Category: Risk Management

Globe & Mail asks M. Williams about SocGen’s risk management–and $7.2 billion loss

April 13th, 2010 in Finance, Risk Management, SMG Hot Topics

Mark WilliamsFor their article on rouge trader Jerome Kerviel and the scandal he unleashed at French bank Société Générale, Canada’s Globe & Mail seeks insight on risk management from Mark Williams, executive-in-residence at Boston University School of Management’s Finance & Economics Department and MBA Program alumnus (GSM ’93).  Journalists Sinclair Stewart and Paul Waldie, in “One phone call, and it all unravelled,” report:

[R]isk experts were befuddled as to how a trader [such as Kerviel] with a €13.5-million portfolio could make such massive wagers for what appears to be a lengthy period of time….Like most in the industry, SocGen’s risk management systems have been criticized for failing to see warning lights in the subprime housing market. Now, the bank’s internal controls are being questioned too.

Mark Williams, a finance professor at Boston University who specializes in risk management, believes the costly blowup at SocGen will push banks to focus on managing risk, rather than taking it.

“You’re going to see a swift pendulum shift,” he predicted. “You can never eliminate rogue trader risk. You can only minimize it … by having strong risk controls in place. Clearly Société Générale did not have those in place.”…

Harvard Swaps Crisis: Nonprofit “Case Study in What Not to Do,” Mark Williams Tells Media

April 13th, 2010 in Faculty, Finance, Risk Management, SMG Hot Topics

“Clearly, There were major missteps,” Williams says

 

Mark WilliamsFor coverage of Harvard University’s deep financial woes, caused by their high-risk investment strategies, Bloomberg and WBUR News talk to Mark Williams, executive-in-residence in Boston University School of Management’s Finance department, and BU alumnus (MBA ’93).

WBUR News reports,

Harvard University had to scramble last year to raise $2.5 billion….It turns out the university spent $1 billion just to get out of volatile investments it owned.

Harvard had bought these financial derivatives in 2004.  The university was trying to lock in interest rates for debt — for financing the huge, multi-billion-dollar construction project planned in Allston, which recently was halted. Interest rates were very low at the time. And with a project of that size, if rates go up, costs rise by millions of dollars.

Mark Williams, a risk management expert at Boston University, said not having enough cash on hand was Harvard’s fundamental mistake.

“It’d be the equivalent of you going on vacation and not looking at your tank and making sure it’s full of gas,” Williams said. “And getting out in the middle of the desert, running out of gas, and being forced to sell your car just to buy a bus ticket to get home.”

From the article “New Report Shows Harvard Scrambling After Financial Losses,” by Curt Nickish, WBUR News, December 18, 2009

Bloomberg News reports,

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps….The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them.

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

From the article “Harvard Swaps Are So Toxic Even Summers Won’t Explain,” Michael McDonald, John Lauerman and Gillian Wee, Bloomberg News, December 18, 2009

Predictions

March 17th, 2010 in MediaWatch, Risk Management, Video

In this series of video clips, Senior Associate Dean Mike Lawson and faculty colleagues Don Smith and Mark Williams from the Finance Department at the School of Management, and Con Hurley, Director of the Morin Center at the School of Law, discuss the financial crisis in mid-January 2009.  They reflect on the need for better regulation, improved business school education, and more explicit communication to financial services consumers.

This text will be replaced

  1. Looking Back: Fall 2008
  2. Waiting for Stabilization
  3. Have We Failed as Financial Educators?
  4. Sunlight is the Best Disinfectant
  5. Predictions (above)

 

Related Videos:

Hurricane on Wall Street: Managing Large-Scale Financial Crises

Making Sense of the Bailout: Faculty Panel

The Wall Street Crisis: What Happened? What Happens Next?

Sunlight is the Best Disinfectant

March 17th, 2010 in MediaWatch, Risk Management, Video

In this series of video clips, Senior Associate Dean Mike Lawson and faculty colleagues Don Smith and Mark Williams from the Finance Department at the School of Management, and Con Hurley, Director of the Morin Center at the School of Law, discuss the financial crisis in mid-January 2009.  They reflect on the need for better regulation, improved business school education, and more explicit communication to financial services consumers.

This text will be replaced

  1. Looking Back: Fall 2008
  2. Waiting for Stabilization
  3. Have We Failed as Financial Educators?
  4. Sunlight is the Best Disinfectant (above)
  5. Predictions

 

Related Videos:

Hurricane on Wall Street: Managing Large-Scale Financial Crises

Making Sense of the Bailout: Faculty Panel

The Wall Street Crisis: What Happened? What Happens Next?

Have We Failed as Financial Educators?

March 17th, 2010 in MediaWatch, Risk Management, Video

In this series of video clips, Senior Associate Dean Mike Lawson and faculty colleagues Don Smith and Mark Williams from the Finance Department at the School of Management, and Con Hurley, Director of the Morin Center at the School of Law, discuss the financial crisis in mid-January 2009.  They reflect on the need for better regulation, improved business school education, and more explicit communication to financial services consumers.

This text will be replaced

  1. Looking Back: Fall 2008
  2. Waiting for Stabilization
  3. Have We Failed as Financial Educators? (above)
  4. Sunlight is the Best Disinfectant
  5. Predictions

 

Related Videos:

Hurricane on Wall Street: Managing Large-Scale Financial Crises

Making Sense of the Bailout: Faculty Panel

The Wall Street Crisis: What Happened? What Happens Next?

