The GlobalRiskBlog

Warren Buffett on Risk

2010-03-02T11:06:00.002-05:00

"A CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries… If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer."

--Warren Buffett, 2010 Berkshire Hathaway Letter to Shareholders

One of the investor rites of spring (as I look out my window at piles of snow....) is the Berkshire Hathaway Letter to Shareholders which showcases Buffett's folksy wisdom on things financial. Forbes has some good excerpts from the latest.

Can a Financial Meltdown Happen Again?

2010-01-06T09:44:00.005-05:00

Happy New Year. Most people in the financial industry are likely happy to see the 2009 calendar go in the trash and have high hopes that 2010 brings a continued recovery for the battered sector. The American Economic Association is currently gathered in Atlanta, and while most agree that the worst is behind us, they are skeptical about real progress being made to avoid a similar crisis in the future. In fact, count Tom Sargent, an economist from NYU, among those who think the response so far has actually made us more vulnerable to a deeper crisis! The logic goes that the bailout has created an expectation of future bailouts for big banks, and as a result management will feel emboldened to take even more risk, knowing that the government safety net will be there. Some wonder, like we have at GlobalRiskJobs, that the window for real meaningful reform may be closing. One of the current problems is that bank lending, especially in light of the collapse of the shadow banking system, is crucial to sustaining this fragile recovery. Hence, any Draconian measures the regulators might enact must not forestall banks' willingness to lend. Other economists worry that central banks' interventions have exposed them to greater financial and political risk which could hinder their effectiveness in future crises.

Also at the top of today's news is the decision by US Senator Chris Dodd (D-CT), the chairman of the Senate banking committee and a central figure in the government’s financial bailout of 2008 and the economic stimulus package adopted last year, not to seek reelection. What effect will his lame-duck status on pending financial reform legislation? Only time will tell. Will he ignore the demands of the special interests on the left? Will he go back to his roots and stand with the banks and financial firms who traditionally donated to his campaigns? Or, will he ignore partisanship altogether as he exits and push for simply the most effective reform that he can? Interesting questions as we start the new year and push toward the finish line on financial reform.

Pelosi to Wall Street: "Party's Over". House passes financial overhaul.

2009-12-11T16:26:00.004-05:00

The U.S. House of Representatives today passed the Wall Street Reform and Consumer Protection Act, 223-202. The House tightened rules for derivatives and created powers to break up large financial firms that threaten the economy, despite opposition from Wall Street and Republicans. Also included was the creation of a Consumer Financial Protection Agency and stronger oversight of hedge funds. The bill also ends a ban that shielded the Federal Reserve from audits of its monetary policy decisions. The House failed to add language for mortgage "cram-downs". Passage of the House bill moves one step closer to achieving the White House objectives for financial reform. The focus now shifts to the Senate, where lawmakers lack a schedule for action on a bill.

House Could Vote Friday on Financial Overhaul

2009-12-08T10:15:00.003-05:00

The bigger they come, they harder they.....get hit? The giant banks could be the biggest losers in Congress' efforts to overhaul financial regulation. A populist groundswell in the majority Democrat House of Representatives has led to the addition of amendments that are unfriendly to the largest financial institutions. The bill seems to be going way beyond what the White House envisioned when it sent its proposal to Congress last June. The House bill contains much of what the White Hose wanted: powers to take over/break up large companies, new consumer protection rules, tougher regulation of derivatives, executive pay limits. The Senate bill differs considerably, so real change may not be imminent.

Some of the highlights aimed at policing the Big Banks:

Regulators would be able to block healthy banks from certain practices or mergers, and even order a bank to shrink if it posed systemic risk.
Financial companies with more than $50B of assets wold have to pay into a $150B fund to deal with future collapses of large financial institutions.
The government would be able to order certain large banks to split off their commercial bank from their investment bank if regulators are concerned.
Large banks would have to submit to consumer compliance exams from a new Federal Agency, while many small banks would be exempt.

More regulation on tap for Munis?

2009-10-29T13:42:00.003-04:00

Federal laws that exempt much of the $2.8 trillion municipal bond market from filing quarterly financial statements and U.S. Securities and Exchange Commission regulation should be repealed, Commissioner Elisse Walter said.

Walter is the third commissioner this year to call for municipal bond issuers to follow the same rules as sellers of corporate securities. SEC Chairman Mary Schapiro has hinted that the commission would seek expanded authority over the market sometime in 2010, and Commissioner Luis Aguilar called for greater oversight. All three have been appointed since 2008.

The Government Finance Officers Association, which represents state and local municipal officials, “strongly opposes any actions by the SEC or Congress” to give the commission “direct authority over municipal bond issuers or to directly or indirectly impose new disclosure or accounting standards,” according to a comment letter filed with the SEC in September.

Committee Approves Private Advisor Registration Bill

2009-10-28T11:01:00.003-04:00

Could it be that the long awaited first step toward the anticipated increase in demand for compliance professionals has been taken? Yesterday, the House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 with extensive bipartisan support by a vote of 67-1. Today, the Committee is expected to vote on Chairman Kanjorski’s H.R. 3817, the Investor Protection Act and H.R. 3890, the Accountability and Transparency in Rating Agencies Act.

But the bill fell short of a White House proposal to oversee private pools of capital. The committee exempted venture capital funds and funds with less than $150 million in assets.

Securities and Exchange Commission Chairman Mary Schapiro warned broadly at a Wall Street conference on Tuesday against too many exemptions, saying she would work with Congress to avoid creating new carve-outs that "could come back to haunt investors in later years."

Stay tuned to GlobalRiskJobs and GlobalComplianceJobs for opportunities as the regulatory story continues to unfold.

Bernanke to Congress: Now's the Time

2009-10-23T11:59:00.004-04:00

Fed Chairman Ben Bernanke urged Congress on Friday to enact legislation overhauling the nations' financial regulatory system to prevent a repeat of the banking and credit turmoil that created the financial crisis.

“With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises,” Mr. Bernanke said in remarks to a Fed conference in Chatham, Mass.

The Fed has recently been moving to strengthen oversight of banks, and intensify consumer protections. On Thursday it announced a sweeping proposal to police banks’ pay policies to make sure they do not encourage top executives and other employees to take outsize risks.

But Congress needs to step in and close regulatory gaps and make other changes that only lawmakers have the power to make, Mr. Bernanke said.

At the top of Mr. Bernanke’s list: Congress must set up a mechanism similar to the FDIC to safely wind down big financial firms whose failure could endanger the entire financial system.

And, the costs for such a mechanism should be paid for through an assessment on the financial industry, not by taxpayers, the Fed chief said.

Moreover, Congress needs to set up better systems for regulators to monitor risks lurking in the financial system, he said.

The Obama administration has proposed such action as part of its revamp of financial rules. Its plan would expand the Fed’s powers over big financial institutions but reduce it over consumers. Congress, however, is leery of expanding the Fed’s reach because it and other regulators failed to crack down on problems that led to the crisis.

A House panel on Thursday approved a piece of the Obama plan, the creation of a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate increases.

Stay current on career opportunities in the ever-changing risk and compliance world by visiting GlobalRiskJobs and GlobalComplianceJobs.

Geithner Running Point on Reform

2009-09-23T10:38:00.007-04:00

Although healthcare reform seemed to be pushing ahead of financial reform in the political dialogue race, President Obama's Lehman Anniversary speech on Wall Street last week seems to have re-energized the movement somewhat. While GlobalRiskJobs and Risk Talent Associates are definitely seeing an increase in activity on the financial risk and compliance front, we definitely expected more to see more robust signs of recovery on the hiring front at this point in the year. One of the preconditions to a wholesale shift has always been a more intense regulatory/reporting environment, which we still believe will come, but things have been slow to develop largely because of the traffic jam in Washington. So, with Geithner's focus now moving from crisis manager to running the point on financial reform, we will see where it takes us. Geithner seems to have simplified the message, focusing on three key points that legislators should consider when enacting financial reform: 1) offer “substantial” new protections to consumers and investors, 2) make the financial system less vulnerable to crisis, and 3) protect taxpayers from having to bail out future crises.

Are some of the regulators past the point of fixing? Bloomberg commentator Susan Antilla wonders as much about the SEC in a recent piece. She looks at Judge Rakoff's beat-down of the SEC-Bank of America settlement as just the latest example of a regulator that needs an overhaul. Meanwhile, the SEC is seeking more power to oversee derivatives markets.

GlobalRiskBlog favorite Andy Kessler weighs in on bank pay controls in today's Wall Street Journal. Kessler argues that it was excessive leverage, rather than excessive risk that drove the financial system to the brink of disaster.

As the G-20 convenes in Pittsburgh, U.S. and European leaders remain divided on how much capital the world's largest financial institutions should keep on hand to meet unexpected losses. Most agree that a major lesson of the Crisis is that higher capital requirements are essential, and G-20 leaders hope to have an agreement on new standards by the end of 2010, with implementation by the end of 2012.

Congress has turned its attention to the Rating Agencies. New allegations by a recently departed Moody's analyst named Eric Kolchinsky have added fuel to the debate over the role and influence of credit ratings and whether recent reforms are sufficient to prevent a repeat of past missteps.

The FDIC is being criticized for its handling of many of the recent bank failures. A recent report about the failure of Colorado-based New Frontier Bank criticizes the agency and other regulators for not being aggressive enough in handling the brewing financial crisis.

And finally, the controversial filmmaker Michael Moore is back in the headlines with "Capitalism: A Love Story", a scathing look at the financial system through the lens of the Crisis.

Risk is Back! Sort of.

2009-09-17T11:50:00.004-04:00

The New York Times has a special DealBook section today examining the current state of Wall Street one year after Lehman. In Sorkin's cover story, "Taking a Chance on Risk Again", he assesses the state of risk taking as the pendulum swings from refusal to take risk back toward the balanced middle. Where is the "critical point" on the risk spectrum? The usual discussion of VaR and its shortcomings takes place as Sorkin tries to capture the state of the market...Zachary Kouwe looks at the hedge fund fee model as the old standard of "2-and-20" is questioned...Risk is back in the bond market. But the robust high yield market is raising concerns...Harvard Professor William George just published "Seven Lessons for Leading in Crisis", a look at how the banking chieftains responded to the financial meltdown...The Deal Professor has an idea. You want to reduce hedge fund risk? Open them up to Main Street...And finally, it pleases GlobalRiskJobs to know that Gordon Gekko is back! Yes, it's true: Oliver Stone is remaking Wall $treet (1987) to focus on 2001-2008. Thankfully, Michael Douglas will reprise the Gekko role (post-prison), and the cast includes Josh Brolin Susan Sarandon, Frank Langella and Shia LaBeouf. Nouriel Roubini and Jim Chanos are technical advisors and Jim Cramer makes a cameo of course. Can't wait for that one.

Stiglitz says system worse than pre-Lehman

2009-09-14T15:21:00.003-04:00

Nobel Prize winning economist Joseph Stiglitz says that little has changed in the year since Lehman and that system is on even shakier ground than it was before the collapse. “It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

(un)Happy Anniversary!

2009-09-14T09:24:00.004-04:00

Well, we have begun to be treated to the first of what are sure to be dozens of pieces marking Tuesday's One Year Anniversary of the death of Lehman Brothers. Everyone should remember just how dire the global financial situation seemed in the wake of Lehman's bankruptcy. We at Risk Talent Associates and GlobalRiskJobs certainly remember, as like many who make their living in and around Wall Street, it was a time like no other. "Bulge Bracket" firms disappearing seemingly overnight, stock markets plunging, and of course, the layoffs. Yet, even in those darkest of days, we advised that things would indeed get better at some point, and job seekers needed to get up off the canvas and be ready for that time. Certainly, the first order of business was to use all means necessary to stabilize the system, but when that financial triage was finished, players (particularly regulators) would turn their attention to figuring out how to never let us get in that position again. As I stated in the blog last week, much of that push to reform has been bogged down in political wrangling, shifting of the topic to healthcare, etc. But, just as we start to doubt the Administration's resolve, Here comes President Obama to Wall Street to stoke the fire of reform by reminding us of where we were a year ago. Obama’s speech apparently will focus on the need to take the next series of steps on financial regulatory reform, enacting safeguards to ensure such a crisis doesn’t happen again. Let's hope he can jump start the process and push us through this period of "regulatory limbo".

As we consider the Lehman collapse a year later, there will be many arguments either way that letting Lehman fail was either the right/wrong thing to do. Joe Nocera of the NY Times had a good piece on Saturday where he reconsiders the Lehman failure. My own thoughts about this haven't changed much over the year. I believe that when a Bear Stearns failure became inevitable, the Powers-that-Be (Paulson, Bernanke, et. al.) decided they would give the U.S. banks and investment banks a "Mulligan". Against the pure capitalist philosophy of non-intervention, they rushed in to arrange the orderly sale of Bear to JPM. In its wake, the warning was given: the next guy wouldn't be so lucky. Whether that "next guy" was going to be Lehman, Merrill, Morgan Stanley or someone else (not Goldman of course, being too well-connected), it seemed pretty clear there was going to be some BIG financial institution that would become a lab rat for too-big-to-fail. Unfortunately for its employees and investors, lehman won the race to the bottom and the experiment was in full force. Everyone would find out just what happens and how far-reaching the repercussions are when one of these institutions fails. Well, the rest is well-documented and we can probably say the result was the ability of Paulson to light a fire under Congress and get the resources to fight the crisis. Step 2, however, is far from complete. We still need to figure out how to structure or regulate the system in a way that allows risk taking without the collateral damage that was clearly part of the Lehman failure. Maybe Obama can get that process back on track this week.

