Nassim Nicholas Taleb, author of Fooled By Randomness and The Black Swan (not the Aronofsky movie), was on the BBC’s Newsnight with Emily Maitlis to discuss the multi-billion JP Morgan trading disaster.
One of the most vocal critics of the value-at-risk (VaR) risk metric, Taleb was deeply critical of the risk management practices being employed by the world’s largest banks.
“We’ve known since 1998 that tools they use to manage their risk don’t work,” said Taleb referring to JP Morgan’s use of VaR. “They are using the wrong tools. It’s not a fluke.”
By Taleb’s estimation, “JP Morgan has 10 times to 15 times the risk of a regular hedge fund”
He believes more regulation was not the answer because “derivatives traders can game regulation.”
Rather, he thinks banks should structure compensation so that traders should take a bigger hit if they deliver large losses. Furthermore, he argued that banks should get out of the trading business, be run like utilities, and just make plain vanilla loans.
To this the Maitlis suggested Taleb was an idealist. This irked Taleb, who exploded with this rant:
“I’m not an idealist. I’m someone who doesn’t want to be paying $14 million for this lady Ina Drew, which is more than John Gotti, the mafiosi god. I don’t want to keep paying her all this money for taking risks.”
Here’s the whole interview. Maitlis calls Taleb an idealist at the 5:55 mark.