Category Archives: Risk and risk management

Mirabile Dictu! Someone (Bankruptcy Trustee Freeh) Finally Sues Jon Corzine Over MF Global

The great unwashed public might get to enjoy a bit of theater.

Richard Alford: Fed Policy – Old Wine in New Bottles

Yves here. This is an important post, in that it describes how the Fed, despite the unconventional look of some of its measures, is using more extreme variants of traditional policy approaches, and why that is not such a hot idea.

Sheila Bair Talks about Bank Greed, JP Morgan London Whale Hearings on Bill Moyers

Not surprisingly, Sheila Bair was appalled by the revelations from Carl Levin’s hearings on the JP Morgan London Whale losses. She discusses not only what it says about the bank, but about the state of regulation in the US.

The Cyprus File

It would be ironic if Cyprus, one the smallest countries in Europe with little over 1 million people and about 0.5% of the European Union (“EU”) economically, were to prove a key inflexion point in the crisis.

Senate “Whale” Report Reveals JP Morgan as a Lying, Scheming Rogue Trader (Quelle Surprise!)

There is so much grist in the just-released Senate Permanent Subcommittee report on the JP Morgan London Whale trades that the initial reports are merely high level summaries, which is understandable. Even with the admirable job done by the committee in documenting its findings and recommendations, it will take some doing to pull out the critical observations and convey them to the public. Plus the hearings tomorrow should provide good theater and further hooks for commentary.

But some critical findings emerge, quickly. We here at NC were particularly harsh critics of JP Morgan’s conduct, and disappointed in the media’s failure to understand that the information JP Morgan presented as it bobbed and weaved showed glaring deficiencies in risk controls. Yet the failings described in the report are even worse than we imagined.

David Dayen: Out of Control – New Report Exposes JPMorgan Chase as Mostly a Criminal Enterprise

There’s been an unlikely yet welcome resurgence of chatter about breaking up the nation’s largest and most powerful banks. Bloomberg’s story quantifying the too big to fail subsidy grabbed some eyeballs (and there’s an upcoming GAO report on the subsidy that will do the same). Sherrod Brown announced an unlikely pairing with David Vitter working on legislation on the subject. Dallas Fed President Richard Fisher is going to give a big speech on Friday on breaking up the banks… at CPAC, the largest conservative political conference of the year.

Cathy O’Neil: Black Scholes and the normal distribution

By Cathy O’Neil, a data scientist. Cross posted from mathbabe

There have been lots of comments and confusion, especially in this post, over what people in finance do or do not assume about how the markets work. I wanted to dispel some myths (at the risk of creating more).

The Growing IT Mess at Big Banks

There is a very useful and accessible article at BBC (hat tip Richard Smith) on the information technology hairballs and baked-in level of future problems at major banks. The article was prompted by widespread problems at NatWest this week in accessing accounts.

Richard Alford: To Learn or Not to Learn, That is the Question

By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

The US has experienced numerous disasters both natural and man-made. Unfortunately, the authorities have not always availed themselves of the opportunity to learn from these episodes.

UBS Risk Management Fiasco Illustrates Hidden Big Bank IT Time Bombs

Yves here. One of the sources of risk in big and even moderately big banks that does not get the attention it deserves is information systems

The Probability of Greek Exit, Revisited

Fears of an imminent Greek exit from the Eurozone have subsided, for now. This column attempts to measure the probability of a Greek exit, finding that the changing fortunes of Greek political parties, and the possibility of an early election, mean that the risk of a Greek exit may actually be quite high. It suggests that, despite investors’ efforts to measure political risk, a persistent sense of unease about the Eurozone’s future is set to continue into 2013 and that Eurozone financial assets will thus continue to embed significant risk premiums in the coming years.

Quelle Surprise! OCC Confirms that Big Banks are Badly Managed, Lack Adequate Risk Management Controls

American Banker has an article up that is astonishing in that it tells us that the main regulator of national banks, the OCC, has confirmed one of our ongoing complaints: that the controls at the biggest banks are inexcusably weak. The OCC is the last place you’d expect to hear this from; historically it’s been a major enabler of banks playing fast and loose with the rules. And the implication is that bank execs should be wearing orange jumpsuits rather than getting multi-million pay packages.

Risk and Reward in High Frequency Trading

A new paper that analyzes the activities and effects of high frequency trading reaches some damning conclusions.

Khuzami Deathwatch: SEC Ignores Tips About $12 Billion of Hidden Losses at Deutsche Bank

Two days ago, we said it was time to fire the SEC’s chief of enforcement Robert Khuzami, who has not provided the tough policing warranted by the biggest financial crisis in the agency’s history. We didn’t anticipate that the story of Khuzami’s negligence would blow so big so quickly. Today, the Financial Times reported that three separate whistleblowers charged that Deutsche Bank had mismarked up to $12 billion in exposures to make it look healthier in 2008 and 2009 than it was, yet the agency had not acted on these allegations. And had Deutsche carried its positions at the levels these former employees suggest was more accurate, Germany’s biggest bank may well have needed a bailout.

Mirabile Dictu! Regulators Using Trading Scandals to Push for Tougher Capital Requirements

Most news reports on financial regulatory reform hew to a few storylines: banks pushing back in private and winning on diluting regulatory reform; banks attributing lousy profits to new regulations (with a notable lack of proof of this convenient blame-shifting); bank regulators demonstrating capture, corruption and incompetence (which even though true to a fair degree is played up by industry incumbents to support the notion that regulation is futile).

So it’s refreshing to see a contrasting storyline….