Feds locked in "Regulatory Limbo"?

2009-09-09T11:14:00.007-04:00

Well, after a quiet end of summer at GlobalRiskJobs and the Blog, it's time to get back to business. I spent most of August in Europe, doing first hand due diligence on the effect of the weak dollar on American tourism. It really hit home in Switzerland, when I shelled out the equivalent of $11.00 for a Big Mac, fries and a Coke at rest area outside of Zurich. Ouch!

Back to the markets...

The summer was characterized by lots of talk but not enough action on the regulatory front. After nearly nine months of the Obama administration, we have been treated to lots of ideas about how the regulatory structure should/could/might look when the dust settles, but there has not been a ton of substantive change. It has been nearly a year since the collapse of Lehman Brothers, and the financial world is, admittedly, a different place. Real change on the regulatory front has not materialized, as efforts to remake the rules of finance have been stymied by infighting among regulators, pushback from banks, and opposition from lawmakers who are skeptical of increased government power and scope. Ironically, banks' appetite for risk has grown, with the Wall Street Journal reporting today that the daily VaR of the nation's top 5 banks was over $1B in the second Quarter of 2009, a record level. Geithner went to Capitol Hill with Obama's financial reform outline on March 26! There was a big sense of urgency at the time, but that was nearly six months ago. Geithner urged lawmakers to grant the authority for the government to take over failing financial institutions quickly, yet here we are. Is momentum for change fading? Or is the regulatory reform movement going to slowly and steadily work its way through the financial system...?

The links...

Peter Wallison of the AEI says asking the Fed to monitor "systemic risk" is like asking a thief to police himself in this opinion piece from the WSJ.
Goldman Chief Blankfein spoke in Frankfurt today and said anger over banker pay is justified, but overregulation would prove harmful to the markets.
NY AG Cuomo is investigating the timing of Bank of America's firing of its former General Counsel, Timothy Mayopoulos.
Dutch Banks (are there any left...?) agreed to bonus limitations.

FHFA's Lockhart to step down

2009-08-05T16:11:00.000-04:00

Federal Housing Finance Agency Director James Lockhart, who oversaw last year’s federal takeover of mortgage-finance giants Fannie Mae and Freddie Mac, said he plans to leave the agency later this month.

“The timing is appropriate,” Lockhart said. Freddie Mac hired a new chief executive last month and the housing market is starting to show some signs of recovery, the regulator said in an interview today.

Fed to launch new bank exam teams

2009-08-04T13:15:00.003-04:00

The Federal Reserve plans to intensify its scrutiny of bank lending and financial health with teams made up of experts in a variety of new areas. Fed Governor Daniel Tarullo outlined the plan during a Senate Banking Committee hearing in Washington today. The overhaul, which would make reviews more uniform across the banking system, builds on the stress tests the central bank completed on the biggest 19 banks in May, he said. “We are prioritizing and expanding” the examination process to “assess key operations, risks and risk management activities of large institutions,” Tarullo said in his testimony today. “This program will be distinct from the activities of on-site examination teams so as to provide an independent supervisory perspective. This work will be performed by a multidisciplinary group composed of our economic and market researchers, supervisors, market operations specialists and accounting and legal experts,” Tarullo said.

A regulatory tussle has been unfolding since the Obama administration proposed strengthening the Fed's regulatory profile. The major regulators have each opposed some aspect of the plan in hopes of maintaining their own powers as the winds of change blow in.

Two sides to the Fed-as-Regulator debate

2009-07-29T11:56:00.005-04:00

Lee C. Bollinger, president of Columbia University in New York, says the U.S. needs a "First Amendment for the economy" after a failure of regulation that could be fixed by giving the Fed more responsibility. Bollinger called the economic crisis a “huge failure of public regulation”, and proposed an independent regulator based upon the judicial system which could issue written rulings and change precedents. Bollinger said the Fed had the capacity to stand outside the system as an independent regulator to monitor risk.

On the flip side, Harvard professor and author Amar Bhide says in a WSJ opinion piece that the Fed has done such a terrible job at financial regulation it would be unthinkable to give it more power, and goes so far as to say we should be talking about dismantling the Fed, not increasing its power. Bhide goes on to write that Fed's regulatory mission has become so big as to be unmanageable and proposes a minimum of splitting the monetary policy and regulatory functions of the Fed as was done with the Maastricht Treaty that established the European Central Bank.

Also in the news...

CFTC Chairman Gary Gensler said he believes the agency must seriously consider setting stricter limits on traders who place bets on energy contracts. His remarks are the just the latest example of a shift in tone for the commodities regulator vis a vis trading curbs and other regulatory measures. Gensler went on to say that "every option must be on the table to curb "excessive speculation", which the WSJ called out as politically expedient remarks in its editorial on "The Politics of Speculation". In addition, Goldman Sachs talked its own book by saying attempts to curb speculation may prove "disruptive" to markets.

House bill proposes ban on naked CDS

2009-07-23T15:33:00.004-04:00

House Financial Services Committee Chairman Barney Frank said "naked" credit default swaps may be banned in the overhaul of derivatives industry oversight. House Agriculture Committee Chairman Collin Peterson (D-MN) said he is helping draft the legislation which would ban credit-default swaps where the investor doesn't own the underlying debt. Under the current proposal, market makers would be exempt from the ban. As much as 80% of the $26T CDS market is traded by investors who don't own the underlying debt.

Regulators sit in judgment of CIT

2009-07-21T20:11:00.002-04:00

While bond investors seem to have come through with a $3B private bailout for CIT Group, it appears regulators will have the final say on the troubled lender. CIT needs an exemption from the Federal Reserve and approval from the Federal Deposit Insurance Corp. to transfer assets from a holding company to its bank in Utah. It can then raise customer deposits to fund those assets. Earlier this year the regulators allowed a transfer of $5.7 billion in student loans by CIT, but more recently they have seemed reluctant to grant additional transfers. Bondholders hope, however, that with a private-sector deal in hand, the regulators will take a second look and allow more transfers. Even though CIT's long-term plans center around the regulatory waiver, no imminent action is expected on that front, a person familiar with the matter said. For more details on the CIT situation, check out this story from the WSJ.

FSA under fire from UK conservatives

2009-07-20T16:15:00.002-04:00

The UK's conservative party appears to be flexing its muscles with a proposal to scrap the regulatory body created by Prime Minister Gordon Brown in 1997. The conservatives are pushing to hand bank supervision over to the Bank of England, while creating a separate consumer finance protection agency, which is similar to the changes that the Obama Administration has proposed in the US.

For full story go to Forbes.com.

UK's Darling pushes "global rulebook" for banks

2009-07-13T13:36:00.002-04:00

U.K. Chancellor of the Exchequer Alistair Darling, following a meeting with U.S. Treasury Secretary Timothy Geithner, said the world needs a global rulebook for banks to prevent future crises. ‘‘There is recognition that because banking is global it needs to be dealt with in the global arena. There is also recognition that many issues need international cooperation.’’

Darling said he expects ‘‘in September that progress will be made’’ when leaders of the Group of 20 nations meet in Pittsburg. He said finance ministers of the G-20 will meet in London on Sept. 4 and Sept. 5.

RTA 5th Annual Professional Compensation Survey Released

2009-07-07T11:33:00.003-04:00

Bonuses declined by 20% and total compensation decreased by 12% in 2008 for risk professionals in capital markets.

New York / June 8, 2009 - Risk professionals in the capital markets saw their average bonus decrease by 20%, and average total compensation decrease by 12% in 2008 over 2007, reflecting the impact of the credit crisis, and early parts of the recession and financial crisis. These figures were reported in the fifth annual Professional Compensation Survey by Risk Talent Associates, a leading risk management executive search firm. Last year’s survey demonstrated a healthy 8% compound annual growth rate between 2003 and 2007. This year’s data depresses that number to a 1% CAGR between 2003 and 2008, essentially reducing gains in total compensation back to 2003-2004 levels.

The 2009 survey reports that average salaries decreased by only 1%, in stark contrast to deeper reductions in cash and non-cash bonuses as firms operating in the capital markets could not pay their employees bonuses typical of the industry historically. For 2008, 21% of respondents reported not receiving any bonus, compared to only 7% in 2007. Michael Woodrow, President of Risk Talent Associates, notes, “the fact that salaries did not get hit as hard signals that companies place an ongoing value on top-quality risk management. The declines in bonuses reflect the broader trend of pay overhaul in the U.S. banking system.”

Risk professionals hardest hit by compensation reductions are those with the most years of experience and senior titles. Bonuses dropped by 21% and 19% respectively for the most senior professionals- those with over 16 years of experience, and those with 7-15 years of experience. Bonus decline for those with 6 or less years of experience was only 7%. Total compensation for Chief Risk Officers, which has routinely topped $1 million in previous surveys fell to $764,000. Michael Woodrow adds, “for Chief Risk Officers and senior risk people with executive status, compensation is more directly related to firm performance. These individuals shared in the company losses incurred through the financial crisis.”

Over 300 risk professionals representing the capital markets participated in this year’s Risk Talent Associates salary survey, including participants from commercial banks (42%), investment banks (36%), foreign-owned banks (8%), government sponsored entities (6%), credit card (3%), mortgage brokers and lenders (3%) and foreign exchange (2%). Risk Talent Associates, an executive search firm focused on risk management, will publish additional survey updates in 2009 including asset management, compliance and other risk fields (software, consulting, energy and corporate). All surveys analyze compensation trends by years of experience and title, industry segment, risk focus, and geography.

About Risk Talent Associates
Risk Talent Associates (www.risktalent.com) is the leading international executive search firm focused exclusively on positions in the fields of market, credit and operational risk, as well as financial compliance and risk technology. Risk Talent's expertise, industry knowledge, proprietary network and dedicated focus shorten the recruiting process to deliver senior and mid-level risk managers in the capital markets, asset management, energy, consulting and software industries. Risk Talent has offices in New York, Chicago, London, and Hong Kong.

Contact:
Jennifer Bonadio
Risk Talent Associates
410-926-9989
jbonadio@risktalent.com

RBS CRO Resigns

2009-07-02T14:39:00.001-04:00

Royal Bank of Scotland’s chief risk officer, Peter Nathaniel, has announced that he’ll be stepping down—just days after the $37.4 billion bank hired Nathan Bostock as head of restructuring and risk.

For the time being, Bostock will be in charge of all risk reporting until the company finds a replacement for Nathaniel, including taking over as chair of the group risk board and all other relevant risk committees.

Nathaniel joined Royal Bank of Scotland in 2007. Prior to that, he was managing director and head of global risk oversight for Citigroup.

Battle joined on consumer financial protection agency

2009-07-01T14:27:00.005-04:00

The Obama regulatory plan has now been percolating through the financial world for two weeks, and the reaction has been mixed. Predictably, banks and mortgage lenders are placing top priority on killing the proposal to create the so-called Financial Products Safety Commission. The banks and their lobbyists are bracing for a big fight, unhappy with the extension of powers being discussed for the new regulator. The proposal delivered to Congress calls for stripping away all the consumer responsibilities that are currently assigned to existing regulators like the Fed, FDIC and OCC. Among the powers being discussed, the new agency could set standards for traditional mortgages and could restrict or prohibit certain types of mortgages.

Links:

The collateral damage from lawmakers releasing confidential Federal Reserve emails could be a less open regulatory process as banks and regulators may share less information with eachother.
The Supreme Court decided with New York 5-4 in Cuomo v. Clearing House Association. The decision affirms that New York's AG could demand mortgage data from federally chartered banks to seek evidence of discrimination under the state's fair lending laws.
Morgan Stanley pulled in its risk-taking in 2009, and it's now seeing the downside of that strategy.
There is some grumbling about the selection process for the job of Head of the NY Fed.
The FDIC is seeking limits on the ability of private equity firms to buy up failed banks.
Sometimes it's better to be lucky than it is to be good....

Financial Reform Movement in Retreat?

2009-06-09T15:46:00.004-04:00

It looks like the Obama administration is tempering its ambitions for financial regulatory reform. It seems that the potential political brouhaha that would accompany a reduction in the number of agencies overseeing the financial markets would expend too much political capital. Instead, the administration will focus on securing broader powers for existing regulators to limit risk-taking. While the revamp of oversight will dramatically change the regulatory environment for finance, has the US missed an historic opportunity to completely overhaul the arcane regulatory framework of US finance? Possibly. It seemed as if the financial crisis presented lawmakers with a clear path to reworking the system. As time has passed and the global financial system has stabilized somewhat, the outcry for major structural change has become less loud. reform hawks will no doubt be disappointed by anything short of wholesale change to the system and will lament the loss of reform momentum.

The links:

Te Obama administration wants Europeans to put their banks through much more rigorous public stress tests to ensure survival in a slipping economy.
Deloitte & Touche released its 6th Global Risk Management Survey. The survey indicates that banks and other financial institutions continue to have significant opportunities to strengthen their risk management processes and tools.
As plans for banks to leave TARP solidify, the WSJ wonders what to do about Citigroup.
The 10 banks that got the green light to repay TARP include: Goldman Sachs, JPMorganChase, Morgan Stanley, American Express, Bank of New York Mellon, BB&T, Capital One, Northern Trust, State Street and US Bancorp.
SIFMA Chief Executive Tim Ryan says that Wall Street accepts its share of responsibility for the crisis and intends to partner with the governments to overhaul the regulatory system.
Morgan Stanley says there has been a fierce rally in leveraged loan CDO's.

