Big Banks and Value-at-Risk

Since the middle of September, when more big banks began to implode, others gobbled up the remains, and the Fed began issuing band-aid loans to help make this happen, I’ve been wondering what risk analysis tools the bankers and government are using.   If there was ever an historical moment when decision making under uncertainty was the only way to play the game, we are living it right now. Because repackaged loans created the fissure that started these earth-shaking events in the financial sector, I kept thinking how difficult it must be for the bankers who are   fortunate enough to be buyers to calculate the value of what they want to buy and the value-at-risk they are creating for themselves.  But in all the press coverage there was almost no mention of a specific decision evaluation process.

Then last Friday, I came across a reassuring item in the Seattle Post Intelligencer:  a description of how JP Morgan supported its decision to purchase Washington Mutual even before it was known if a federal bailout would take place.  According to one banking consultant, “They did a little decision tree on whether the bailout will happen and how bad the situation will get and the bargain they got on the branch network, and they figured they’d pay a risk-adjusted cost for the assets they’re taking.”  Aye-aye-aye.  Let’s hope this was shorthand for a more rigorous analysis with more heavy-duty tools.

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