Morgan Stanley has some of the most sophisticated risk-management systems on
planet earth. And
yet, somehow,
The company disclosed today that daily trading losses during the quarter
exceeded the firm’s trading value-at- risk calculation on six days during
the quarter.
Needless to say, this is something which is not meant to happen. "Value
at risk" means, basically, the amount of money you could conceivably lose
in one day. To lose more than that in a day is a sign that your models might
well be broken. To lose more than that six days in one quarter is a
sign of utter cluelessness.
Update: jck
has the rather misleading graphic,
from Morgan Stanley’s Q3. It shows four trading days with more than $125 million
in losses, and three days with losses of somewhere between $50 million and $125
million, which means that Morgan Stanley’s VaR was probably somewhere around
$75 million or so.
What it doesn’t show is just how skewed the distribution really is: on its
worst day, Morgan Stanley lost $390 million. Which is more than four times
its VaR. Fat tail, much?