Bank of America names Greg Curl CRO

2009-06-04T15:55:00.002-04:00

Bank of America today replaced Chief Risk Officer Amy Woods Brinkley with Gregory Curl, a 31-year veteran of the Charlotte-based financial services giant. Curl most recently was global corporate strategic development and planning executive. He has been a key insider who has helped transform BofA from a regional bank to a global powerhouse. He had key roles in NationsBank's purchases of Bank of America (1998), Countrywide (2007), and Merrill Lynch (2008). Curl joined the NationsBank family when he was serving as vice chairman and COO of Boatmen's Bancshares which Nations acquired in 1996.

Brinkley, 53, has decided to retire, with the official line from BofA being that Ken Lewis and Brinkley "mutually decided that we needed a different approach to our risk management and it was a good time to change leadership." Brinkley has been a regular in lists of influential woman executives, and had made steady progression through the senior ranks at BofA. Brinkley joined NCNB in 1978 as a mangement trainee in the commercial credit department. She graduated Phi Beta Kappa from University of North Carolina at Chapel Hill.

Regulatory Turf Wars Gaining Steam

2009-05-26T17:31:00.005-04:00

Lots of buzz this week about future oversight of the financial markets. While GlobalRiskJobs and GlobalComplianceJobs have been anticipating significant changes in the regulatory landscape, the political landscape has thus far provided more of a speed bump to true reform than initially thought. The Obama Administration is (finally) expected to finish up a plan to present to Congress by the end of June, but the timetable for any reform plan to be approved by Congress looks like the end of this year. The Obama administration has been pushing a more radical reform agenda, while existing regulators naturally have sought to defend their existing turf. As a result, no firm regulatory structure has yet to emerge. The primary issue seems to be whether to reorganize the basic structure of oversight, or whether to implement new rules at existing agencies that would accomplish the same end. It would seem that, given the scope of this crisis, if there was ever a time where legislators and te public would be willing to accept a radical overhaul, now would be it. The adminsitration has had its hands full with the issue of bank supervision, and the Office of Thrift Supervision (OTS) which has come under fire for its seeming impotence in the AIG, WAMU and IndyMac fiascos is likely to be sacrificed first in the name of reform. Also on the table is a merger of the SEC and the CFTC, although House Financial Services Committe Chairman Barney Frank is not a supporter of such a move. Another political sticking point surrounds the idea of a systemic risk regulator. Treasury wants the Fed to become a financial market uber-regulator responsible for systemic risk, although many politicians and regulators are reluctant to concentrate so much power at the Fed. As mentioned last week, a new Financial Products Safety Commission has also been proposed, although Mary Schapiro naturally opposes any threat to diminish SEC power and lashed out against the idea. Another battle on the Hill is brewing between Frank and House Agriculture Committe Chairman Collin Peterson surrounding who will get authority to regulate credit default swaps. The Ag Committees in Congress traditionally oversee the CFTC and oppose any challenge to their authority.

The Links:

The FT details some of battles being fought over bank regulation.
Bloomberg's Alison Vekshin has written a good profile of FDIC Chief Sheila Bair.
Wall Street is having its say in the battle over derivatives regulation. Banks want to preserve the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible.
The FT believes regulatory authority in the US should be assigned by function, not product.
EU banking regulators may get the power to overrule national banking authorities under new plans in the works as a response to the financial crisis.
The WSJ comments on the derivatives PR war going on inside the Beltway.

What to do about 'Regulator Shopping'?

2009-05-21T15:10:00.005-04:00

Thursday's NY Times has an editorial on "regulator shopping", investigating its role in the current financial crisis. The piece laments the fact that banks and finance companies were allowed to choose their own regulator and seemed to switch at will in order to find the most lax or favorable overseer. The editorial really takes issue with the "optional federal charter" proposal to regulate the insurance industry which would would allow insurance companies to switch to federal regulation if they had issues with state oversight (the current environment) in the future. There has been much outcry about regulator shopping and how it may have played one body off another in contributing to the crisis. So, if the Obama administration and Congress are serious about simplifying and streamlining financial product regulation and consumer protection, this would be a good time to step up.

----------

William Poole examines "too big to fail" in the FT. He ponders whether bankers would rather face the discipline of subordinated debt or much heavier regulation from Washington.
Is LIBOR signaling that risk in the banking system has abated? Michael Mackenzie explores the issue but still finds dislocation in some areas.
S&P's threat to downgrade the UK from AAA upset the markets on Thursday.

Is Warren's Financial Product Safety Commission on Tap?

2009-05-20T11:06:00.005-04:00

The Washington Post reports that the Obama Administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds. The move would require legislation, and would centralize regulatory authority that is currently spread among a group of federal agencies. The proposal is sure to be opposed by financial services industry groups who will continue to argue that such regulation will crimp access to such financial products. Additionally, such a move could intensify political wrangling among existing regulators like the OCC, Fed and SEC as they battle to hold onto legacy powers.

The idea is believed to have sprung from a plan proposed by Harvard Law professor Elizabeth Warren, who now chairs the Congressional Oversight Panel for the US Government's financial rescue initiative. Warren wrote in a 2007 article in the journal Democracy called "Unsafe at Any Rate" that the government had failed to protect American consumers in their relationships with financial companies and that it was now time for a Financial Product Safety Commission.
------

The Links:

WSJ's Gordon Crovitz says that Geithner's focus on disclosure over regulation when it comes to derivatives constitutes smart reform.
The FT says that the derivatives industry is girding for battle.
Gillian Tett, author of "Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan was Corrupted by Wall Street Greed and Unleashed a Catastrophe" is out promoting her book. She thinks she has a sense of what Main Street thinks of Wall Street.
Jamie Dimon speaks out about rules preventing US banks from hiring foreigners.

Please sir, I want some more (regulation)...

2009-05-19T14:55:00.003-04:00

"We are looking at a world where the fist of government will be stronger than the invisible hand of the market"

--Mohamed El-Erian, Chief Executive Officer of PIMCO, 5/19/09

In El-Erian's May Outlook piece, he envisions a banking system that is a shadow of its former self. Regulation will be more expansive in form and reach, and the sector will be "de-risked, de-levered, and subject to greater burden sharing. The forces of consolidation and shrinkage will spread beyond banks, impacting a host of non-bank financial institutions as well as the investment management industry".

At GlobalRiskJobs and GlobalComplianceJobs, we can't help but nod in agreement when we hear things like this. We have been anticipating such an environment as the pound of flesh to be exacted in the wake of the Great Meltdown, and when high profile investors like El-Erian go on record with such comments, it sends the signal that the government is a long way from backing down from intnsifying the regulatory environment. Thus far, it seems there has been much talk and little action on the "new normal" that has been talked about. It appears that many banks, asset managers, and other finance companies are engaged in a game of personnel "chicken". They seem to know in their hearts that a new regime is coming that will require new bodies; professionals with the expertise and experience to help them comply with new legal and risk reporting requirements that will certainly be part of the this new environment. But, the overall trend appears to be one of wait and see. When are the requirements going to come? June? August? October? Why not hold out until the last minute and hire when the government imposed deadline is looming? Well, there are lots of reasons not to do that, first and foremost being the tone of the employment environment. When the deadline is looming, how many others will be in the same boat? Lots. And a basic understanding of supply and demand would tell one that when the talent market tightens one pays a lot more for that talent. Look no further than Sarbanes-Oxley for Exhibit A from the recent past. And, guess what else becomes a real issue? Retention of existing employees. Because, when there is a bid out there in the market and the phones start ringing it will make everyone wearing a risk or compliance hat a more valuable commodity.

The links:

A new credit card reform bill was passed by the Senate and is on its way to President Obama.
The Federal Reserve will include legacy assets for the first time in a $1 trillion program to revive credit markets, expanding the effort to commercial real estate securities issued before the start of this year.
NY governor Andrew Cuomo sued two debt settlement firms for deceiving consumers and false advertising.
Treasury Secretary Geithner said the government should not impose caps on executive pay.
New fees proposed by the FDIC would hit big banks harder than small ones.
The FT weighs in on Geithner's plans to regulate the derivatives markets.

Taming the Derivatives Tiger

2009-05-14T13:57:00.005-04:00

The Obama administration asked Congress yesterday to move quickly on legislation that would allow federal oversight of derivatives like credit default swaps. Geithner said the measure should require swaps to be exchange traded and backed by capital reserves. The adminsitration is also seeking repeal of of major portions of the Commodity Futures Modernization Act of 2000 which kept derivatives mostly unregulated (endorsed, incidentally, by then Treasury Secretary Larry Summers). The new measure would give regulatory oversight to the CTFC and the SEC. ISDA issued its own comments in the wake of the news.

Geithner also stated that the administration would be laying out a comprehensive proposal to overhaul the regulation of the financial system. A centerpiece to the plan will be eliminating the ability of companies to pick the most favorable regulator.

So, will moving derivatives to an exchange help prevent future meltdowns? TMX Group CEO Thomas Kloet believes it can.

The links:

Paul Kanjorski, the chairman of an influential House subcommittee said the federal government, not the states, should have the primary responsibility for overseeing the insurance industry. he said Congress must address insurance activities as part of the broader overhaul of financial regulations.
The SEC moved to impose new rules on money managers to safeguard client holdings in the wake of Madoff's $65B Ponzi scheme. SEC commissioners voted 5-0 today on a proposal to subject about 9,600 investment advisors to annual surprise inspections by independent auditors to make sure they have adequate procedures to protect client assets.
The Federal Reserve may revise rules that currently favor the established credit rating agencies. The Fed currently only accepts collateral ranked by the major NRSROs (Moody's, S&P, Fitch) and is conducting its review as the number of NRSROs is increasing.

R.I.P Bill Seidman. The former head of the FDIC and RTC died yesterday in Albuquerque, NM at the age of 88.

The Compensation Tug o' War

2009-05-08T16:32:00.008-04:00

"This is not going to be about capping compensation or micromanagement. It will be about understanding what is the best way to align compensation with sound risk management and long term value creation."

--Obama Administration official, 5/12/09

There it was this morning on the front page of the Wall Street Journal. Above the fold. "U.S. Eyes Bank Pay Overhaul". Just when it seemed that focus on compensation limits had begun to abate, news comes that the Obama administration has begun serious talks about how it can change compensation practices across the financial services industry. Yes, you read that correctly. Not just at TARP recipients, but also at institutions that received no federal bailout money. This is new ground for regulators, although they do currently have the (rarely exercised) power to sanction a bank for excessive comp structures. President Obama and Geithner have been critical of the quarter-by-quarter mentality that pervades the financial services business, and Bernanke said the Fed was working on rules that would more closely align compensation with longer term goals. Recently, FDIC Chairman Bair said regulators needed to examine comp pratices in the mortgage industry. One former regulator thinks it is a bad idea to regulate banker pay. Former SEC chairman Arthur Levitt thinks it is a slippery slope to try and regulate banker pay, saying "it has never worked and it cannot work." So what is the right answer? How do you achieve the goal of aligning compensation with risk management and long term value creation?

Links to recent news:

Hedge funds get behind registration plan. MFA President Richard Baker told a congressional hearing that the organization supports a regime that would subject the vast majority of investment advisers, including the largest and those considered most systemically relevant, to the SEC's registration requirements.

The SEC's Elisse Walter said that Financial Advisors should be regulated under a unified umbrella, which would help harmonize regulation. Should RIA's have their own SRO?

Stephen Morse, managing director and head of compliance, operational risk and information risk at Barclays Capital has been named Compliance Reporter's Compliance Leader of the Year.

Banks are bracing for a credit card write-off storm.

What is the future of US financial regulation? Rob Cox at BreakingViews has some thoughts on that question.

The Future of "Too Big to Fail"

2009-05-07T12:54:00.006-04:00

FDIC Chairwoman Sheila Bair addressed "Too Big to Fail" in front of the Senate Committee on Banking Housing and Urban Affairs. Bair urged lawmakers to consider a government regulatory framework to monitor global, systemic financial institutions thought to be “too big to fail.” Read the testimony here.

Stress Test results are out, and BofA's apparent need for $34B in capital has been this week's worst-kept secret. banks will need to raise at least $65B in new capital The WSJ has a helpful interactive graph comparing the 19 banks that were stress-tested. Also, WSJ's David Wessel explains what the stress tests will tell us about bank health.

Matthew Richardson and Nouriel Roubini write about a missed opportunity in the FT. The pair feel that insolvent banks should feel the wrath of the markets, asking "why keep insolvent banks afloat?" and invoke the concept of "creative destruction" first argued by Joseph Schumpeter. fellow Doom-and-Gloomer Nassim Nicholas Taleb calls the current global crisis "vastly worse" than the 1930s becaause the global financial system is so interdependent now.

The GAO criticized former SEC chairman Chris Cox and his regime for creating an atmosphere in which enforcement attorneys felt thay had been weakened in their ability to take action. New SEC chair Schapiro dicontinued Cox' "Pilot Program" which had instituted a pre-approval process for investigations.

Author Richard Posner writes that we should move the spotlight off the bankers for a bit and focus on goverment officials who failed in their role of assuring economic stability.

