What I Learned from Losing $200 Million - Issue 31: Stress

I'd lost almost $200 million in October. November wasn't looking any better.

It was 2008, after the Lehman Brothers bankruptcy. myself recently, on the bank's website. My first reaction was that it seemed almost farcically fashioned to "fight the last war": The Dow drops by about half, U.S. GDP dips around 5 percent, unemployment spikes to 10 percent—basically it's the aftermath of 2008 all over again. It doesn't account for other potential calamities, like a breakup of the Euro, for example, or an emerging market crisis, or hyperinflation, or shock-induced feedback effects like the ones I faced with fuel.

There's also the inconvenient fact that both Fannie Mae and Freddie Mac were stress tested regularly by their regulator, and declared well capitalized—right up until they failed in 2008. The same was true for Iceland's banks.

I'm not alone in my skepticism. The former Fed economist Til Schuermann, who had a hand in designing the Fed's tests, thinks that they actually add risk to the system, rather than reduce it, a position he outlined in a 2013 Wall Street Journal op-ed. "The danger is that the financial system and its regulators are moving to a narrow risk-model gene pool…
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