Sub Prime mess- A nail in the coffin of Traditional Risk Management

About three years ago when I was fascinated by Economists and used to read on daily basis a lot of economic commentary, almost every one focused on China as next epicenter of economic chaos. No one, not a single soul suspected the great USA. Now the mess seems to be getting out of control. The Black Swan by Nassim Nicholas Taleb offers explanation for such blindness. It was only after the sub prime crisis that people started agreeing with his ideas to a greater extent. The traditional risk management techniques failed comprehensively. Now, I think , the whole discipline of risk management needs to be rebuild and much of it would be based on Taleb's philosophy.

Here is the first indication:

Death of VaR Evoked as Risk-Taking Vim Meets Taleb
Jan. 28 (Bloomberg) -- The risk-taking model that emboldened Wall Street to trade with impunity is broken and everyone from Merrill Lynch & Co. Chief Executive Officer John Thain to Morgan Stanley Chief Financial Officer Colm Kelleher is coming to the realization that no algorithm or triple-A rating can substitute for old-fashioned due diligence.Value at risk, the measure banks use to calculate the maximum their trades can lose each day, failed to detect the scope of the U.S. subprime mortgage market's collapse as it triggered more than $130 billion of losses since June for the biggest securities firms led by Citigroup Inc., Merrill, Morgan Stanley and UBS AG.The past six months have exposed the flaws of a financial measure based on historical prices that securities firms use idiosyncratically and that doesn't anticipate every potential disaster, such as the mistaken credit ratings on defaulted subprime debt.``Finance is an area that's dominated by rare events,'' said Nassim Taleb, a research professor at London Business School and former options trader. ``The tools we have in quantitative finance do not work in what I call the `Black Swan' domain.''Taleb's book ``The Black Swan,'' published last year by Random House, describes how people underestimate the impact of infrequent occurrences. Just as it was assumed that all swans were white until the first black species was spotted in Australia during the 17th century, historical analysis is an inadequate way to judge risk, he said. for full articlehttp://www.bloomberg.com/apps/news?pid=20601109&sid=axo1oswvqx4s&refer=home