Regulators looking North for inspiration? Marie-Josee Kravis sets the record straight on why it wasn't regulation, per se, that has spared Canada's banks from the worst of the crisis. She credits prudent management, rather than regulation, which prevented the excesses that were commonplace in the U.S. banking environment.

Don't forget to visit GlobalComplianceJobs, the place for high profile regulatory and compliance career opportunities.

Senate Passes Ant-Fraud Measure

2009-04-28T14:56:00.003-04:00

In a 92-4 vote, the U.S. Senate passed legislation giving the government more power to prosecute mortgage and financial fraud. The legislation would also create a commission to investigate the causes of the economic crisis. Some highlights:

makes it easier to prosecute fraud in commodities futures trading - including options and debt derivatives.
Authorizes $265 million over the next 2 years to hire more than 600 lawyers and investigators at justice department, SEC and other federal agencies.
Extends anti-fraud law to cover private mortgage brokers and TARP recipients
Examines the role of credit rating agencies.
Creates a Senate committee to conduct its own investigation of the financial crisis.

Burning the Village in order to save it?

2009-04-27T11:54:00.004-04:00

The WSJ has a strong Op-Ed piece this morning that takes a look at Federal tactics used to force BofA to complete the Merrill acquisition last December. They look at the BofA case and see Paulson and Bernanke forcing Ken Lewis to "blow up" Bank of America (maybe this is how Lewis earned his "mulligan" while Rick Wagoner caught one between the eyes...). Spreading systemic risk in the name of containing it....ordering the deception of shareholders, killing financial confidence in the name of restoring it...The Journal appears sympathetic to BofA and goes on to say that the Merrill-related bullying fundamentally increased systemic risk by "transplanting" risk from a Wall Street brokerage to one of the country's largest deposit-taking institutions. In addition, the WSJ states that Bernanke and Paulson undermined the transparency so vital to investor confidence in the capital markets. The collateral damage here seems to be the lukewarm response from most of the investor community and Wall Street to the latest federal initiatives like TALF and PPIP...For Caroline Baum's take on the same, check this out.

Here's word that Goldman Sachs is increasing risk taking at the fastest pace on the street. This should not be that surprising, although given Morgan Stanley's apparent pullback in risk taking, it is important. According to Bloomberg News, Goldman's VaR jumped 22% to $240 million in the 1st quarter - 2x that of Morgan Stanley. Consequently, GS reported 1st Quarter revenue of $9.4B to MS reporting $3.04B.

While the NYT reports Wall Street is unfazed by stress test details, many investors are simply waiting for the results to be released on May 4. Get the Fed white paper disclosing the stress test methodology at GlobalRiskJobs.

Regulators shift gears to focus on loan quality

2009-04-21T09:49:00.004-04:00

As bank stress tests for "The 19" evolve, regulators are increasingly focused on loan quality, given the big disparity they are finding in underwriting standards at the banks. Subsequent to their initial due diligence, the feds have determined that lending practices have to be given at least as much weight as macro-economic scenarios in determining individual bank health. This is an important development because it makes it easier to separate vulnerabilities caused by bad management from those caused by factors beyond management's control. This criteria gives Geithner more leverage to make management changes at any banks coming back for more TARP cash.

G-20 moves forward on regulatory framework

2009-04-02T14:12:00.005-04:00

The new era of finance is now dawning in earnest. Word from the G-20 meetings in London is that world leaders have agreed on a regulatory framework for countering excesses that led to the current global financial crisis. In particular, the group called for stricter limits on hedge funds, executive pay, credit-rating agencies and bank risk-taking. In addition, they pledged more than $1T in emergency aid to assist with collateral damage from the crisis. While countries will mainly be left to regulate their own markets and companies, the G-20 recognized a need for some global oversight by establishing a new Financial Stability Board to promote regulator cooperation and work with the IMF. Hedge funds defined as "systemically important" will be subjected to greater regulation and oversight. Pay and bonuses will be examined to create "sustainable compensation schemes". Accountants will need to improve valuation methods and creit rating agencies will need to meet a new code of standards.

Meanwhile, focusing back on the US, KC Fed President Thomas Hoenig endorsed the notion of the Federal Reserve becoming the regulator for systemic risk in US finance. In Geithner's recent proposal, such a systemic-risk regulator would have the authority to compel companies to boost their capital and curtail borrowing, as well as to seize companies get into trouble.

The Financial Stability Forum agreed to move towards creating stricter capital requirements for banks around the world, reversing their prior view of giving financial institutions more flexibilty in how they calculate reserves.

Ron Resnick, co-founder of financial consulting firm CounselWorks has an interesting piece on his views about government assumptions in the regulation of financial firms. He questions Treasury's new supervisory and regulatory foundation based upon the concept of "systemically important firms".

Summers: AIG Proves Regulatory Regime is Unsatisfactory

2009-03-16T08:57:00.005-04:00

Get ready for a new front to open in the compensation wars. Last week, Reuters reported that Citigroup is writing bonus guarantees to attract traders in London. And once again, A.I.G. is at the center of the bonus battle with news that it will be making good on $165mm of bonus guarantees. The disclosure has, predictably, touched off a firestorm in the court of public opinion, with White House economist Larry Summers firing the first shot on CBS' Face the Nation Sunday. Yes, there is something outrageous about the poster-child for the credit crisis taking $170B of public funds to stay afloat and then paying out big incentive money to employees. But, what can be done? A.I.G. is in a unique position, to say the least. The government, concerned about systemic risk and the devastating market consequences of allowing the company to fail, feels like it must prop up the giant insurer. A.I.G. seems to understand this and, rather than deal with legal challenges to employment contracts, has decided to honor those deals. But let's think of it from an employees perspective. Let's turn back the clock to January 2008. You are a credit default swap salesman. Your space is one of the few seemingly robust parts of the credit market, and there is a healthy bid for your services. You are happy at Broker X, but AIG comes calling and blows you away with an offer. Of course, as is convention in the finance world, you aren't going anywhere without guaranteed money for, let's say two years. Why do you hod out for this? Well, you just never know what can happen, markets turn, bosses leave, things happen, and this is maybe that chance to have a some security for a couple of years. Now it is March 2009 and the world is an entirely different place. The move to A.I.G. was a big stinker, but you were smart to negotiate that guarantee because you are protected. God thing you paid that compensation lawyer big bucks to make sure it was all kosher. Management can come and ask you to take a decrease or defer some money, but why would you do that for a firm that may not be around next month, let alone next year? That's the way it works (worked?) on Wall Street. Are these contracts indeed bulletproof? Should A.I.G. and the government spend time, money and energy renegotiating these contracts? The answer is likely "no". But, what the government will do is add this situation as one more arrow in its regulatory reform quiver. By expressing outrage, the court of public opinion will tend to fall on the government's side, and if you look closely at Summer's remarks yesterday, he said "What the lesson is, is this: We don't really have a satisfactory regulatory regime in place." The drumbeat is continuing in the march toward a dramatic overhaul of the financial regulatory system. The regulatory reform train is finally starting to pickup speed. The Obama plans key points were revealed this morning, and they center around the Federal Reserve getting new powers to monitor and address broad risks across the economy. Also proposed are Changes to bank oversight, more transparency for inter-bank money flows, tougher capital requirements for big banks, and a consolidation of consumer protection enforcement.

The links:

More bad PR for A.I.G. As if news that it paid guaranteed bonuses wasn't enough to keep the spin-doctors busy, the list of its counterparties that were streamed payments after bailout funds were received is out.
A great profile of Thain's hubris by Greg Farrell and Henny Sender in the FT Weekend.
Unhappy Anniversary Bear Stearns; it's hard to believe it's been a year since the powder-keg of Wall Street exploded. WSJ's James Freeman says there is still a lot we haven't figured out since then.
The WSJ's Real Time Economics blog has a view on what to do first in avoiding another financial calamity.
Paul Krugman says Europe's financial crisis could be way deeper than that of the U.S.
Roubini says beware of the dead-cat bounce.
The G-20 is split on hedge fund regulation.

Multi-tasking during the Fire

2009-03-12T10:13:00.006-04:00

"When firefighters are still struggling to extinguish the blaze, talking about fire prevention seems premature. The worst financial crisis since the Depression isn't over, yet it's time to put the best brains to work at restructuring the financial regulatory structure so we don't go through this again."
-- David Wessel, Wall Street Journal, 12 March 2009

At GlobalRiskJobs, we couldn't agree more. Yet, this crisis has legs, and I don't think anybody is really ready to declare that the end of it is near. But, it does seem as if the stirrings have regulatory discussion have begun in earnest this week. When government officials like Bernanke, and business commentators like Wessel begin to turn their attention to regulatory architecture, it is a good thing for the market for risk and compliance professionals. It means that what you have known was coming for the past year or more is beginning to materialize. For a long time, it appeared that the discussion would not begin to take place until the system was stabilized. Yet, the longer the pain goes on, the more apparent it is that discussions of real change on the regulatory front need to occur now. For awhile, things were held up by the natural turbulence of a massive government change-over. As the Obama administration settles in and appointments have been made, the executors have dug-in and begun to take steps. Be prepared for the pace to pick up.

The links:

Bloomberg's Jonathan Weil writes that Moody's admission of its shortcomings in independence and integrity in federal court last week will prove extremely damaging to the Agency's public reputation.
Bernie Madoff is ready to plead guilty. While he is ready to go down on his sword and face up to 150 years in prison on 11 charges, he's holding out on the conspiracy charge to avoid implicating others. The WSJ has a helpful primer on the Madoff case so far.
Not in my lifetime? GE has lost its S&P AAA rating which the company had held since 1956 - the year of CEO Jeff Immelt's birth.
Compensation consultant Johnson Associates believes Wall Street's longtime comp structure is going to change radically.
The Oracle of Omaha has weighed in on suspension of mark-to-market debate.
As MBA's enter the home stretch, the WSJ has a story on the state of hiring at London's banks. It's not pretty.

More on "Hire American"

2009-03-11T11:13:00.003-04:00

The WSJ has a couple of good op-ed pieces continuing the debate about TARP and H1-B. The "Employ American Workers Act" (EAWA) which was folded into the stimulus bill is the culprit here. The Amendment was sponsored by Senators Grassley (R-IA) and Sanders (I-VT) and designed to prevent TARP fund recipients from hiring foreign workers if they laid off Americans recently. In "Turning Away Talent", the WSJ editors set the record straight on some misconceptions about H1-B statistics. They also warn that the U.S. will just drive much of the best talent away to, yup, foreign banks. Also in the WSJ, a trio of Dartmouth professors says that it is a terrible time to be rejecting skilled workers. They warn against such protectionist thinking in a global economy, but ask the more fundamental question, don't we want the best and the brightest fixing this mess, regardless of where they come from?

Bernanke sketches out regulatory philosophy

2009-03-10T09:11:00.005-04:00

"At the same time that we are addressing such immediate challenges, it is not too soon for policymakers to begin thinking about reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future. We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components. In particular, strong and effective regulation and supervision of banking institutions, although necessary for reducing systemic risk, are not sufficient by themselves for achieving this aim."

--Ben Bernanke, 10 March 2009, Speech to the Council on Foreign Relations

It seems like it's all starting to crystallize on the regulatory front. Yesterday, Fed Chairman Bernanke took another step forward by urging a major overhaul of U.S. financial regulations aimed at containing the future volatility of financial markets and continued that theme this morning in his speech to the CFR. The Chairman went on to sketch out what he views as the 4 key elements of any strategy: 1) address the problem of "too big to fail", 2) strengthen the financial "infrastructure", 3) review regulatory policies and accounting rules to ensure they don't induce "excessive procyclicality", and 4) consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would protect the system from future crises similar to this one. It certainly appears as though Bernanke is sowing the seeds of increased Fed power in the future regulatory scheme. Congress is currently considering how to regulate systemic risk but has yet to agree on which agency should assume that power. Barney Frank has been "Fed-friendly" in his views, although Chris Dodd has taken the opposite stance, wondering if the Fed is up to the task. With no obvious model for success out there, the next few weeks will be crucial to shaping the new regulatory environment. Bernanke appears to be ready and willing to use his post to advocate for the central role. And as the nation embarks upon this path to reform, toay's WSJ has an interesting primer of sorts called "Ten Questions for Those Fixing the Financial Mess". It contains profiles of the six major regulators - CFTC, FDIC, Fed, OCC, OTS and SEC - and speculates as to how thing might unfold in the coming weeks. Stay tuned, as the battle for the future has begun.

The links:

Meredith Whitney is feeling the power. Fresh off formation of her own firm, she's grabbed the spotlight in today's WSJ to warn against what she sees as the next credit crunch: credit cards. Bloomberg says Canadian losses may be a bellwether on the credit card front.
Yesterday, GlobalRiskBlog reported on BofA's decision to rescind offers to foreign MBAs. Today's NYT has a follow-up story about the H1-B quandary.
From the NYT Science Section of all places, a story on scientists who became Wall Street quants. A former Goldman MD compares options theory to physics.
As the rating agency vigilance pendulum swings back toward extreme caution, Moody's is trying to get out in front of corporate bankruptcies.
The FHLB of Seattle has fallen short in one of its capital requirements.
Citigroup employees are reminded about the bank's "compliance culture" in an internal memo.
The FSA has added David Kirk as Chief Criminal Counsel.

