Demand Surges for Senior Risk Managers
Bear Stearns survived the Depression, WWII and a slew of recessions, but the 85-year old firm has fallen amid the current credit crisis. JPMorgan Chase announced it is acquiring Bear Stearns for just $2 a share a mere fraction of what the investment bank was worth just a couple of weeks ago. Last week, Bear Stearns’ clients had pulled $17 billion in two days, and its creditors stopped renewing loans, according to The New York Times. The shocking deal was reached on Sunday night and fast-tracked by the federal government to avoid a bankruptcy.
Executive search firm, A.E. Feldman, says the latest development is yet another wake-up call. A senior recruiter and industry veteran working A.E. Feldman says the industry has realized just how important it is to look at underlying risk. As a result, demand for senior-level risk managers with the experience to detect early warning signs and deliver accurate trend analysis is soaring. Looking ahead, risk management opportunities will continue to grow significantly as firms seek to shore up their risk management teams.
JP Morgan Chase says, effective immediately, it is guaranteeing the trading obligations of Bear Stearns and its subsidiaries and is providing management oversight for its operations.
The Federal Reserve has also stepped in to mitigate risk by agreeing to provide special financing. The Fed will fund up to $30 billion of Bear Stearns’ less liquid assets - the troubled mortgage and other assets that got the nation’s fifth-largest investment bank into trouble. The fact that the Fed took such an extraordinary step is only fuelling rumors that the situation at Bear was worse than the firm reported. Still, Jamie Dimon, Chairman and CEO of JPMorgan Chase, contends the deal involves “reasonable” risk.
In a statement, Dimon says, “JPMorgan Chase stands behind Bear Stearns. Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk.” Dimon adds, “This transaction will provide good long-term value for JPMorgan Chase shareholders. This acquisition meets our key criteria: we are taking reasonable risk, we have built in an appropriate margin for error, it strengthens our business, and we have a clear ability to execute.”
JPMorgan Chase is one of the few major banks to emerge relatively unscathed from the subprime crisis. Dimon has said that risk management and the Chief Risk Officer (CRO) function is a “critical role for our company.” Dimon named Barry Zubrow to the position of CRO last November. Zubrow, who reports directly to Dimon, is said to “oversee all risk management for the company - working closely with senior risk managers and business heads around the firm, and advising the senior leadership team on risk strategy and policy.”
In contrast, Bear Stearns was among the most exposed to risky bets on mortgage-backed investments. Now Wall Street is speculating that others, particularly Lehman Brothers, may be next. Lehman’s stock took a dive in the wake of the Bear Stearns takeover. The AP reports however that Lehman’s CEO, Richard Fuld, denies the firm is having similar problems.
Back in December, Lehman Brothers named Chris O’Meara (the firm’s CFO) as Global Head of Risk Management, reporting directly to Fuld. In a statement, Lehman says as O’Meara is responsible for “all aspects of the Lehman’s risk profile, including oversight of risk management policies, procedures, analytics and metrics; and, in conjunction with the Firm’s Executive Committee, monitoring Firmwide risk appetite, trading limits and required equity capital.”
Hindsight is 20/20
As the credit crisis emerged, senior executives felt very confident about their ability to manage risk and opportunity, according to a new Towers Perrin study conducted in conjunction with the Economist Intelligence Unit in the third quarter of 2007.
“The findings and timing of this study -especially in the context of the problems in today’s credit markets and within the broader economy - underscore the challenges business leaders face in managing risk and opportunity,” said Mark V. Mactas, Towers Perrin’s Chairman and CEO. “With the benefit of hindsight we can say that many organizations underestimated risks or completely missed emerging risks, and that the levels of optimism and confidence the study revealed in the third quarter of 2007, when economic times were relatively good, were not justified.”
The Towers Perrin study shows that 9 out of 10 executives believe they are as good as or better than their industry peers in managing risk and opportunity. In fact, the banking industry is the most confident about managing operational and strategic risk, and second only to the insurance industry about managing financial risk.
Bottom Line
“The most telling lesson of the study is that business leaders must maintain a consistent approach to risk and opportunity management through the inevitable shifts in business and economic cycles,” says Mactas. “This doesn’t mean rigid processes and compliance programs. It does mean a dynamic, long-term and tailored approach that pays attention to risks when times are good and to opportunities when times are bad, and that maintains a balance between seizing opportunity and managing risk every day. The ultimate goal of business, after all, is to thrive, not just to comply.”
