Risk Management Watch: Wave of Management Changes Continues as Banks Focus on Risk
Lehman Brothers has reshuffled top execs as the banks’ risk management is called into question. The embattled investment bank has replaced both its chief financial officer and its chief operating officer. The moves are the latest in a wave of management changes on Wall Street as banks continue to suffer heavy losses on mortgage assets and related trading positions. Citigroup, Merrill Lynch, Morgan Stanley, UBS and Washington Mutual are just a few of the financial firms that have reorganized top management.
Despite the recent shake-up, Lehman’s CEO, Richard S. Fuld, has assumed responsibility for the banks second-quarter loss of $2.8 billion. In a statement, Fuld says, “We have begun to take the necessary steps to restore the credibility of our great franchise and ensure that this quarter’s unacceptable performance is not repeated.” Those steps include a big capital injection of $6 billion.
Risk management has become an offensive field. Corporate boards today face unparalleled levels of business complexity, new regulations and mounting shareholder demands. As a result, executive search firm, A.E. Feldman, says risk management jobs are evolving to better manage initiatives to ensure that business objectives are met, losses are minimized, business processes are improved and greater accountability is achieved. In short, risk is the name of the game.
Risk is the Name of the Game
Goldman Sachs, the world’s largest investment bank, actually profited from the subprime downturn, according to Seeking Alpha. The report states that by the summer of 2007, floor traders at Goldman Sachs predicted the subprime meltdown and convinced management to begin selling off most of the firm’s subprime exposure while selling short the securities everyone else was buying. Seeking Alpha also reveals that Goldman rotates employees from the trading floor to the risk management office to teach employees how to manage risk and minimize exposure.
Wells Fargo has also done well despite the market turmoil. Acting on the advice of the company’s risk management division, Wells Fargo avoided the subprime business, reports Seeking Alpha. The bank’s decision turned out to be a good long-term strategy.
Now, as the economy continues to slow, banks are relying more heavily on their risk management divisions to help protect them from multibillion dollar writedowns. Seeking Alpha says risk professionals are becoming more involved in everyday affairs…not just the tiny voices in the back of the room.
Industry veterans now recruiting for A.E. Feldman echo this view, pointing out that Chief Risk Officers are being handed more power. In fact, many now report directly to the CEO. MarketWatch quotes NYU’s Economics Professor Larry White as saying, “It comes down to resources, organizational structure and giving authority to someone who can say, ‘Hey guys, the party’s over.’”