Bank of "America First"

2009-03-06T13:16:00.010-05:00

One of the news items that caught the attention of GlobalRiskJobs this weekend was a story in the FT about Bank of America pulling its job offers to foreign MBA students. In a field like risk management this is big news given the high number of professionals who have trained in advanced degree programs overseas. The Troubled Asset Relief Program prevents financial institutions that have received federal bailout money from applying for H1-B visas for highly skilled immigrants if they have recently made US workers redundant. Given that just about all of the big banks have already cut loose thousands of workers, it would appear this provision will have far-reaching impact in the coming months. Is this a "Buy American" initiative in an industry that, unlike manufacturing, hasn't seen much of that sentiment? Could this be dangerous for certain highly-skilled math and finance fields where the best and most qualified professionals are needed now more than ever? I guess it's symbolic that the Bank of America was the first to announce details of the pullback, but expect more news of this type to follow. And a story in today's Washington Post examines more evidence of budding jingoism in the midst of the global financial crisis. A US House panel is criticizing the Obama administration for not policing deals where TARP banks lent money overseas. The populist sentiment seems to be that banks getting federal funds should deploy those funds to help the domestic economy.

The links:

Is Paul Volcker urging a return to Glass Steagall? It sure seemed like the Former Fed Chairman wanted to turn back the regulatory clock in a speech last week. BreakingViews' Hugo Dixon doesn't agree. He believes that improving risk management and tightening regulation across the financial industry is a better approach.
BofA accused of obstructing Cuomo bonus probe. Yes, the comp saga continues...
Robert Schiller examines the role of government in this FT piece about controlling the "animal spirits".
The Nationalization debate continues...Alan Blinder gives his take in the NYT...BofA's Ken Lewis talks his own book in the WSJ as he seeks to set the record straight...Goldman's Blankfein thinks it's a bad idea as well...Senators McCain and Shelby preached tough love for the banks.
Geithner needs help! The NYT reports that politics, among other things, has slowed the building of a team to deal with all the aspects of the crisis.
And of course, the AIG firestorm continues. The WSJ reported this weekend who some of the major counterparties were that received federal money via AIG. BofA, Goldman, Deutsche, Merrill, Calyon, Barclays...

AIG: Stealth or Regulatory Incompetence?

2009-03-05T14:18:00.012-05:00

In the last GlobalRiskBlog, quotes from Geithner and Bernanke which seemed to blame the AIG CDS fiasco on its ability to fly below the regulatory radar were prominently featured. This morning we read that such a notion is being disputed by one of their own! On Thursday, Scott Polakoff, acting director of the OTS (AIG's primary regulator) appeared before the Senate Banking Committee and agreed that the perception that London-based AIG Financial Products exploited a lack of supervision was incorrect. So what is it then? A 2007 GAO report said that OTS "lacked the needed expertise to regulate complex financial products like credit default swaps". Polakoff admits that some of the issues and problems at AIG were identified but steps taken were insufficient to head off disaster. Doesn't it always seem to work that way? A lack of urgency ultimately winds up blowing up in your face and upon reflection the problems seem so crystal clear. Think about 9/11 or consider baseball's battle with performance enhancing drugs. In a similar way, times were good and people were happy. Warnings went unheeded or were met with symbolic or half-measures. Yet, when disaster struck everything was reconsidered and the vigilance pendulum swung completely in the other direction. Naturally, it will be the same this time.

The links:

US experts clash on who can monitor risk. While lawmakers seem to agree that the financial regulatory system is broken, they are not necessarily all in the same boat as to how to repair it.
The Washington Post chronicles the Obama administration's quest to put a valuation on toxic assets at the heart of the crisis.
Uh oh. Merrill Lynch says its risk officers discovered a trading "irregularity". Beleaguered chief Ken Lewis can't be happy.
All sizzle and no steak? Paul Krugman is growing impatient with Obama and Geithner.
The CDS market is killing Buffett and Immelt.
In an obvious blow to Geithner, two picks for top jobs at Treasury have withdrawn from consideration. Deputy Treasury Secretary choice Annette Nazareth and International Affairs Undersecretary pick Caroline Atkinson have decided to stay put.
Philly Fed President Plosser says the Fed needs a better roadmap to deal with crisis.
Times Online has some good outtakes on the crisis from Mervyn King.
Sen. Dodd is moving to allow the FDIC to borrow up to $500B from the Treasury.
William D. Cohan has written House of Cards, the first of what should be many looks at the collapse of Bear Stearns. James Freeman reviews the book for the WSJ.
And finally, just in case you missed it, the Daily Show's Jon Stewart proves once again that Hell hath no fury like talk show host scorned. His guns are blazing at CNBC in this video.

Closing the regulatory gap on AIG

2009-03-04T09:43:00.010-05:00

"If there is a single episode in this entire 18 months that has made me more angry, I can't think of one other than AIG. There was no oversight in the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company"

--Ben Bernanke, 3 March 2009

"AIG is a huge, complex, global insurance company attached to a very complicated investment bank hedge fund that was allowed to build up without any adult supervision."

--Timothy Geithner, 3 March 2009

At GlobalRiskJobs we take every opportunity to consider data points and anecdotes that support the expectation of a coming explosion in risk and regulatory career opportunities in the midst of digging through the various aspects of this global financial crisis. It looks like Geithner and Bernanke are providing us with more evidence. AIG continues to be propped up by the Feds as its CDS exposure threatens the company's viability and it is quickly becoming one of the more obvious albatrosses dangling from the Obama administration's neck as it tries to plow through the crisis. Bernanke went on to say that AIG "exploited a huge gap in the regulatory system", and in a world where every remark is scrutinized for hidden meaning, Bernanke's open slap of AIG is viewed by most as evidence that regulators plan further curbs on risk and concentration in the financial services industry. So, what is the new framework going to look like? Glass Steagall redux? Or maybe a simpler plan putting a conservative Federal Reserve firmly in charge of the banks is the way this plays out. Regardless, leverage has become the boogeyman in all of this so its a solid bet that banks will get harsh new limitations on leverage and risk taking. In addition, Sheila Bair at FDIC has questioned the Basel II model on the basis that it assumes banks internal quantitative risk measures are reliable, so expect a whole new regulatory framework for the banks to be constructed.

The links:

Who says there are no second acts in real life? Some former Countrywide managers are making money buying up residential mortgage market detritus.
The Treasury has released guidelines for TALF and Relief for Responsible Homeowners.
Holman Jenkins rethinks the nationalization of Fannie and Freddie in this WSJ opinion piece.
The WSJ questions increased FDIC insurance levies against banks at a time when most are receiving Federal funds in through the other end.
In the face of regulatory reform discussions for the credit rating agencies, S&P called for global regulatory changes to eliminate conflicts of interest and require more disclosure of rating methodologies.
Heard on the Street says TALF turns the Fed into a generous prime brokerage.
The FT's John Plender wrote a fine piece dissecting the carnage in the investment world.
The bank Nationalization Debate rages on.

Bailout Weekly: AIG loses $62B and gets a 4th course at the trough

2009-02-26T16:16:00.010-05:00

Anyone remember how much aid A.I.G. asked for way back in September? Well, we are a long, long way from September 16, 2008 when the U.S. government extended the insurance giant a two-year loan of up to $85B in exchange for a 79.9% stake. Less than a month later, those bailout loans were increased to $123B, then to $150B in November, which included a new $40B government investment. So, here we are in March 2009, and AIG is bellying up to the TARP trough for $30B in rescue funds in a reversal of the initial plan. Last fall, the government was acting as short term lender trying to help AIG get through rough times with some "tough love". It looks like Geithner has changed the parenting philosophy by relaxing loan terms and giving more access to TARP rescue funds - now standing at $70B. Yes folks, that is 40% more than Citigroup has taken so far. What does it all mean in the context of "too big to fail"? It appears that the Feds are still trying to their arms around the deep aftershocks any kind of AIG failure would have on the financial system and beyond. It's all about buying more time and keeping the newly vigilant rating agencies at bay.

More news of interest on this snowy Monday:

Hedge fund D.E. Shaw is reacting to Madoff, et. al. by planning to step-up its due diligence by appointing 3rd party administrators to verify investments.
A Treasury audit report blames an aggressive growth strategy, nontraditional loans and insufficient underwriting for the demise of IndyMac Bancorp last summer.
The Bank Stress Test is found to be lacking in this piece by David Reilly, and the NYT questions some of the test's assuptions in this Op-Ed.
FT says and FDIC on steroids might be the answer.
Barney Frank on bailouts.
S&P sees more losses for subprime securities.
More on nationalization in the NY Times Magazine.
Is the crisis spawning new regulation for the European Union?
Bloomberg's Caroline Baum thinks some banks need to fail to clean out the system. Former Treasury Secretary James Baker writes in the FT that we need to heed the lessons learned from Japan in the 90s and kill off some zombie banks.

Another investment fraud comes to light, RBS sets dubious record

2009-02-26T09:52:00.005-05:00

Another day, another investment fraud for newly energized regulators to sink their teeth into. Paul Greenwood and Stephen Walsh were arrested by the FBI yesterday and will face criminal charges. High profile victims include Carnegie Mellon University, The University of Pittsburgh, and the Iowa Public Employees Retirement System. So, the initial perceptions are looking correct, that Madoff was, if not the tip of the iceberg, the glacier that was poking above the surface. So what is going on here? Were these "money managers" simply taking advantage of years of lax oversight coupled with investor hunger to be part of the sexy alternative investment universe? The one thing that seems to be certain is that the laissez faire regulatory environment for hedge funds will come crashing down soon. Many of these "proprietary models" (Enhanced Stock Indexing, split-strike conversion, etc.) have proven to be little more than hot air used to hide behind a cloak of secrecy offered in large part by QIB and AI rules. Prepare for change.

News links:

RBS appears to be on the brink of Nationalization as it announced a £24B net loss for 2008. The UK government has agreed to inject up to £25.5B into the poster-child for troubled banks. And news that the Scottish behemoth could close its leveraged finance buisness as part of the pressure to refocus on UK retail and commercial customers.
The EU has laid out its guidelines for toxic banks. European countries have been told to watch the total cost of bailouts and focus on banks of "systemic importance".
Bloomberg's Jonathan Weil writes that it isn't easy getting a good estimate of what a bank's assets are worth. He cites recent disclosure by Regions and Huntington that dispute the value of loans on their books.
Geithner laid out details of the bank stress test. The doomsday scenario includes a jobless rate above 10% and another 25% drop in home prices. Once inconceivable, those guidelines don't appear to so remote today...Click here for the Bank Stress Test FAQ.
The Treasury has put out a white paper on its new Capital Assistance Program (CAP).
Peter Wallison has some advice for Geithner on pricing troubled assets.
Gary Gensler, Pres. Obama's choice to head the CFTC promised to act forcefully as a regulator in confirmation hearings.

Moelis hires Ryan to Advise on Risk

2009-02-25T10:46:00.006-05:00

Christopher Ryan, former head of credit fixed income at UBS is close to joining Moelis & Co. to advise clients on risk and balance-sheet issues. Warburg Dillon Read hired Ryan in 1999 from Lehman Brothers to oversee leveraged lendng, loan portfolio management and acquisition finance.

U.S. Regulators Issue Joint Statement. Markets Tank.

2009-02-23T16:52:00.013-05:00

As reported here in yesterday's blog, US regulators took the unusual step of issuing a joint statement to ensure the investing public knows they will be stress testing banks. President Obama is looking to clear up the stench around U.S. banks by subjecting them to reviews and trying to revive liquidity in the market for their toxic assets. The Wall Street Journal thinks the joint statement bothered the equity markets. Stress testing will begin tomorrow for 20 of the largest banks to determine which ones will need government capital injections to survive. The potential downside of "opening the kimono" in this way is that bringing banks' problems into the public spotlight is that it could intensify investor concerns rather than quell them. Citigroup continues to be the big bank "guinea pig", as officials struggle with how much more aid they can or should provide the behemoth as the nationalization debate continues to rage and shareholders worry about being completely wiped out. Former FDIC Chairman William Isaac joins the chorus against nationalization in this WSJ Op-Ed piece. Isaac was responsible for nationalizing Continental Illinois Bank in the 1980s, so he knows of which he speaks. The NYT's Eric Dash reports that at least a partial nationalization seems inevitable for Citigroup. A third injection would give the U.S. 40% ownership in Citi and likely the ability to exert more influence over the bank. Across the pond, the UK's experience with RBS which has led to a 68% ownership stake in the Scottish bank is being looked upon as a sort of model. Key management has been replaced and the the government seems to be controlling lending and strategic decisions. A key question being asked in all of this is "what's the exit strategy"?

And now for the links:

A story on regulating the Shadow Banks in breakingviews. Political momentum for regulating these entities seems to be gaining steam in advance of April's G-20 meetings in London. Thekey question will be, "what is appropriate oversight?"
PIMCO's Bill Gross thinks nationalization would be a huge mistake in his latest Investment Outlook. Gross says that if you think letting Lehman fail was a mistake, just watch what nationalizing Citi and BofA would do...
What exactly is nationalization? The WSJ has a helpful primer.
"Black Swan" author Nassim Nicholas Taleb says that the current banking crisis will be harder to end than the Great Depression. Taleb goes so far as to say that, for him, the real "black swan" event would be for the markets to emerge unscathed and return to normalcy.
Here's one way to manage risk: Amex is paying potential deadbeats to go away.
Morgan Stanley is closing its Chicago prime brokerage unit.
Geithner's "bad bank" plan may need to provide low-cost financing to distressed asset investors.
NPR's Jim Zaroli walks us through a bank stress test.
Is there a dangerous bubble brewing in investment grade corporate bonds? At least one analyst thinks so.
S&P thinks proposed Basel changes will cut risk taking.

