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IndyMac was the 7 th largest mortgage lender in 2008, but it went bankrupt in July 2008 (and was one of the largest lenders to
- IndyMac was the 7th largest mortgage lender in 2008, but it went bankrupt in July 2008 (and was one of the largest lenders to file for bankruptcy). IndyMacs end-of-2007 annual report has a Sensitivity to Market Risk section in which it says: We use a Value-at-Risk (VAR) measure to monitor the interest rate risk of our assets. We have chosen a historical approach that uses 500 days of market conditions along with portfolio data to estimate the potential one-day loss at a 95% confidence interval. As of December 31, 2007, the mortgage-backed securities portfolio was valued at $6.4 billion. The average VAR for the year on the MBS portfolio was $1.3 million, or 2 basis points.
- Given this, why is IndyMac bankrupt? What went wrong with the models? (If you need it, recall that a 95% confidence interval is equivalent to 1.645.)
- Assume you are a VAR consultant to IndyMac. What advice would you have given IndyMac at the end of 2007?
- Given this, why is IndyMac bankrupt? What went wrong with the models? (If you need it, recall that a 95% confidence interval is equivalent to 1.645.)
- Assume you are a VAR consultant to IndyMac. What advice would you have given IndyMac at the end of 2007?
Fast forward to November 2020 and assume you are a VAR consultant. What advice would you give your clients about measuring and managing market risk heading into 2021?
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