Do you actually think they just look at VaR models and call it a day? Important rule of thumb, if during a congressional hearing a financial institution references a risk model in an explanation to these senators and representatives, then its probably a pretty simple model that is a marginal decision driver.

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If they understand 'risk' on an enormous scale then why did we have these bailouts (BofA has a $118 billion commitment to cover its toxic assets from FED)?

You mean A bailout. As I said earlier, S&L's were bailed out in the 80's. The ignorance of what occurred in 2008 still astounds me to this day. Were banks completely innocent in the events leading up to the financial crisis? Absolutely not. But for some reason everybody seems to forget about pointing fingers at every other cog in the process, not the least of which the regulators whom were blatantly absent and the political motivations for increasing home ownership (then the originators, rating agencies, or borrowers themselves).

When 2008 happened, it was complete crisis. A good friend of mine was on the credit desk at BofA during the crisis. He had an ABS book that he hedged out the credit risk with CDS, only problem was when they wrote down one of the deals he had from 85 to 63 in the morning, CDS didn't move because it was so illiquid at the time it just didn't trade. He lost $20 million dollars that day. You know the flip side of all of this that people don't realize? That same book is now extremely profitable at this point in time.

By the way, that $118B you're referencing was BofA's TARP takedown. If you're so mad about them using "you're taxpayer dollars" for this program, why are you mad about one of the only government programs that has been paid back in full, early, with interest?

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Please do enlighten me with some evidence that the risk models used by these institutions are sound?

Not claiming anything is perfect, but how about the ~20T notional swaps business, ~4-5T daily repo business, ~10B IG/HY, ~8B Treasury, ~15B equity, etc. market that primary dealers transact and hold on a daily basis (I'm not even going into any of the option, futures, munis, the list goes on and on). They do this daily and now continue to comply with new regulatory reporting requirements that constrict all aspects of these businesses more and more. They've done this daily for decades, and only once have had an instance where it all crashed down (at a time when everything crahsed).

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he past decade of failures and insolvency tell me these models are very flawed,

Mother of god name me some times of insolvency for a primary dealer. You have LTCM and 2008... don't worry I'll sit back and wait...

All ears...

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I'd rather have no model than one that underestimates risk.

You'd rather have zero concept of your risk profile compared to one you know underestimates it? I'm really glad you're not in charge of any risk management for a firm that's big enough to do business with us (I hope).