Regulation Monday

2009-02-20T00:55:00.006-05:00

The regulators are back in the top of the news this morning, with two prominent articles in the NY Times Business pages. SEC chief Mary Schapiro has used her first month to move aggressively toward reversing major decisions by prior chief Cox, and to strengthen the enforcement program which has been blasted for missing several huge frauds. Cox had a policy which required enforcement lawyers to obtain consent of commissioners before moving to resolve major cases. With the commission largely made up of opponents of government regulation, the residual effect was to discourage cases and reduce penalties. Schapiro is under the gun to restore crdibility to the agency, as Congress prepares legislation which may overhaul the entire securities regulatory structure. Schapiro is moving quickly to adopt rules to minimize conflict of interest at credit-rating agencies, as well as looking at new restrictions on short selling. Schapiro's moves will be made more challenging by news of the latest collateral damage from the Cox era, as the Agency faces scrutiny for its handling of allegations of insider-trading by former Lehman executives. Sen. Grassley wants answers...

Bank stress testing will be in the spotlight this week as the Obama administration scrutinizes the financial condition of the 20 biggest banks to assess their fitness to weather a worse downturn than expected. The U.S. said that banks would have access to capital necessary to keep them afloat. Read the joint statement from Treasury, FDIC, OCC, OTS and Federal Reserve here.
More news on "Creeping Nationalization" as the Obama administration may take another step in that direction if it converts the government's preferred shares in Citigroup into common equity to help the stumbling giant withstand losses. Paul Krugman says just do it, but Gerald O'Driscoll says to beware.
Phil Gramm, often pointed to as the architect of deregulation weighs in on Gramm-Leach-Bliley and what it all meant.
From Bloomberg, word that the US and Europe are discussing joint regulation of the $28T credit default swap market.
US regulators are being forced to sell real-estate loans of failed banks at a discount to lure buyers spooked by the likelihood of increased loan losses.
A major CDO is bankrupt.
Sen. Dodd tells Al Hunt short-term bank nationalization is a possibility.
Sovereign CDS is being used to speculate on currency strength.

Regulators Step-Up Game to Nab Stanford

2009-02-19T09:45:00.004-05:00

Doesn't it always seem like it happens this way? In many areas of life we have rules and oversight in place to avoid a cataclysmic outcome, but what it really takes is for someone to get away with something. Something BIG. So, here we are again being reactive. Bernie Madoff got away with a huge scam for years, before finally being exposed in December. Today in the WSJ we learn that it took fallout from the Madoff case to have the SEC increase its scrutiny of R. Allen Stanford and his own $8B fraud. Madoff. Cosmo. Forte. Nadel. Stanford. How many more of these fraudsters will be exposed as the new harsher regulatory spotlight shines in the darkest corners of the financial markets?

Bank Lending Picked Up in December

2009-02-17T20:45:00.003-05:00

The first results of the US Treasury's new monthly bank lending report are out and they say that bank lending rebounded in December. Overall, loan origination and underwriting activity were weak in October and November, but picked up in December, fueled by falling mortgage rates. Read about the results here. Still no word on how much the shadow banking system is lending...

More news from around the financial world:

Greenspan comes out in favor of bank nationalization and says U.S. needs to do more
A few Congressional Republicans joined him in putting nationalization on the table.
R. Allen Stanford is accused by U.S. regulators of running a massive ongoing fraud through his Houston-based Stanford Group Co.
A former chief accountant for the SEC thinks Madoff investors may be able to hold their auditors accountable in the fraud.
RBS feels the heat and gets Draconian on incentive comp.

Haldane on Risk Management

2009-02-17T00:03:00.005-05:00

Andrew Haldane, the Bank of England's director for financial stability, made a speech last week that outlined his recommendations for improving risk management. He says the failure of banks to count, hedge and mange their risks was responsible for both the growth and the crash, and took a swipe at the limitations of mathematical models as well. Read the full text of Haldane's speech here.

The N-Word

2009-02-12T13:42:00.019-05:00

With the G-7 meeting kicking off in Rome today, Treasury Secretary Geithner will want to tap into his European counterparts for experience with the big N: Nationalization. Ireland injected €7B into its two largest banks this week, four of Britain's largest banks are under de facto control of the new government holding company, and now word that Germany may be ready to get in the act as Hypo Real Estate Holdings could be nationalized by Merkel. Europeans have put the questionable banks on a tight leash, while the US so far has been committed to keeping its banks in private hands. Who has the better approach? Economists seem to agree that the government needs to exercise some control to get bad assets off the books, but disagree on how much control. It is not surprising that Nouriel Roubini is one who believes it's time to nationalize U.S. banks. Roubini says the banking system is basically insolvent, with bank and finance company losses already passing the $1T mark and possibly peaking at $3.6T. He estimates the banks will need another $1.4T in new capital to resolve the credit crunch. Scary stuff. Keeping with that theme, Steve Lohr of the NYT says banks look like "dead men walking". Without a cure for the bad assets, the problem will linger and keep dragging the economy and banking system further into the mire. In a preview of the Washington Post's Sunday Outlook section, Roubini and fellow NYU professor Matthew Richardson push the idea of nationalization even further. Although Obama seems to be against a full scale nationalization, some say the U.S. is engaging in "creeping nationalization" as it empowers regulators and implements bank stress testing, but where we end up is anybody's guess at this point. Who knows, maybe some of that European aggressiveness rubs off on Geithner this weekend...

On to the Headlines:

With all that is happening at Treasury, it looks like Geithner is understaffed. Bloomberg reports that a dearth of staff experts is slowing him down. Hmmm, hasn't he heard of GlobalRiskJobs?
There's more grist for the regulatory mill. Hedge fund insider trading is top news today as unsealed court documents obtained by Bloomberg indicate Kynikos, SAC and other funds are being accused of trading on material non-public information. New regs may be on tap in Europe as France seems to be calling for a hedge fund crackdown. The US and UK have been oceans apart on hedge fund regulation.
Regulators from the SEC are probing Stanford Financial Group.
AIG's London-based financial products unit is being investigated.
George Mason University law professor Todd Zywicki says the price for mortgage modification is too high in this WSJ opinion piece.
Ahhhh, politics. Are campaign contribution rules going to stifle real regulatory reform?
A Tale of Two Cities in the Junk market. Charter's filing is more evidence that souring corporate debt starting to fester, but the amount of new issue high yield bond sales tripled ($2.38B) this week, signaling investor appetite for risk may be increasing.
Former HBOS risk chief Paul Moore stood firm on his claims against the bank.
John M. Reich, Director of the Office of Thrift Supervision stepped down yesterday. Read the official press release.
More negative news for big banks as Wells adds an impairment.
Art imitates life on the big screen, as Clive Owen stars in "The International" a new film about, yup, financial corruption.
And finally, some snark from Michael Lewis to get the weekend started. No matter what you think of his views, they are usually entertaining.

Stress Test will Empower Regulators

2009-02-12T09:49:00.005-05:00

In the aftermath of Geithner's layout of the bank rescue plan, federal banking regulators are descending upon the 18 biggest US banks with a set of new more stringent criteria with which to stress test the banks for long term health. NYT's Eric Dash wonders if regulators could become the new arbiters of American finance. The new scrutiny may go a long way toward determining which banks succeed long term, and which wind up being nationalized or allowed to fail. And regulation is sure to be a hot topic at the upcoming G-7 meetings in Rome. The Financial Stability Forum will likely propose new global standards on bank capital rules and for regulating off-exchange markets.

More news:

The HBOS whistleblower saga continues. Read the full text of the Moore memo here.
Speaking of whistleblowing, WSJ's Aaron Lucchetti wonders why Wall Street is reluctant to blow the whistle on the likes of Madoff.
Bank CEO testimony on Capitol Hill had its moments. Evan Newmark thinks the CEOs showed their sales chops at least. It looks like Congress needs a lesson in the shadow banking system to understand who is not lending. Bloomberg's Caroline Baum imagines the tables being turned and CEO's questioning Barney Frank.
Keep an eye on RBS as a model for the future of banks with big government ownership. If the the UK wants the balance sheet reduced, where do you think it's going to come from? Not the domestic market...
At least one firm thinks investment grade debt looks attractive.
Shareholders rise up and the Fortis deal is voted down.

Remember to visit GlobalRiskJobs for career news and job postings in risk and compliance.

What's a Toxic Asset Worth?

2009-02-10T22:34:00.010-05:00

Well, everyone knows by now what the equity markets thought of Geithner's bank rescue plan yesterday. Long on generalities, short on specifics seems to have been the consensus. Investor doubt surrounds failure to address 3 major issues: 1) will some banks be forced to fail? 2) How will illiquid assets be removed from bank balance sheets? 3) How do we stop the decline in housing prices? One of the key issues relating to toxic assets seems to be how to value them. Oaktree's Howard Marks is one veteran of distressed debt investing who appears to be in no hurry to wade into the sub-prime swamp. The main hangup seems to be what these assets are really and truly worth. In response to Geithner's plan, GlobalRiskJobs favorite Andy Kessler weighs in with a radical plan of his own in today's WSJ. Kessler stresses valuation as well, saying banks can sell toxic assets today; they just don't like the price. Geithner faces a dilemma in trying to find a "market price" that could very well push banks to insolvency. Kessler also says we need to learn from Japan's experience and stay away from creating "Zombie Banks", something that PIMCO's Koyo Ozeki would appear to agree with in this piece about using Japan's lost decade to put the current crisis in perspective.

A tour of some of the news for a Wednesday morning....

An interesting take on banker pay from Bloomberg's Matthew Lynn
Geithner pledges $2T to help banks.
Senate approves stimulus package.
The prospect of Pan-European supervision is back in the headlines, and the FSA is ready to debate.
More on HBOS former Risk Chief Moore's allegations about his firing. And Bloomberg reports that James Crosby, deputy chairman of Britain's FSA, resigned after claims he fired Moore when he HBOS Plc's CEO.
Who needs A-Rod and Roger on The Hill when you've got Jamie, Ken and Vik? A preview of bank exec testimony in what's sure to be an entertaining session on Capitol Hill.
Mortgage servicers are under increasing stress.
WSJ's Holman Jenkins says the markets wonder if Geithner understands Regulatory Forbearance.

HBOS ex-Compliance Chief Moore Hits Back

2009-02-10T11:58:00.003-05:00

Paul Moore, HBOS plc Head of Group Risk from 2002-2005 said he was fired for saying the bank was a threat to the financial system. In a document released today, Moore stated that HBOS was a serious risk to financial stability and consumer protection. Moore further claims his group was threatened by management for carrying out its role of complying with FSA rules. Just one more piece of evidence as to where risk and compliance has been, and where it needs to go.

Big Banks to be "Stress Tested"

2009-02-10T08:51:00.010-05:00

More news on the regulation front. The Wall Street Journal is reporting that many banks will be subject to rigorous examinations to see if they are healthy enough to lend before they receive additional federal bailout funds. Federal regulators will likely require large banks to undergo a stress test to determine just how bad things could get in the worst case. The new oversight could take a step toward addressing longstanding disagreements among regulators about the health and viability of scores of institutions. Setting up a stress test could create a more objective set of standards and might also reveal the depths of the industry's problems. Keep in mind the theme that GlobalRiskJobs has been repeating for quite some time: regulation and reporting requirements will just keep getting stronger.

Geithner will unveil the Obama Adminstration's bank rescue plan later today. He is expected to present a multi-faceted program to encourage financial institutions to lend again. A housing plan centering on mortgage modification and a "bad bank" public-private partnership will also be key areas. Bloomberg has a preview of the 11 am announcement.
Nouriel Roubini had some strong words about regulation in the FT. He states that risk models fail because business lacks discipline to heed them, and thinks Basel II has failed even before being fully implemented.
Also in WSJ, news of an emerging plan calling for issuers of pools of mortages to retain a slice of the securitization in order to keep some "skin in the game". Participants in the annual American Securitization Forum this week in Las Vegas are discussing different ways to buttress the market.
The new SEC Chief pledged to crack down on fraud as she announced big changes at the commission. The WSJ thinks her central point has got it backward.
Japanese corporate bond risk has risen to all time highs resulting from the pace of economic decline.
We mentioned credit cards becoming a problem last week. NYT reports that private label cards are already showing signs of strain.
Chris Hughes has some notes on the global nature of this credit crisis.
DealBook reports that 8 big bank chief execs will descend on the Capitol via public transportation in order to get their public whipping from Barney Frank and the House Financial Services Committee.

Big Week for Risk Managers

2009-02-09T10:13:00.004-05:00

GlobalRiskJobs notes that GARP's (Global Association of Risk Professionals) 10th annual Risk Management Convention and Exposition begins this morning in New York City and runs through Thursday. It is a timely gathering with the global financial system in the spotlight. Today's agenda includes the Enterprise Risk Forum, which will focus on how leading global financial are harnessing enterprise risk data for competitive advantage. A highlight of the day will be a panel discussion entitled, "The Road Ahead: What We Should be Doing in the Next 12 Months". Panel members are GARP's Jaidev Iyer, the Fed's Roger Cole, BofA's Marta Johnson and SunGard's Jonathan York. Should be an interesting week given the backdrop of bank bailout details starting to emerge.

