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As long as Wall Street keeps churning out the sausages, most investors would prefer not to look too closely at what goes into them. In any case, there is precious little disclosure on the packet.

One ingredient on display, however, is value-at-risk. Broadly, VAR measures the maximum loss a bank could take in its proprietary trading business on any given day at a certain level of confidence. Based on proprietary models and tending to understate the level of risk during periods of illiquidity – such as now – VAR is an imperfect statistic.

Still, it can yield useful insights, as demonstrated in Tuesday’s results from the Street’s shiniest sausage machine: Goldman Sachs. In the second quarter, Goldman made just less than $20 in net revenue from its fixed income, currency and commodities and equities trading businesses for every $1 of net VAR exposure – down almost 30 per cent quarter-on-quarter and down 45 per cent on the average for the previous 12 months.

VAR has crept up even as FICC and equity trading revenues have declined. In other words, the risk of potential losses has risen as markets have turned rougher. Although numbers are not directly comparable, a similar trend can be seen elsewhere on Wall Street. For example, JPMorgan’s proprietary trading revenues per dollar of VAR have declined since early 2007 and have turned negative.

The lesson for investors is that the stellar black box revenues that have juiced Wall Street’s profits in recent years have become a riskier proposition. In that context, Goldman’s better record in avoiding blow-ups should inspire some faith. Above all, VAR numbers should not be treated in isolation. Taken as a whole, Goldman deserves kudos for reporting a 20 per cent return on equity in a quarter that claimed Bear Stearns and ravaged Lehman Brothers.

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