House Could Vote Friday on Financial Overhaul

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.
  

Bernanke to Congress: Now's the Time

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.

Risk is Back! Sort of.

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.

AIG: Stealth or Regulatory Incompetence?

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.
  

Haldane on Risk Management

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.

HBOS ex-Compliance Chief Moore Hits Back

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"

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

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

"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.

The Securities Act of '09?

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.
  

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

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.