The search for blame in the financial crisis continues to gather momentum. Pundits have been going from house to house, shooting the losing generals (James Cayne, Richard Fuld, Charles Prince, Stanley O’Neal et al.), and tarring and feathering the enablers (Alan Greenspan, various SEC chairmen, free-market ideologues, the Bush administration, and pretty much everyone in Congress).

Now, a predictable new phase has begun: Barn-door closing, with a focus on the regulatory and institutional letdowns that allowed it all to happen. There’s been a lot of self-serving preposterousness -- it was Fannie! It was Freddie! It was the poor! By God, it was Chuck Shumer! -- but there have also been serious attempts to explore why risk management turned out to be an utter failure.

The New York Times Magazine weighed in on January 2nd with a cover story on Value-at-Risk by Joe Nocera, a business columnist for the newspaper. Value-at-Risk (VaR, for short) describes various metrics that supposedly provide a hard number for the expected probability of losses as markets and prices change. VaR is accused of giving Wall Street a false sense of confidence about true risk, leaving the financial-services industry vastly more exposed to calamity than investors and regulators realized.

It’s a great topic, and Nocera’s piece is so fair and balanced that I’m still confused as to where he stands. We get the impression that VaR is a fine tool that was misused, burdened with more responsibility than it was ever intended to bear. He also hints that VaR was very convenient for traders and executives who wanted to boost their compensation: To the degree that VaR understated risk (or could be tweaked to underestimate risk), it allowed firms to take on more leverage - which in turn made it appear that everybody was outperforming relative to the risk they were taking on. This boosted bonuses, while leaving the financial system vulnerable to the calamity that ensued.

Fair enough - but I would go much further and argue that any metric that fairly measured risk (if such a thing is possible) would never have been adopted, precisely because a t rue risk measure wouldn’t have allowed such absurdly inflated compensation. Before the present crisis, VaR failed colossally during the collapse of Long Term Capital Management. If a bad idea survives the exposure of its fatal flaws, then there’s usually some venal reason for its tenacity.

Moreover, I’d argue that, while VaR has its inherent failings, it becomes truly dangerous only in combination with a number of other factors. The combination of lax risk metrics, greed, leverage, and a pile-on tendency on Wall Street created a toxic environment in which any strategy could be pushed beyond its limits.

If you're un-levered, you can make big mistakes and survive. If you’re levered 40 to 1, you have to be right - and if everyone is doing the same thing you’re doing, improbabilities become destiny.