Risk Management Watch: Firms Hiring Risk Managers Tested by Previous Market Cycles
Treasury Secretary Henry Paulson has proposed an overhaul of the country’s financial regulation system. The Treasury’s Blueprint for a Modernized Financial Regulatory Structure, which includes a broad expansion of the Fed’s powers, has triggered a growing emphasis on risk - primarily within investment banks that have been accused of indulging on hugely overvalued complex derivatives. According to Paulson, the proposed changes are designed to attack problems as they occur rather than prevent them.
Right now, the emphasis on risk management is growing. The industry has realized just how important it is to look at underlying risk. That’s according to executive search firm, A.E. Feldman. A senior-level industry veteran and management consultant working with the recruiting firm says demand for senior-level risk managers is surging. A.E. Feldman adds that the risk office must absolutely be more aware of where the risks are and where the value is. Today, risk managers must be able to determine how deep the problem is, who is being paid out first and what is the risk for the investor. Firms are hiring risk professionals who have been tested by previous market cycles.
Paulson’s overhaul of the U.S. financial regulation system has been characterized as the biggest financial reform since the Great Depression. The plan, which has sparked fierce criticism, would change how the government regulates not only top U.S. banks… but also local insurance agents and mortgage brokers. According to Risk Center, the plan strengthens consumer protections, improves tools for market stability and enhances financial innovation.
Paulson’s blueprint includes a merger of the SEC with the Commodity Futures Trading Commission. A central body, the Mortgage Origination Commission, would also oversee individual U.S. states’ licensing of mortgage lenders.
Under the plan, the Fed’s powers would be extended enabling the central bank to delve into the books of banks and brokerages suspected of taking excessive risks. Paulson says the central bank “would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability.”
Paulson adds however that his plan will take years to complete. “We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers,” said Secretary Paulson in remarks at the Treasury Department. “The challenge is to evolve to a more flexible, efficient and effective regulatory framework – and that is the purpose of this Blueprint.”
Firms Focusing on Risk Management
Risk management has evolved into an offensive field in which risk-adjusted information is used to determine corporate strategies, business initiatives and asset allocation. Wall Street firms have traditionally viewed risk managers as advisers, not decision makers. Today, that is changing and the role of Chief Risk Officer has come under increased scrutiny. Firms around the world are naming new Chief Risk Officers and working to shore up their risk management teams.
The List is Long and Growing…
PrivateBancorp has named Kevin Van Solkema to the position of Chief Risk Officer. Solkema is responsible for the firm’s overall risk management encompassing credit, operational and enterprise risk and loan review.
Bank of Montreal is also recruiting talent to improve the bank’s risk management culture. The bank has appointed Don Wilson III, former Chief Risk Officer at JPMorgan Chase, to its board of directors. “He is a superbly qualified individual, who brings a broad competence in financial markets and all aspects of risk management,” said BMO Chief Executive Bill Downe. “I am confident that Don’s wealth of experience in financial institutions globally will serve the bank well.” Downe says he plans to overhaul BMO’s risk management profile, following a series of foul-ups, including last years’ $850-million natural gas trading scandal.
PrivateBancop and BOM join a slew of other firms reorganizing their risk management teams. Ambac recently named David Wallis to the newly created position of Chief Risk Officer, or CRO. Morgan Stanley Chairman and Chief Executive Officer, John Mack, is currently ramping up efforts to closely monitor risk-taking after bad bets on securities tied to subprime mortgages led to a $9.4 billion writedown and a quarterly loss he described as “embarrassing.” The firm has hired several new risk managers.
Merrill Lynch, CEO, John Thain, also says he is fundamentally changing the firm’s risk management process. He has already created two Chief Risk Officer positions that report directly to him. Thain also says he will be hiring talent and emphasizing risk management in the future.
Vikram Pandit, the new CEO at Citigroup, which reported a record $9.8 billion fourth-quarter loss, says the company must intensify risk management, cut costs and do what it can to retain and recruit talent. Citi named Brian Leach to the role of Chief Risk Officer, reporting to Pandit. Leach is also Acting Chief Risk Officer for the Institutional Clients Group. In addition, the firm named four new senior managers to the Risk organization. According to Pandit, “Taking intelligent risk is the core of our business. As our industry grapples with one of the most difficult periods in market history, we at Citi are moving aggressively to transform our risk management culture into a significant competitive advantage.”
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