If you’re looking for a cheerleader, go bark up another tree.
“Say you want to be out ahead of it and give a lot of speeches and talk about all the good we’re doing,” Gorman said today at an industry conference in New York. “And then some trader does some stupid thing like this guy at UBS did and he’s in jail and all bets are off,” Gorman said. He was referring to Kweku Adoboli, the UBS AG trader convicted of fraud this month in the largest unauthorized trading loss in British history…Traders at New York-based Morgan Stanley had too much latitude in the past, “what I call having an outsized sandbox,” Gorman, 54, said at the conference, which was sponsored by the Securities Industry and Financial Markets Association. “Until we can be really confident we’ve got discipline around the sandboxes, I think you have to be really careful not to be holier than thou,” Gorman said. “We’re going to be in the doghouse for a while.”
Incidentally, this would a good time to mention that Gorman’s bonus policy instituted last January– STFU or GTFO– still stands. Read more »
A value-at-risk model basically works like this. You have some stuff, which is worth X today. Tomorrow it will be worth X + Y, where Y ranges from more or less negative infinity to positive infinity. Y is a function of a bunch of correlated random variables, rates and credit and stock prices and general whatnot. You look at a distribution of moves in those variables and take (usually) a 2-standard deviation daily move; if 95% of the time rates move by -10 to +10 basis points, your VaR model will assume a -10bp or +10bp move, whichever is bad for you. You take the 95%-worst-case, taking into account correlation etc., and tot up how much you’d lose in that case. Then you write that number down and feel a bit better, since you’ve sort of implicitly replaced “we have $X today and will have some number between negative and positive infinity tomorrow” with “we have $X today and will have some number between ($X – VaR) and positive infinity tomorrow,” though of course the first statement is true but unhelpful and the second is not true and also unhelpful.
But that aside! You get your VaR from a distribution of your variables, but the obvious question is what distribution. A good answer would be like “the distribution of those variables over the next three months,” say, for quarterly reporting, but of course that is only a good answer because it begs the question; if you knew what would happen over the next three months you would, one assume, always end those three months with more than $X and this VaR thing would be moot or moot-ish.1
So instead you look at things that you think will allow you to predict that future distribution as accurately as possible, which is epistemically troubling since VaR is a measure of how inaccurate your predictions might turn out to be. Anyway! You pick a distribution of variables based on the sort of stuff that you always use to estimate future distributions in your future-distribution-estimating business, which could mean distributions implied by market prices (e.g. option implied vol) but which seems to mostly mean historical distributions. You look at the last N days of data and assume that the world will be similarly distributed in the following M days, because really what else is there to do.
Picking the number of days to use is hard because, one, this is in some strict sense a nonsense endeavor, but also two, the world changes over time, so looking back one year is for instance rather different from looking back four years. Here is how different: Read more »
Back in January, Morgan Stanley CEO James Gorman sent a simple messages to his employees, who had been grumbling about their pay: STFU or GTFO. “You’re naive, read the newspaper, No.1,” Gorman told Bloomberg he would say to any members of his staff that wanted to give him lip about their compensation to his face. “No. 2, if you put your compensation in a one-year context to define your over all level of happiness, you have a problem which is much bigger than this job. And No. 3, if you’re really unhappy, just leave.” Today, in an interview with the FT, Gorman reiterated his stance and added that in addition to reducing compensation for current employees, the bank will likely be drastically cutting pay for future analysts. If anyone has a problem with that, they should consider applying for a gig at Bank of Mythical Pre-Crisis Era Bonuses. Alternatively, Gorman is happy to discuss a compensation plan in which you’ll be awarded shares of his foot in your ass, which vest immediately. Your call. Read more »
They’re not there yet, however; first, they’re going to send James Gorman a strongly worded letter about the issue and make a decision based on his response. They do sound pretty miffed though, so God help the guy if his answer is anything but “I’ve got my tool kit and I’m on the way over.” Read more »
Earlier today, Bloomberg ran a lengthy piece about the latest crisis on Wall Street: a lack of Jamie Dimon. Specifically, a lack of Jamie Dimon telling meddlesome regulators, anti-industry populists, know-nothing Congressmen, and hypocrite bastard newspapers where they can go and what they can suck. True, it’s not as though he’s gone anywhere, and he’s still reminding people “it’s a free fucking country” but “juggling multiple investigations and a $5.8 billion trading loss on wrong-way bets on credit derivatives” has left his hands a little tied and, some believe, cost him his once untouchable “stature” in the industry.
And while one should never simply offer problems without solutions, Bloomberg isn’t gonna sugarcoat this one: when it comes to “any kind of credible statesmen” to step in for JD, Wall Street is shit out of luck and not just because no one besides Lloyd came close in sales of their respective Bankers At Work And Play pin-up calendars. Among current CEO’s, Lloyd Blankfein, Brian Moynihan and Vikram Pandit are deemed too busy “fixing their own firms or repairing their reputations,” while Wells Fargo chief John Stumpf, though respected among his peers, is ruled out due to geography (“Part of Jamie’s fitting into that role was his natural brashness as a Wall Streeter and New Yorker, and that is not John”).