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Pink Iguana

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Pink Iguana

Why do I have the feeling that the discussion surrounding the Black Swan Credit Crisis is all one massive game of charades? 

The conclusion that the Black Swan Credit Crisis discussion is mired in an obscure Byzantine argument is predicated on an understanding of the Pink Iguana problem – missing inputs typically produce inaccurate output. In this case, the Pink Iguana that Darwin missed when exploring Galapagos lends its name to the problem of missing inventory inputs to risk management VAR computations. A hypothetical “perfect VAR” that only sees half of a firm’s positions isn’t going to compute accurate loss estimates for that firm. Missing inventory because there isn’t a security representation or valuation model doesn’t get fixed by knowing a system’s quantitative limitations due to skew and fat tails. Although the evidence of partial inventory feeds to all the production VAR codes running on the Street is circumstantial, Corporate Risk Management has historically struggled with significant notional in Synthetic CDO and Corporate Loan inventory. Oh, and the chances that NT does not know about the Pink Iguana problem (perhaps under a different name) are similar to the chances of a securities firm’s VAR forecasting accurate and actionable loss bands prior to the current Black Swan Credit Crisis. 

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