Risk Management Watch: Firms Stress Counterparty Risk, Hunt for Talent Continues
Citigroup is promising to improve its risk management. Fortune reports that the financial behemoth is expecting to cut roughly $500 billion from its $2.2 trillion balance sheet. The bank has announced plans to exit unprofitable client relationships, and really complete the 1998 merger of Citicorp and Travelers. The Fortune report quotes Citigroup CEO, Vikram Pandit, as saying, “We’re finally going to merge it all.” Pandit admits, however, that the plans will be meaningless unless Citi manages to rein in risk. “If we can’t get risk right,” Pandit adds, “nothing else I’m saying will matter.”
Executive search firm, A.E. Feldman, says risk management jobs are opening up as firms continue to emphasize the strategic importance of effective risk management processes. Experience however is essential. Firms are on the hunt for risk professionals who have been tested by previous market cycles. One senior industry veteran now working with A.E. Feldman also notes that market participants should not rely exclusively on mathematical models, qualitative and trend analysis or geographic distributions. In addition, there should be more disclosure related to counterparty risk to make the extent of different investors’ exposures more clear.
The mishandling of risk has led Citigroup to take around $35 billion in writedowns within the last year, reports Fortune. Most recently, Citigroup reported a net loss for the 2008 first quarter of $5.1 billion. Results include $6 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures.
In a statement Pandit said, “Our financial results reflect the continuation of the unprecedented market and credit environment and its impact on our historical risk positions. During the first quarter, valuations of our sub-prime related exposures in fixed income markets and leveraged finance assets have further declined and credit costs in our consumer lending businesses have increased.” Pandit goes on to say that, “We continue to enhance our risk management processes, our capital productivity and expense containment, as well as our ability to deliver innovative, world-class products that meet our clients’ specific needs….At the same time, we are taking the necessary steps to make Citi more efficient while fostering a culture of accountability and teamwork.”
Citigroup’s, Chief Risk Officer, Brian Leach has acknowledged the “sheer vastness of the Citi franchise,” according to Fortune. To deal with this challenge, Leach says he has set up an elaborate risk structure which focuses in turn on regions, businesses and risk products. Fortune quotes Leach as saying, the whole kit and caboodle “must avoid negative outcomes that destroy value.”
Both Pandit and Leach say they intend to make sure the renewed emphasis on risk amounts to a cultural change, according to Fortune. The report quotes Pandit as saying the important thing is that “the risk manager has an ability to say no.”
Wachovia is another bank that has announced plans to re-examine risk. According to the Charlotte Business Journal, Wachovia’s CEO, Ken Thompson, revealed during an investor conference that a third-party firm will be hired to analyze its internal controls and risk-management processes.
Thompson says there will be a “thorough” review of the interaction between Wachovia’s various business lines and functions such as risk and compliance. The review will be led by management as well as the board’s audit committee. The report quotes Thompson as saying, “We will take the results from that and make changes at our company.”
This comes on the heels of Wachovia’s expanded first-quarter loss of $708 million, due to a $315 million write-down on three contracts in its life-insurance portfolio. That was up from the $393 million first-quarter loss the bank reported in mid-April.
Meanwhile, Wachovia has already moved towards governance reform. The bank recently announced it has separated the roles of Chairman and CEO, stripping Thompson of his title as Chairman. Thompson says the decision will allow him to “focus 100 percent of my time and attention on guiding the company through the current environment and building and delivering enhanced value for the benefit of our shareholders, customers and employees.”
In response to Wachovia’s decision to name an independent Chairman, William Patterson, Executive Director of the CtW Investment Group, released a statement calling on other financial firms to follow suit. He says, “The failure of boards of directors to challenge aggressive risk taking by their CEOs contributed to massive subprime losses at many banks. By naming an Independent Chairman, the Wachovia board has taken a much needed step to restore appropriate checks and balances on the power and risk taking of its CEO. The onus is now on the boards at Morgan Stanley and other banks that suffered similar failures to stop stonewalling their shareholders and adopt this critical governance reform.”
