"Experience is the best teacher, but the tuition is high," is a proverb that Mark Perry recently cited in another context. It comes to mind as a reader brings to my attention a press release from the Securities and Exchange Commission announcing that Gregg Berman had been named a "senior policy advisor" in the SEC's new Division of Risk, Strategy, and Financial Innovation. Mr. Berman's background? As this New York Times Magazine article from before Mr. Berman was named to the SEC job explains, Mr. Berman was a founding partner of RiskMetrics, which specialized in the Value at Risk, or VaR, model that failed in some significant ways in the financial crisis. The Times article quotes Nicholas Nassim Taleb describing the RiskMetrics firm as "intellectual charlatans."
As the Times article explains, the SEC encouraged the Value at Risk concept, and RiskMetrics made plenty of money selling products permitting a VaR number to be calculated. The software and the government-endorsed measurement of risk didn't prevent a lot of firms from underestimating the risks they were taking leading up to the crisis. In fact, some argue that misplaced confidence in this government-sanctioned, RiskMetrics-enabled view of risk made it easier for firms to stop thinking broadly about risk and to take on too much of it.
Mr. Berman may learn from his mistakes and bring some useful experience to the SEC, but if he succeeds in accurately judging risk in his government job, he'll be succeeding in the public sector where his firm is blamed for having failed in the private sector. The SEC press release announcing his appointment made much of his Ph.D. from physics from Princeton. This brings to mind another parallel with the New Deal that Amity Shlaes spoke of in her Hayek Lecture – the emphasis on experts with doctoral degrees that leads, in a certain way, to a kind of arrogance and talking down to everyone else.