Burning the Village in order to save it?

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.

Here Come the Regulators!

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.