And a tour of the news:

Goldman's Lloyd Blankfein slams Wall Street risk management practices and says mark-tomarket should be strengthened, not abandoned, in the FT. Read it here.
Geithner delays the announcement of Obama's financial recovery plan as planners debate the disposition of toxic assets.
Paul Krugman is not satisfied with the stimulus bill.
The NYT looks at research analyst "Buy" recommendations.
Stanford Professor John B. Taylor thinks government bears responsibility for the financial crisis.
Sunday's NYT digs deeper into the Merrill - BofA merger. Due dligence failure or hubris?
In People News, there's word that former federal prosecutor Robert Khuzami will be named the new head of enforcement the SEC. Khuzami is currently a top lawyer at Deutsche Bank AG in New York.

Risk (Management) and Reward

2009-02-06T09:21:00.003-05:00

"We're going to be taking a look at broader reforms so that executives are compensated for sound risk management and rewarded for growth measured over years, not just days or weeks."
--President Obama, 4 February 2009

In one line from a White House speech on the economic crisis and executive compensation, President Obama seems to have hit on something near and dear to the hearts of risk managers everywhere: being compensated for sound risk management.

As GlobalRiskjobs has been active in risk and compliance forums during the crisis, we know that the topic of how it happened / how do we stop it in the future is a constant. One of the more prevalent themes is how do risk managers get a bigger voice in profit-driven organizations run by those paid to push the envelope to make more money for the firm? Individuals are compensated for making money and risk managers have too often been viewed as advisors who are more of a drag on maxing out these earnings than contributing to the safety of those earnings.

So, have we reached an inflection point in the financial markets where someone will finally figure out - or even mandate - a way to compensate individuals for sound risk management? If we are not there yet, it would seem to be as good a time as any for risk managers to find a way to better align their compensation with the goals of the firm: protection of the ability to earn consistent returns ad limit capital destruction.

How do risk managers and compliance people raise their profiles in the organization? How do they measure their own performance within the performance of the organization as a whole? We would love to hear from you with ideas on how to do this.

A quick tour of the headlines:

It's Employment Friday and the numbers are ugly. The 7.6% unemployment rate is the highest since 1992 and payrolls were down 598,000.
A life insurance unit at The Hartford missed a capital target.
Geithner looks to be favoring guarantees over the Bad Bank plan.
Moody's is worried about the financial position of the U.S.
Credit cards are showing signs of big strain.
Felix Salmon of Portfolio weighs in on a broken model at hedge funds.

Have a great weekend.

Washington Fiddles while Banks Burn

2009-02-05T11:34:00.004-05:00

Bank of America and Citigroup seem to be running neck and neck in the race to be first to be nationalized by the federal government. Bank of America blasted through the $5 level yesterday - important because many funds are restricted from owning stocks less than $5, and is approaching $4 - a 25-year low - today as investors and traders speculate about nationalization. Citibank was quoted at $3.43 at 11:24 am.

The Securities Act of '09?

2009-02-05T06:38:00.007-05:00

At GlobalRiskJobs we focus on professionals in the risk management and regulatory compliance communities. For quite awhile we have been anticipating that more intense regulation and reporting (and hence more demand for such professionals) would be the ultimate payback for all of the government money that has been used to stabilize the financial system. Well, since the Obama administration took office two weeks ago, it has been hard to miss the drumbeat of regulation and government oversight that has been getting louder. Alison Fitzgerald and Alison Vekshin of Bloomberg News have written a piece that consolidates that belief in a huge revision of securities laws. The authors anticipate the biggest overhaul of financial regulation since Roosevelt created the FDIC and the SEC in the 1930s. Pres. Obama is, in fact, discussing reregulation this week with congressional leaders, and topics include controls on unregulated hedge funds, new rules for executive pay and restricting naked credit default swaps. NYU-Stern professor Robert Engle suggests that this is a "major moment", a situation so unique that it offers the ability to make a huge impact. And Sen. Chris Dodd, Chairman of the Senate Banking Committee went on record yesterday as saying Congress will consider creating regulators to enforce consumer protections and monitor systemic risk as lawmakers rewrite the rules on Wall Street. In the House, Financial Services Chairman Barney Frank said he planned to start the overhaul with legislation that makes the Federal Reserve the systemic-risk regulator. And former Fed Chairman and current presidential advisor Paul Volcker said hedge funds and private equity firms should be required to register with the SEC to increase transparency. So it appears that public opinion has swung so far as to put EVERYTHING on the table. We've said it before but it bears repeating. New regulation means consulting jobs as companies seek help figuring out what it all means, and more new jobs when those consultants leave and the companies need people to keep up with those requirements.

A tour of the headlines today:

Bernard Madoff rejected a fund's demand for an outside audit, saying his fund's strategy was so secret only his brother could do that. Linda Sandler reports.
More color on the U.S. government pressure on BofA to complete the Merrill acquisition in the Wall Street Journal.
A.I.G.'s securities lending business was also a key contributor to its demise, according to the WSJ.
A WSJ editorial says that lost in the executive pay hoopla is a dangerous toxic asset guarantee debate.
The SEC took a beating on Capitol Hill yesterday at the Madoff Hearing.
The head of risk management at a hedge fund seems to have fallen down on the job.
A 45% decline in syndicated loans in Europe is leading companies to pay higher fees to lock in bank loans years before they expire.
The FT reports on details of Deutsche Bank's 4Q trading hit.
A good story on being George Soros by Chrystia Freeland of FT.

The Season of Endless Losses

2009-02-04T08:57:00.003-05:00

Doesn't it seem like the bank losses just keep coming out of nowhere? In the past, didn't banks just swallow hard, take the equity beating and move on? What's going on here? Well, it's different this time and the so-called Shadow Banking System is why. PIMCO's Bill Gross wrote about it way back in December 2007 in his monthly Investment Outlook, when he wrote that we were witnessing nothing less than a breakdown of a modern banking system that had become exceedingly complex. The piece was an interesting read back then, it is a stunning read now. Flash forward to the current day, where Forbes has a commentary written by NYU-Stern Professors Viral V. Acharya and Philipp Schnabel warning us to expect the shadow banking losses to keep coming. They cite the recent RBS ($41B) and State Street ($10B) losses as examples of losses that seem to come from out of the blue but are largely the product of off-balance sheet vehicles which were set up to arbitrage regulation. The commentary is adapted from a soon to be published book called Restoring Financial Stability: How to Repair a Failed System....A quick tour around the news outlets:

Today's Wall Street Journal contains several good Op-Ed pieces as the stimulus debate continues. Former Vice Chairman of the Federal reserve Board Alan S. Blinder presents his economic wish list, former U.S. House Majority Leader Dick Armey thinks Washington could use less Keynes and more Hayek, and the inimitable George Soros thinks we can do better than a "Bad Bank".
Early Madoff critic Harry Markopolos testifies at a Congressional hearing today. His written testimony has been released here. It's more blistering criticism of substandard performance by regulatory and enforcement bodies.
Continuing yesterday's thread on "Bonus Outrage", early details today of a $500,000 cap on executive pay at TARP banks proposed by the Obama Administration. Also, check out Thomas Frank's WSJ opinion piece about the Wall Street bonus system.

Wall Street Compensation Under Fire

2009-02-03T08:49:00.007-05:00

In the time since it was revealed that John Thain paid bonuses to legacy Merrill employees in the run up to the BofA merger, there has been a growing outcry about Wall Street compensation. It seems a day does not pass without a new story and a new angle on the bonus controversy. I know everyone is weary of the "Wall Street / Main Street" rhetoric that was so prevalent in the fall, but the heart of bonus season has added new fuel to the fire. No doubt spurred on by U.S. President Obama's "shameful" comment in reference to Merrill's conduct, it seems every media outlet has an opinion on the matter. Personally, I was pulled into the debate immediately upon arriving at a Super Bowl party on Sunday night. On one side, a guy who makes his living on Wall Street, on the other a tech entrepreneur doing everything he can to keep his small company moving forward in a sinking economy. At the center of the storm, how can a bank that takes government money to survive pay any bonuses at all? Let me be clear, the Wall Streeter is not a guy who has made outsize sums of money pushing now-toxic assets around the financial universe, but rather a hard-working guy with 3 kids who makes a decent living (by NY standards) in a more traditional product area. He is, however, employed by a financial institution that has taken billions in TARP funds to stay afloat. You can guess where this is going...The media loves to write about the hedgies and bankers who got paid millions and ruined the financial system, but there is another side to this as well. While many of the American Middle Class lives paycheck to paycheck to eke out a living, it may come as a surprise to hear that lots of Wall Streeters live bonus check to bonus check. A disruption to the comp cycle can be just as devastating for these folks. Yes, there are lots of people in the NYC suburbs, for instance, with 3 or 4 kids, living in one modest residence, with hefty property tax bills, paying nannies and babysitters to ease the dual working couple burden who, as shocking as it sounds to the rest of the world, cannot make ends meet on a $150,000 base salary. They rely on that "variable comp" component to get even or sock a few bucks away for college and retirement every year. But, the debate raging now is all about the question of what IS a bonus? Is it a little extra cash in years where everything goes right? Or is an entitlement that gets scaled based upon different performance metrics? How many of you who work on the street have heard the mantra, "it's a year end business" when asking for a bump to your base salary, perhaps? Is it "discretionary" compensation, as many bosses like to put it? Or is it "arbitrary" compensation, as many receivers of a bonus can tell you they feel there is no rhyme or reason to the number. I remember vividly being told by a super-cynical more senior banker early in my career that one's bonus is "a little bit about what you've done, a little bit about what we think you're going to do, and a LOT about what the job market away looks like". Well, I'm thinking he may have been right. It seems that this comp year at financial firms that generally did not make money last year and have dim prospects for this year, the defense of bonuses is that troops will simply walk across the street and find another employer if they don't get paid. The Main Street reaction is that this argument is pure B.S. and the hundreds of thousands of layoffs in the sector would seem to back that up. But as the latest news of a financial talent raid illustrates, the reality is that there will always be a bid for skilled people. That's what the banks fear. In past downturns, things have turned hard the other direction and banks did not want to be caught in the talent squeeze by having to dole out even more money by way of guarantees to attract people back to their firms when lots of others want to hire the same people. Will it play out the same way this time?

Let's take a quick tour of compensation news form the last few days.

Catherine Rampell looks at a history of the holiday bonus
NY Times has some, er, passionate letters to the editor today regarding the bonus debate.
President Obama continued to pound the table about Wall Street bonuses.
Rob Cox at Breakingviews says the bonus system should be reformed, not destroyed.
Andrew Ross Sorkin ponders what a world where regulators receive bonuses would like.
David Segal reports on a most unpopular group of professionals.
News that Credit Suisse will cut bonuses 55%
BofA looks like it knew more about Merrill bonuses than it initially let on.
News that Deutsche Bank will cut bonuses by 60%.
Deal Journal wonders if Thain might have been right about the Merrill bonuses.

And remember, wherever you stand on the bonus debate, you can always look to GlobalRiskJobs for Risk and Compliance career opportunities and compensation information.

ICAP bids for LCH.Clearnet. Money Funds the Next Big Risk?

2009-02-02T07:21:00.009-05:00

News from the world of CDS this morning as Bloomberg reports that ICAP Plc is among a group of financial companies that may bid for LCH.Clearnet Group as regulators look to overhaul the $28 trillion Credit Default Swap market. The offer competes with DTCC which has an existing bid of over $900 million for the firm...Also from Bloomberg, U.S. President Obama will require banks to boost lending to businesses and consumers in return for taxpayer aid from the $700 billion bailout fund. While Treasury may not unveil the plan until next week, the administration is likely to reveal a stricter set of rules about executive pay for those who take taxpayer money...JP Morgan economist Jes Staley says the $4 trillion money market fund industry poses the greatest systemic risk to the financial system that has not yet been addressed....Valuation is the problem as the Obama administration prepares to buy or guarantee troubled assets on the books of the nation's biggest banks. The New York Times reports about the challenge of pinning a "real" or even objective value on assets whose prices are not only subject to huge volatility, but also vary wildly depending on the source of those prices...The Wall Street Journal has an Op-Ed piece by consultant Bert Ely challenging the conventional wisdom that commercial banks aren't lending and maintaining that banks must always lend prudently...and finally, a story about the circularity of the market for CDS protection on U.S. government debt, where prices have soared over 700% in a year...Remember to visit GlobalRiskJobs to keep up with current news and career information that affects risk and compliance professionals around the world.

OTS takes another bullet

2009-01-30T17:18:00.004-05:00

Late news on the regulatory front. Officials at the Office of Thrift Supervision allowed 5 banks to improperly report capital infusions in a way that can make them appear healthier, a big blow to an agency already under fire for its role in the financial crisis. The OTS allowed banks to backdate capital infusions to earlier quarters, which would have allowed them to skirt regulatory penalties that might have occurred had their capital levels fallen below certain thresholds. OTS had already been under fire for its handling of IndyMac Bank. It's just one more data point that leads GlobalRiskJobs to believe that BIG change is going to come on the regulatory front sooner rather than later.

Davos, Sovereign Debt Risk & More Regulation for Hedge Funds?

