Number That Killed Us" drags the risk measurement tool that has repeatedly and severely hurt the financial world into the spotlight.

Flap copy

The devastating financial crisis that began in the summer of 2007and led to staggering losses for the banking industry, a globaleconomic recession, and an implosion in government finances wascaused by two main factors: toxic assets and leverage. But why didbanks and other financial institutions take on this "toxicleverage" in the first place? Because an immensely powerful, butlittle talked about, mathematical model told them to. Known asValue at Risk (VaR), this model inaccurately projected no risk forthese clearly worthless assets, insisting that they could beaccumulated worry-free. Intoxicated by the promise of short-termprofits, the banks listened, and disaster followed. Now, for the first time, "The Number That Killed Us"reveals the "greatest story never told" about the Great Recession, explaining the key reasons behind this and past market disasters.Providing a comprehensive overview of the development ofVaR--a story fraught with mathematical wizardry, intriguingcharacters, and financial drama--the book reveals how all ourlives have been influenced by this mysterious analytical tool.For the past two decades, VaR has been one of the mostinfluential forces in finance. Acting as a radar for risk thatguides the decision-making processes of banks around the world, itcan determine whether a banking crisis takes place or not. But withits tendency to sanction dangerous and reckless behavior, VaR canalso create chaos out of nothing.As in his previous book, "Lecturing Birds on Flying," author Pablo Triana takes important financial issues off thebackburner and brings them to the forefront of controversialcontemporary debate. Financial instabilities are revealed, and VaR, the mathematical ruler of the past twenty years, is finally seenfor what it really is--flawed and impractical.

Table of contents

Introduction When a Tie Is More Than Just a Tie ix April 28, 2004 Steve Benardete Gets His Wish; The World Suffers xxvii Chapter 1 The Greatest Story Never Told 1 Chapter 2 Origins 49 Chapter 3 They Tried to Save Us 71 Chapter 4 Regulatory Embracement 89 Chapter 5 Abetting the CDO Party 113 Chapter 6 VaR Goes to Washington 161 Chapter 7 The Common Sense That Should Rule the World 181 Finale The Perils of Making the Simple Too Complex 213 Guest Contributions 223 Why Was VaR Embraced? A Q&A with Nassim Taleb 223 A Pioneer Wall Street Rocket Scientist's View An Essay by Aaron Brown 226 Notes 245 Acknowledgments 251 About the Author 253 Index 255