Investigators at Societe Generale SA say the French bank’s management failures and culture of risk-taking were partly to blame for failing to identify unauthorized trades, which cost the bank $7.1 billion, reports the AP. Société Générale Junior Trader, Jerome Kerviel, started building up large positions in 2007. As his losses accumulated, he covered them up by hacking into the bank’s risk management system. Now, in two long-awaited reports, investigators into the fraud say Kerviel’s bosses missed more than 1,000 faked trades, a significant increase in his earnings last year, unusually high levels of cash flow, accounting anomalies, and high brokerage expenses, according to the AP. The investigators also believe that Kerviel concealed the unauthorized trades with the help of an assistant.
Experts say the Societe Generale scandal shows just how lax risk management had been leading up to the credit crisis. It seems the warnings of risk managers were either overlooked or they were simply not given enough power or data to do their jobs effectively. Today, however, risk management has become a top priority. Subprime losses have caused a slew of banks to shore up their risk teams and create new Chief Risk Officer positions. Massive writedowns stemming from the subprime crisis have also gotten the attention of corporate boards, spawning board-level risk committees, according to Financial Week.
A senior-level industry veteran and recruiter working with executive search firm, A.E. Feldman, says, “The emphasis on risk is growing. It is more important now than ever before.” Financial institutions are re-shuffling and expanding their risk teams, reports A. Feldman. Risk management jobs are opening up as top banks seek experienced risk professionals who have been tested by previous market cycles.
One report investigating the Societe Generale scandal was led by a committee of three board directors. The second was issued by audit firm PriceWaterhouseCoopers. According to the AP, although the directors’ report examined the details of the alleged fraud, the 36-page report by PwC focused on the culture of risk-taking at the bank as it grew its investment banking business. “Several key controls that could have identified fraudulent mechanisms were lacking,” and “there was a lack of an appropriate awareness of the risk of fraud,” the PWC report stated.
In a statement to shareholders, Societe Generale’s board said it approved the conclusions of both reports, according to the AP. The board said the bank is tightening computer security, reinforcing controls and taking more account of the possibility of fraud. The AP report also notes that deeper reforms, such as the creation of a team dedicated to preventing fraud, “significant investments in security for information technology,” and a campaign to raise staff awareness have been launched at Societe Generale and will be completed by 2010.
Boards Focus on Risk
The subprime crisis has made risk a top priority in a growing number of board rooms. A full 70% of financial institutions place such oversight responsibilities with the board, up from 57% in 2002, reports Financial Week citing a survey by Deloitte Global Risk Management.
Financial Week quotes Lionel Allan, CEO of the Silicon Valley chapter of the National Association of Corporate Directors, as saying, “Boards need to better understand risk, whether it’s the audit committee, the risk committee or some other committee. We’re seeing separate committees because companies want to tell the world that they’re taking this seriously, but they’re not necessary as long as the board is handling risk.”
Peter Kurer, the new Chairman of UBS, has laid out his vision for the bank in the wake of nearly $38 billion in losses, according to Financial Week. The report quotes Kurer as saying that UBS will not only scale back its investment operations, but will also reshuffle the board of directors and create a risk committee to better tackle future threats to the company’s business. Financial Week also states that governance experts expect more companies to establish stand-alone board risk committees to protect shareholders from excessive exposure risk.
CROs Hot Commodities
Meanwhile, companies are scrambling to add chief risk officers to their top management ranks. Public companies hired or promoted 25 professionals to the position of Chief Risk officer (CRO) in 2007—a 25% increase over the previous year, reports Financial Week. The report also contends that this year, hires and promotions are on track to outpace last year’s big bump by a staggering 140%, citing data from Liberum Research.
Currently leading the pack are financial services firms. The list of companies scrambling to add Chief Risk Officers (CROs) to their top management ranks is long and growing:
- UBS AG has appointed Philip Lofts as Group Risk Chief Operating Officer. The bank has also named Thomas Daula (formerly CRO of Morgan Stanley) Chief Risk Officer of its investment bank, as of June 2008. Daula’s newly expanded role also includes the responsibilities of chief credit officer.
- Washington Mutual has appointed John P. McMurray as the bank’s new Chief Enterprise Risk Officer. Formerly the bank’s Chief Credit Officer, McMurray is now responsible for overseeing the company’s risk management functions, including credit risk, interest rate risk, market risk, operational risk and audit.
- Commonwealth Bank recently appointed Alden Toevs to the position of Chief Risk Officer and Group Executive of Risk Management. Toevs will join the bank’s leadership team, reporting directly to CEO, Ralph Norris. Commonwealth says the newly created position of Group Executive of Risk Management in an attempt to ensure that risk practices are transformed to global best practice in such areas as credit, operational, technology, compliance and market risks.
- 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. In January, Noel Donohoe was named Co-Chief Risk Officer. Thain also says he will be hiring talent and emphasizing risk management in the future.
- Following a record $9.83 billion fourth quarter loss, Citigroup named Brian Leach to the role of Chief Risk Officer back in February. Leach who reports to Citi’s CEO, Vikram Pandit, is also Acting Chief Risk Officer for the Institutional Clients Group. In addition, Citi named four new senior managers to the Risk organization.
- In November 2007, Lehman Brothers said its CFO, Chris O’Meara, will become the Global Head of Risk Management, reporting to the CEO.
- Following its first-ever fourth quarter loss last year, Morgan Stanley Chairman and Chief Executive Officer, John Mack, hired Kenneth deRegt as Managing Director to overhaul the firm’s risk strategy. 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.
- State Street appointed Maureen Miskovic to the newly created position of Chief Risk Officer. Miskovic, who is to report to State Street Chairman and CEO, Ronald Logue, will lead a global team of more than 250 multi-disciplinary enterprise risk professionals. She will also sit on State Street’s strategy and policy-making team.
- Ambac also named David Wallis to the newly created position of Chief Risk Officer. Ambac says this greater focus on capital will enhance the firm’s ability to strengthen its underwriting process while retaining its focus on risk-return driven capital management.
- 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. 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.
- CIFG Holding, the holding company for CIFG’s financial guaranty subsidiaries, has named David Rockwell to the position of Chief Risk Officer. Rockwell will assume overall responsibility for the company’s risk management activities and surveillance functions.