OTS takes another bullet

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?

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

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?

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

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

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

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

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.

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

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

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

1. JP Morgan
2. Bank of America
3. Citigroup
4. Wells Fargo
5. Goldman Sachs
6. Morgan Stanley
7. PNC
8. US Bank
9. SunTrust
10. CapitalOne
11. Regions Financial
12. 5/3
13. BB&T
14. BNY Mellon
15. KeyBank
16. CIT
17. Comerica
18. State Street
19. M&I
20. Northern Trust
    

Start of a new compliance era?

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...

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.