Morgan Stanley changes VaR model, to its benefit

From the New York Times Dealbook:

Morgan Stanley reported upbeat third-quarter earnings on Thursday. But its numbers provide a lesson in why it’s sometimes necessary to journey down rabbit holes to understand complex Wall Street firms.

The issue has to do with something called “value at risk.” This is an industry term for one type of stress test that Wall Street banks perform on their assets. These tests estimate how much money a bank could lose under adverse market conditions. Value-at-risk tests are hardly fail-safe. They didn’t predict the scale of losses that occurred during the financial crisis. And changes to a value-at-risk model helped cause JPMorgan Chase’s multibillion-dollar losses on derivatives earlier this year.

The rest of the article is here.

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