2009-01-30T16:51:00.007-05:00

As the US floats plans for a two-part bank bailout, there is lots of risk and regulatory news to pass along today as we close out the month of January...At the NY Times, DealBook is doing its usual excellent job with its coverage of the World Economic Forum. It has frequent dispatches and video reports from the WEF with its Davos Diary . Check it out…Along those lines, an article about world leaders like Ernesto Zedillo wondering how the US is going to pay for all those stimulus dollars ($819 billion and counting)….Also in the NYT, Floyd Norris wonders in his High & Low Finance column if decoupling of world economies is on the horizon. While most of the world economies are currently experiencing the downside of globalization, not all global economies are created equal. While the US debates details of how to spend a trillion dollars, smaller economies find themselves caught in the credit squeeze...Signs of a pullback in European cross-border banking? NYT's Carter Dougherty says it would make sense given the government dollars that are being invested to keep banks afloat. Expect huge pressure on bailed out banks to refocus on their home markets and use those balance sheets for domestic lending….Is there another troubling credit bubble brewing? The Wall Street Journal has an Op-Ed piece from German economist Ulrich Volz warning of increased Sovereign Debt Risk this year. S&P has already downgraded Spain, Portugal and Greece due to deteriorating public finances and the rollover of government debt has been severely disrupted by the seizing of the international capital markets. The repricing of risk and the shortage of liquidity in international capital markets has made it increasingly difficult for even well-managed emerging markets to access external financing….And finally, yesterday we reported that the House of Representatives was pushing a plan to regulate the CDS market, today we note that the Senate has taken up a bid to intensify regulation of hedge funds. Senators Levin (D-MI) and Grassley (R-IA) introduced proposals to regulate hedge funds just as the Obama administration is preparing a broader legislative overhaul of the regulatory system...What does this mean for risk and compliance professionals? A new regulatory regime can only mean more career opportunities and higher profiles for risk and compliance pros. Bookmark GlobalRiskJobs on your browser of choice and check in frequently. Enjoy the weekend!

PIMCO's Gross: Stop the decline in asset prices

2009-01-29T12:55:00.004-05:00

At GlobalRiskJobs we always look forward to the first of the month when PIMCO's Bill Gross publishes his monthly Investment Outlook. So, it was a great treat to receive his February piece a few days early. The manager of the World's Biggest Bond Fund (WBBF) says policy makers must stop declines in asset prices in 2009 to revive the economy and curb rising unemployment. While realizing that you can't bailout everybody, Gross points to commercial real estate and the retail sector as two segments that must stabilize before confidence returns. Gross also suggests that TARP's focus on the banks is important but too one-dimesional. He also urges the government to address the so-called "shadow banking system" where deleveraging has continued to weigh on home prices.

Did RiskData software "red flag" Madoff?

2009-01-29T09:47:00.002-05:00

Tom Cahill of Bloomberg News reports that Banco Santander's hedge fund unit used risk software that may have raised red flags about Bernard Madoff investments. RiskData's FOFiX is a tool for hedge fund investors that compares the performance of products with the same strategy to find aberrations in the pattern of results. It also analyzes returns to help explain how a fund made or lost money. Santander is paying private banking clients $1.8 billion to compensate for Madoff-releated losses, so this is sure to add fuel to the ongoing debate of whether it was risk models that failed to find problems or if it was "operator error"...

"Naked" CDS trading under fire from Congress

2009-01-29T09:26:00.005-05:00

Bloomberg News reports that the U.S. House of Representatives is circulating an updated draft bill that would ban credit default swap trading unless investors owned the underlying bonds. The bill is being circulated by Rep. Collin Peterson of Minnesota and also proposes forcing the nearly $700 trillion over-the-counter CDS market to be processed by a clearinghouse. It is estimated that 80% of CDS trading "naked" trading....Seeking Alpha is reporting that the draft bill coupled with rumors about an impending Bad Bank are causing CDS indexes to tighten to levels last seen in November 2008. The article discusses how a ban on naked CDS trading would impact earning potential of the residual Good Banks.

Personnel moves: Merrill Co-CRO Donohoe out at BofA

2009-01-28T12:34:00.003-05:00

The Wall Street Journal is reporting that Noel Donohoe, formerly Merrill Lynch's co Chief Risk Officer, was told yesterday that he would not have a job in the new organization by Bank of America CEO Ken Lewis. Donohoe was one of several former Goldman Sachs executives hired by John Thain last year as he assumed control at Merrill. Donohoe was most recently a partner and COO with Dune Capital Management before joining Merrill. He was Head of Firmwide Risk at Goldman Sachs when he left the company in 2005.

World Economic Forum gathers amid clouds in Davos

2009-01-27T09:22:00.006-05:00

Even though John Thain, Gov. David Paterson and Bono will be sitting out this year's World Economic Forum at Davos, the beat goes on accordng to this article from CNN, and the global financial crisis is, naturally, a pervasive theme this year. Bloomberg has a good special report about the central issues facing bankers as they begin to meet. The writers foreshadow a coming conflict between markets and governments as the latter seek to tighten their grip. The outcome has huge implications for the global economy. The WEF has released its "Global Risks 2009" report, and this one is pretty much a downer, citing international governance on financial stability among other challenges facing the globe. Stay tuned to this space as GlobalRiskJobs keeps an eye on the news from Davos for you.

Future of Finance in The Economist

2009-01-23T15:14:00.003-05:00

The latest issue of The Economist has an excellent 14-page special report on the future of finance. One article in particular is the latest to discuss the reliance on mathematical models and their fallibility. There is also a good piece about financial regulation, a necessary but difficult prospect in free markets. There is also an article whose theme is growing ever more frequent, "Fixing Finance". Nearly everyone agrees that the system, as currently configured, is broken. This article warns that there is a thin line between making this remarkable creation better and suppressing it.

A watchful eye over Fannie, Freddie, et. al.

2009-01-23T10:10:00.005-05:00

Bloomberg News is reporting that the Federal Housing Finance Agency plans to propose new requirements next week for Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. The Agency may place new restrictions on Fannie and Freddie's investments and revamp capital requirements for the home loan banks. The new minimum capital requirements would be just the latest example of a tightening regulatory environment for banks and financial services firms.

Pundits weigh in on reform

2009-01-21T14:02:00.002-05:00

As the old adage goes, "a new broom sweeps clean", and people are lining up with suggestions to help President Obama sweep away the old, broken Wall Street. Dealbook's Andrew Ross Sorkin commented in his blog yesterday with several of the challenges facing the new US leader as he begins to deal with a banking crisis that appears far from over. Today, the Deal Professor (Steven Davidoff) continues the thought by addressing what shape reform should take. Davidoff testifies today (1/21/09) at hearing in front of the U.S. Senate Committee on Homeland Security and Governmental Affairs called, "Where were the watchdogs? The financial crisis and the breakdown of financial governance". Davidoff presents seven key points that he feels should shape the regulatory framework going forward. Text of Davidoff's full written testimony is available here.

List of TARP banks

2009-01-20T10:51:00.003-05:00

The following is a list of 20 banks subject to the new Treasury TARP reporting requirement:

JP Morgan
Bank of America
Citigroup
Wells Fargo
Goldman Sachs
Morgan Stanley
PNC
US Bank
SunTrust
CapitalOne
Regions Financial
5/3
BB&T
BNY Mellon
KeyBank
CIT
Comerica
State Street
M&I
Northern Trust

Start of a new compliance era?

2009-01-20T10:37:00.003-05:00

Bloomberg News reports this morning that Treasury is now demanding that TARP banks begin monthly reports on lending activity. Citi, BofA, et. al. will have to begin to report on monthly business and consumer loan statistics. Coinciding with Obama's inauguration, this appears to be the beginning of the much anticipated new era of accountability for the country's biggest banks. How are banks ultimately going to deal with new compliance demands? Ultimately they will need to hire people experienced in Fed Reporting. At GlobalRiskJobs we are already seeing consultants gearing up in these advisory areas and banks are not far behind. While there may be some delay in major new reporting requirements being handed down due simply to the logistics of the government changeover, this appears to be the first shot being fired and will set the tone for a new administration and regulatory regime.

Tracking the source of the Meltdown...

2009-01-05T08:54:00.003-05:00

A couple of good articles over the weekend as the journos continue their efforts to find the origins of the Global Financial Crisis. In "Risk Mismanagement" Joe Nocera of the New York Times does a good job of shining a light on Value at Risk ("VaR") and its role in the crisis. He takes the reader through VaR's origins at JP Morgan in the late 80's under Dennis Weatherstone, through Wall Streets's adoption of VaR as the standard in risk measurement, up to the present day and the blistering criticism of VaR led by "The Black Swan" author Nassim Nicholas Taleb. The article is largely a debate on the value of VaR, and whether the overreliance on it during the leverage bubble was a central cause of the current crisis. Does VaR have value? Is it worthless? Is it a tool that that is useful in the proper context? Experts like Taleb, David Viniar of Goldman Sachs, Aaron Brown of AQR, Marc Groz of Topos, Gregg Berman and Ethan Berman of RiskMetrics, Till Guldimann of SunGard, author and investor Rick Bookstaber, and Chris Donohue of GARP discuss the uses and misuses of VaR in determining the risk of a financial entity. The article seems to conclude that risk models ultimately have value, but that remote events do indeed happen so risk managers must remain aware of factors that are not accounted for in the models.

Also in the New York Times, the Sunday Opinion section contains a piece co-written by Michael Lewis and David Einhorn titled "The End of the Financial World as We Know It" which cites greed (naturally), short-term thinking, regulatory failings and self interest as major drivers of the current situation. In the first part of the piece the authors discuss what the believe to be the causes of the crisis, and in a second part they present ideas about what might be done to prevent such a meltdown in the future. Some of the ideas proposed include making it more difficult for SEC personnel to be hired on Wall Street, ending the official status of Rating Agencies and regulating Credit Default Swaps.

Quality articles dissecting the crisis will come more frequently in 2009 so stay tuned to this space for links and discussion. GlobalRiskJobs understands that all of the debate will have far reaching impact on careers in risk and compliance, so we aim to keep compliance and risk professionals informed about what is being discussed.

Here Come the Regulators!

2008-12-30T13:46:00.006-05:00

At GlobalRiskJobs we have long anticipated that the ultimate response to the global financial crisis is going to be much more intense regulation. Once the dust settles, the banks have been stabilized, the new administration gets its legs, etc. count on the rules of the game starting to change. Remember how Sarbanes-Oxley came about - it was a response to inadequate corporate audit procedures in the aftermath of Enron, Worldcom, Tyco, et. al. Expect something similar this time as it concerns Risk and Compliance.

Investment banks which are now partly owned by the U.S. Government must brace for regulation and risk reporting way beyond what they have experienced. And now, thanks partially to Bernie Madoff, hedge funds can likely expect similar treatment. A very good recent article in the Financial Times entitled, "Crackdown on hedge funds after Madoff affair" says funds should brace for more stringent requirements by investors and increasing regulatory scrutiny after the massive $50B Madoff fraud.

Lawsuits are being filed, due diligence procedures at funds-of-funds are being put under the microscope and Congress is on the case as well. Third party administrators and more regulation are all but a given in the new normal of high dollar asset management.

What does this mean for the risk or compliance professional? Logically, one would anticipate a slew of new opportunities as banks, I-banks and funds wake up to the new reality. In looking at SOX for precedent, think about the consulting teams that were assemble to assist in sorting out all of the new requirements. Consider the in-house teams at banks and I-banks that will be implemented to deal with the reporting they will likely face. And think of a more transparent - and more regulated - hedge fund world which will need to face scrutiny like never before, and consequently will have to appoint employees dedicated to facing that spotlight.

Massive change appears to be on the way. The only question is when it arrives. stay tuned to GlobalRiskJobs for all the opportunities and news as things progress.

Still Demand for Quants and Risk Managers

2008-12-23T12:50:00.003-05:00

Quants are still in demand. So says a recent Financial Week article about the current state of quant-as-career.

While many of the jobs previously available with the structured credit desks at I-banks have evaporated, risk management is a growth area at pension funds, hedge funds and mutual funds. Investment banks may also need people to price CDOs or assess counterparty risk.

For new graduates of quant programs, the article acknowledges that it is a tough environment, but sees signs of hope. Carnegie-Mellon's future grads are about 69% placed, while NYU is running at about 55%.

GlobalRiskJobs is still showing opportunity for quants. Current openings for quantitative risk modellers, first tier quant support professionals, senior hedge fund risk analysts, and options trading risk managers are among the 2,000+ listings on the site.

Risk Thought Leaders Sorting through Wreckage

2008-12-23T09:34:00.000-05:00

As GlobalRiskJobs monitors the risk workplace looking for career trends, we sometimes see other important trends begin to develop.

One thing taking place as financial professionals begin to assess what went wrong and led us into the worst global financial crisis in generations has been an increasing number of gatherings of thought leaders in the risk community. GARP, whose annual conference will be held in New York this February, has held many panel discussions in its various chapters, as has PRMIA. Many academic institutions have also begun to investigate.

Several MBA programs have also been on the case, proposing concentrations in risk management as they respond to some who point the finger at them as blame for the crisis is meted out. In late November, Northwestern University's Kellogg Graduate School of Management played host to the 2008 Kellogg Risk Summit, where experts discussed the drivers behind the meltdown.

The conference featured leading risk management practitioners and academics who discussed the issues and took part in a panel discussion which was open to questions.

This introspective trend can be expected to intensify in 2009 as global markets stabilize and regulators, academics and professionals begin to ask what needs to change to avoid such a crisis in the future, as well as ahat shape risk management and regulation will take going forward.