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It's Time to Learn the Truth About the Financial Crisis

The credit crisis that erupted in 2007 has shaken the world to its knees.  Many have tried to explain the causes, but the main culprit has so far been left unaddressed. What was truly, truly, behind the wreckage?  According to Pablo Triana, derivatives expert and author of Lecturing Birds on Flying (Wiley; June 2009) - it all comes down to a number.

Otherwise known as Vale at Risk or VaR, this metric is used by financial institutions and regulators to measure market risk and determine bank capital requirements. It allows firms to leverage up their speculative, and often toxic, bets to unimaginable levels. This is a sure recipe for blowing up. According to Triana, the financial crisis will simply repeat itself if the problems behind the numbers are not unmasked.

Pablo Triana takes a critical look at VaR in his latest book, The Number that Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis (Wiley, ISBN: 978-0-470-52973-7; December 2011; Hardcover). This book finally tells the "greatest story never told" and how this mysterious financial risk measurement model has ruled the world for the past two decades continuing to cause market, economic, and social turmoil.

VaR is just starting to be examined as problematic. In The Number That Killed Us, Triana takes readers 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. Triana uncovers exactly why it makes our financial world a more dangerous place. If we care for our safety, we should let VaR go.

In the early 1990s, regulators and policy makers worried about the trading exposures that financial institutions were increasingly carrying.  And thus VaR was born and quickly embraced by financial institutions and regulators as the answer to managing risk.  As long as an institutions’ VaR number was in an acceptable range, it could do what it wanted.  The metric not only hid the iceberg lurking beneath the surface but allowed banks to pile on more and greater risk.  VaR, in effect, created the iceberg, by allowing banks leverage of 100-to-1 and even 1000-to-1 on portfolios loaded with the most toxic assets ever devised by humankind. Wall Street duly sank, and the reverberations of that debacle in turn helped unleashed the 2011 Euro meltdown, compounding the crash and spreading misery all around. It is likely that had VaR not been given the keys to the risk and capital kingdoms, the Occupy Wall Street phenomenon would not have taken place.

The very risk measurement tool that was intended to contain risk allowed financial firms to blindly take on more. Pablo Triana’s The Number That Killed Us reveals how VaR is a problem and what needs to be done to correct the situation.