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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Feb 4

Written by: Donald van Deventer
2/4/2010 12:05 AM 

Today’s fraud charges by the State of New York against former Bank of America CEO Ken Lewis prompted me to think about how people have tolerated the last three years of crisis, particularly risk management experts.  That’s the subject of today’s post.

One of the great things about the 2007-2010 credit crisis, if there are any great things about it, is that blame is being laid squarely on the desks (or former desks) of those responsible: the chief executive officers of the institutions who got in trouble and the Board Members who let it happen.  Ken Lewis, former CEO of Bank of America, was accused of fraud today by the State of New York.  Details are contained in this story from Reuters:

Thanks to the internet, it’s easy to track how various former CEOs of troubled institutions are faring in the aftermath of the crisis.  One of my favorite tools for measuring the “ex post” assessment of CEOs is the legal website, in particular this link.  In this particular case, we’re searching for the number of lawsuits naming former Countrywide CEO Angelo R. Mozilo:

We use the results to rank three prominent former CEOs who lost their jobs in the credit crisis.

Kenneth D. Lewis, Bank of America:              192 lawsuits
Angelo R. Mozilo, Countrywide Financial:     56 lawsuits
Stanley E. O’Neal, Merrill Lynch:                     41 lawsuits
Kerry K. Killinger, Washington Mutual:          33 lawsuits
Charles O. Prince, Citigroup:                          33 lawsuits

The number of lawsuits given is the number of lawsuits filed in the federal courts between April 1, 2004 and February 4, 2010 against persons with the names given above.  We haven’t scanned the results to determine if each and every lawsuit against “Kenneth D. Lewis” is in fact a suit involving the Kenneth D. Lewis of Bank of America.  If the totals are accurate, clearly Kenneth D. Lewis has fewer reasons to be happy “post crisis” than Charles O’ Prince, formerly of Citigroup.  Apparently, not as many investors believe it’s worthy of a lawsuit simply because, as the New York Times reported, Mr. Prince “didn’t know the difference between a CDO and a grocery list.”

How are risk managers doing as we emerge from the credit crisis?  I’ve talked to many of them over the last few months and the “happiness survey” of risk managers shows that there is a wide diversity of experience.  Like all surveys, I’ll keep the identities of the respondents anonymous while hitting the highlights of what I’ve heard.

Risk Managers at Institutions that Performed Well in the Crisis

For the most part, risk managers at firms that fared relatively well throughout the credit crisis have ranked high on the happiness survey.  The very best ones have been hired away because of their firm’s excellent performance.  One individual in particular went from one outstanding firm to a firm even more outstanding because the latter firm felt it could make even greater strides in controlling risk.  Most important, at all levels of the institution the CEO had made it clear that getting better at risk management was mission critical even though this financial institution was heads and shoulders above its peers.

At another institution that has emerged unscathed in the crisis, the head of risk management has taken advantage of institutional relationships to spend many months at the head office of one of the largest banks in the United States.  Before the crisis, the view was that this big U.S. bank should be one of the world’s best in risk management.  The crisis itself, however, made it clear that this was not the case.  I asked the visiting head of risk what he thought. He answered, “Well, they have 500 people working in risk management.”  I persisted, “Well, what did you think about how well they were doing their job?”  He looked at me, shrugged, and rolled his eyes.  That was his only answer.  I told him that in 1-2 years his own firm, one of the largest in the world, would be ranked as one of the most skillful risk managers in the industry because of their on-going commitment to continuous improvement, a commitment long lacking among many of the largest Western financial institutions.  He scored very high on the happiness quotient.

At the other end of the spectrum, at a few firms that emerged in good shape from the crisis, the movement of senior risk people to other firms has created a vacuum that has put more junior players on the field.  They’re happy for the opportunity, but to many, they’d simply won a lottery.  Many lack the fear of risk that can trigger the drive to continually improve.  Some of they are complacent and have an aging risk infrastructure.  These risk managers are happy now, but I fear for their future.  If they’re not afraid, they should be afraid for both their firms and themselves.

Risk Managers at Institutions that Performed Poorly in the Crisis

The risk managers who worked at firms that performed poorly in the crisis span the full range of abilities.  At the low end of the spectrum, there are some who argue “No risk managers and no risk system could have prevented this from happening to my institution.”  This group of people is bitter and unhappy, and many of them feel simply unlucky instead of feeling that they’d missed something important and could learn something from it.  The lucky ones are still employed, typically in more junior roles than before at other institutions that are less sophisticated than the firms they worked at previously.  The unlucky ones are victims of Charles Darwin.  The process Darwin outlined for the evolution of the species “risk manager” is gradually eliminating those unsuited for a role in the risk business.

A much happier group is also much larger.  That is the group of risk managers who told it like it was to senior management and were ignored or shunted aside.  These risk managers are largely regarded as heroes among their peers, and many of them resigned in protest of management action.  This is exactly what Ben Golub of BlackRock and I argued early in these blogs was the only way to save one’s career as a risk manager.  Most but not all who have resigned ended up moving to excellent institutions or moving to other firms with a risk management mess to clean up.  “It wasn’t my fault,” one expert said, “that the CEO limited risk disclosure to the Board to one piece of paper.” There are many in this group whose praises I would love to sing publicly but they’ve asked me not to.  One or two risk managers who properly told the captain that he was steering the Titanic into the ice are still looking for their next gig.  One of them was told, by a university which had just destroyed 30% of its endowment, that he only wanted their chief risk officer job “to repair his resume,” without recognizing that it was the university that needed the repair job!  His time will come.  He’s excellent and the good people know him.

A smaller group of people are stuck, for family reasons typically, at institutions that are still in trouble but not yet failed.  I am very happy to report that these people have for the most part proven their wisdom to senior management and are now much more deeply appreciated.

The Happiest Risk Manager: My Nomination

There was really no contest when it comes to which risk management expert is now the happiest.  Let’s name him Mr. P.  Mr. P has left the New York financial institution where he worked for years to prevent its destruction by line managers chasing bonuses and ignoring risk.  He now works as a fitness instructor in Malibu.

If any of you have trouble understanding why that makes him happy, you need to either rent the movie “Lifeguard” or come visit us in Honolulu.

Donald R. van Deventer
Kamakura Corporation
Honolulu, February 4, 2010