a humble suggestion for a whole new model of Value at Risk

- Alfred Kubin

Sunday’s article by Joe Nocera about the rise and apparent fall of Values at Risk models, which were used by banks, hedgefunds, ponzi schemes and assorted big and little fish, as well as their captive regulators, to justify mad and bad leverage, has caused a lot of commenting on the financial blogs – Yves Smith, hat treasure, provided, as usual, the hectoring chorus, with that radiant skepticism which always sets apart the Wall Street dissident from the usual greed jughead, seeing in Nocera’s simplifications that cool anaesthesia of conventional wisdom which, at the moment, is the way the financial press has been self-medicating itself. It is a story that will no doubt stretch on for years – the story of how everything will return to what it used to be after a few knobs are pushed, a few wires are connected.

The model talk is, to an extent, disingenuous, dancing around the question of whether we would really want a financial system that sucks up such appreciable amounts of capital for the purpose of making a very few people very rich. The financial system is, at best, built upon rents – in itself, it adds little to the prospects of humankind. And, of course, when it swells into a force similar to that which has poisoned our culture and way of life since the early nineties, no small benefit it adds will balance the barbarization that it produces, the insect like calculation it introduces into every crevice and hole of our lives. Teaching the insects to enjoy the insecticide is, of course, an old rule in elite governance, but there are limits!

However, instead of a model that takes transforms non-linear processes into a pleasingly single number, good to use over the whole portfolio of security instruments, LI would suggest that Wall Street look to literature for a better model. Most notably, Balzac’s story of the Peau de Chagrin. Chagrin is usually translated as Wild ass – The Wild Ass’s skin is George Saintsbury’s translation. It is a story ripped from today’s headlines, so to speak. Raphael, the protagonist, is a young man who has lived so largely that he is now bankrupt. One day, thinking about suicide, he goes into an antiquary’s shop and finds a skin, upon which is printed, in Sanskrit, the following message:

“Possessing me thou shalt possess all things, but they life is mine, for God has so willed it. Wish, and they wishes shall be fulfilled; but measure they desires, according to the life that is in thee. This is thy life, with each wish I must shrink, even as they own days. Wilt thou have me? Take me. God Will hearken unto thee. So be it.”

Which means, basically, that every wish shrinks the talisman, and every diminishment of the talisman diminishes the number of days left to the wisher. The wishes, the shrinkage, and death will all combine in one moment. The antiquary, of course, tries to warn Raphael from his own exotic experience (“Yes, I have seen the whole world. I have learned all the languages, lived after every manner. I have lent a Chinaman money, taking his father’s corpse as a pledge, slept in an Arab’s tent on the security of his bare word, signed contracts in every capital in Europe, and left my gold without hesitation in savage wigwams”), but of course Raphael is not to be moved by the cautiousness of an earlier generation.

Well, the U.S. economy has been one enormous Peau de chagrin. And last autumn we decided to re-write the contract, wish back the wishes. It is as if one of the wishes could be to make the talisman grow back again. But this is the limit of the contract. One can’t contract to enjoy the wishes and then wish that the conditions be changed. They go together. The rule of talismans are impervious to the chiseling of logicmongers and traders. We watch the traders hang on, though, hang on and on to their precious skins. One more wish. Bring back the effortless profits! The bonuses! Seize the money from somewhere! Bring on the dancing, captive economists, let them predict good times!

"Quite so," said the man of science. "I understand. The remains of any
substance primarily organic are naturally subject to a process of
decay. It is quite easy to understand, and its progress depends upon
atmospherical conditions. Even metals contract and expand appreciably,
for engineers have remarked somewhat considerable interstices between
great blocks of stone originally clamped together with iron bars. The
field of science is boundless, but human life is very short, so that
we do not claim to be acquainted with all the phenomena of nature."

"Pardon the question that I am about to ask you, sir," Raphael began,
half embarrassed, "but are you quite sure that this piece of skin is
subject to the ordinary laws of zoology, and that it can be

"Certainly----oh, bother!----" muttered M. Lavrille, trying to stretch
the talisman. "But if you, sir, will go to see Planchette," he added,
"the celebrated professor of mechanics, he will certainly discover
some method of acting upon this skin, of softening and expanding it."