Lapses in Risk Management Cost Money

It's always hard to get back to work after a few days off. It's especially difficult when economic uncertainty is casting a cloud of gloom over financial markets. As a result, investment risk continues to rank high as a "must do," making lapses seem even more questionable.

Our December 29, 2007 post talked about a risk management post-audit at Morgan Stanley (MS) ("Lonely CROs - Why Pensions Should Care"). A few weeks ago, Financial Times reporters Chris Hughes and Haig Simonian wrote about UBS (UBS) woes, with the chairman admitting that the "Swiss bank's risk and finance unit had failed to understand the sub-prime mortgage positions that led to its $10bn writedown, even though it was aware of the massive figures involved."

In "CIBC plummets after 'underestimating' subprime risk," Financial Post reporter Duncan Mavin (December 6, 2007) cites multi-billion dollar losses due to sub-prime assets and a "hedged subprime exposure" of nearly US$10 billion, "including US$3.5-billion in a CDO with a counterparty that is single-A-rated and ratings-watch-negative." Peter Routledge, senior credit officer with Moody's, is quoted as saying that "The existence of concentrated risks in [CIBC's derivatives] portfolio points to weaknesses in strategic risk decision-making at the bank and indicate that improvements in the bank's risk management discipline have not permeated the organization as fully as Moody's had expected." A read of the CIBC Risk Management Committee Mandate suggests a focus, however incomplete, on process. In fact, a prominent risk expert sits on that committee, prompting Globe and Mail's Fabrice Taylor to write "The multibillion-dollar question: Who's minding the shop at CIBC?" (December 21, 2007).

From the outside looking in, one can only surmise what might have happened. Lessons learned, as details are made public, will be invaluable to 401(k) and defined benefit plan fiduciaries who rely on banks all the time and for many reasons.