As we suspected from reading between the lines of the Wamu 10-k, a lot of very good risk analysis was done there and run up the flag pole to senior management. We’ll let you know what happened at Wamu in another more detailed post. This post is a compilation of responses regarding the interaction between the risk management staff and senior management at other institutions. The comments show that the CEO, if left unchecked by the Board, has the power to make some extremely poor judgments. That’s the reason why David Reilly’s post on www.bloomberg.com the other day was so important.
He outlines why more bankers, and specifically, more bankers who understand risk, need to be on bank boards to provide some checks and balances. These directors have to call “balls and strikes” (sorry for the U.S. baseball analogy) even when it’s the CEO who is up at bat. For some examples of why this is necessary, read on!
None of these quotes are made up—they’ve been provided by risk managers in various institutions and are paraphrases of actual conversations.
- “The [omitted] business does not generate enough revenues to support investment in a risk management system — if we paid for such a system, profits would be negative” (quote from the Chief Executive Officer)
- “If we refused to accept Countrywide’s credit risk on our balance sheet, we’d lose all credibility and might as well leave the mortgage credit business” (quote from the Chief Risk Officer)
- “I don’t like this credit at all, but I’ll approve it to support the deal team” (quote from the CRO)
- “He won’t vote to approve subprime or AltA credits — he’s simply not a team player” (CEO comment about a senior risk manager)
- “Yes, Nimrod’s still working here. He may have lost the firm $X billion with the ABS CDOs in which he invested, but he’s the only one in the firm who understands them, and we need him to work them out”. (quote from the Head of Surveillance)
- “His mortgage portfolio lost us $x billion, but he’s been an excellent Executive Vice President, so we paid him $1.5million to go away and provided him with excellent references” (quote from the CEO)
- “We don’t really take credit risk; rather we provide “financial assurance” to the overly risk-averse. We don’t need risk systems, and don’t earn enough premium to pay for them” (quote from the CRO)
Only a strong board of directors, with direct exposure to risk management staff, can stop this kind of lunacy from driving more financial institutions into the ground. For more risk issues in real time, follow Kamakura on www.twitter.com/dvandeventer.
Donald R. van Deventer
Honolulu, May 27, 2009