We were seeing things that were 25-standard deviation moves, several days in a row [last week].
Clearly, if Mr Viniar is thinking in terms of bell-curves, this is just cretinous. Even a 9 standard deviation event is unlikely to have happened even once a second since the universe began.
Mr Viniar can't be that stupid. He knows financial returns are not normally distributed, but have fat tails; extreme events are more likely than a bell curve suggests.
More likely, he's thinking of Chebyshev's inequality. It says that in any data sample, no more than 1/k2 of the values are more than k standard deviations away from the mean. On this view, a 25 standard deviation event is a one in 625 probability.
Does this make Mr Viniar look less stupid?
Not really. If we define "several" as "three", then the chance of getting three successive 1 in 625 probabilities is roughly one in 244 million.
No, however we cut it, Mr Viniar is talking wibble. He just under-estimated risk.
There's one very stupid way of doing this. Imagine you're a chicken. Every day, the farmer feeds you. After a while, you figure: "My returns from the farmer are pretty stable, as I seem to get roughly the same amount of corn every day. Being a chicken is a low-risk business."
The following day, the farmer breaks your neck.
Any hedge fund who took default risk (say by holding CDOs) and boasted about its Sharpe ratio based on post-2003 returns would have done much the same as this; you can't measure default risk by looking at past returns.
I had assumed that no-one was stupid enough to fall for this trick; one reason why I was underwhelmed by Taleb's The Black Swan - which laboured similar points - was that I thought he was just stating the bleedin' obvious.
But perhaps I was wrong.