Wall Street Crisis Continued: Looking Back on Fall 2008

March 17th, 2010 in MediaWatch, Risk Management, Video

In this series of video clips, Senior Associate Dean Mike Lawson and faculty colleagues Don Smith and Mark Williams from the Finance Department at the School of Management, and Con Hurley, Director of the Morin Center at the School of Law, discuss the financial crisis in mid-January 2009.  They reflect on the need for better regulation, improved business school education, and more explicit communication to financial services consumers.

This text will be replaced

  1. Looking Back: Fall 2008 (above)
  2. Waiting for Stabilization
  3. Have We Failed as Financial Educators?
  4. Sunlight is the Best Disinfectant
  5. Predictions

 

Related Videos:

Hurricane on Wall Street: Managing Large-Scale Financial Crises

Making Sense of the Bailout: Faculty Panel

The Wall Street Crisis: What Happened? What Happens Next?

 

BusinessWeek Features Zvi Bodie’s Old Advice for Newly Risk-Averse Investors

March 17th, 2010 in Finance, Risk Management, SMG Hot Topics

 

Zvi BodieAs the first anniversary of Lehman’s failure looms, BusinessWeek‘s print edition features commentary on newly risk-averse investors from Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University, who has long advocated for safer savings strategies:

A year after Lehman Brothers filed for bankruptcy, throwing world financial markets into turmoil, BusinessWeek examines the landscape for investors and Wall Street….Firms like Lehman Brothers lived dangerously and paid the price. So did many individual investors saving for retirement. In turn, investors have turned away from anything remotely risky….

These risk-averse investors are often on the right track, some advisers and academics say. The investment industry has been too cavalier about the dangers of investing, too willing to emphasize the benefits of risk and ignore the potential pitfalls. “Financial planners are experiencing a tremendous backlash from their clients,” says Zvi Bodie, a professor of finance at Boston University and a leading advocate of a more conservative investing industry. “People are being put at risk without being told how much they’re at risk,” he says….

Bodie contends that equities are just too risky for most individuals. Over the long term, stocks might tend to outperform other kinds of investments. But, depending on when you start investing and when you retire, stocks can be disastrous. While wealthy investors might be OK, most individuals can’t afford to absorb the big losses that can hit the stock market from time to time. “There’s a notion that somehow if you have a long-time horizon you’re going to outperform everything with stocks,” Bodie says. “If that were true, stocks wouldn’t be risky.”

Moreover, Bodie argues, stocks are sold as a hedge against inflation when there is no proof to this idea. Yes, over the very long term, equities have kept pace with inflation — just as they have outperformed other investment classes. But in periods of high inflation, stocks have done poorly, as in the 1970s….

Bodie advocates investing in Treasury Inflation Protected Securities, or TIPS, federal government bonds that guarantee to cover inflation. As long as they are well-priced, he also favors annuities, which provide investors with a guaranteed income stream in retirement.

From the article “The Flight from Risk,” by Ben Steverman, BusinessWeek (print edition), September 10, 2009.  See article online

Google, Not Microsoft, Will Draw Increasing Antitrust Scrutiny in Europe, N. Venkatraman Tells Media

March 16th, 2010 in Digital Technology Sector, Information Systems, Risk Management, Strategy & Innovation

“The spotlight will be on Google”

 

N. Venkat VenkatramanIn coverage of antitrust complaints against Google search in Europe, the E-Commerce Times seeks insight from Boston University’s N. Venkat Venkatraman, the David J. McGrath, Jr. Professor in Management and the 22nd most-cited management scholar in academic journals across the globe. They report,

The European Commission has notified Google (Nasdaq: GOOG) that it received complaints from three companies about its search ranking practices. The companies are a UK price comparison site, Foundem; a French legal search engine, ejustice.fr; and Microsoft’s (Nasdaq: MSFT) Ciao! from Bing.

Foundem also filed a complaint with the FCC, citing concerns over “search neutrality.”…. Even though users have other search options available to them and Google is pro-competitive, there is a good possibility that this could end up as something very significant in Europe, Ryan Radia, an analyst with the Competitive Enterprise Institute, told the E-Commerce Times….

The spotlight will be on Google in Europe, agreed Boston University business professor N. Venkatraman.

“We saw some hint of that at the Mobile World Congress, with the Vodafone (NYSE: VOD) CEO not being too happy with the powerful position that Google has in desktop search and the potential dominance that they could have in mobile search,” he told the E-Commerce Times.

As Google’s Chrome OS gains traction and as Android gains share against Nokia (NYSE: NOK) and RIM, Google will draw increasing scrutiny in Europe, Venkatraman predicted.

“President Sarkozy has even suggested that Google should pay tax in France where the clicks originate,” he noted. “I see the attention of Brussels shifting away from Microsoft toward Google in the coming years.”

From the article “Europe Sets Antitrust Sights on Google Search,” by Erika Morphy, E-Commerce Times, February 24, 2010.

Wall Street’s new risk management: it’s “return of the nerds,” Mark Williams tells Washington Post

March 15th, 2010 in Alumni, Finance, Risk Management, SMG Hot Topics, Students

Bank execs ready to “cry uncle,” Williams reports

 

Mark WilliamsFor the Washington Post report “Facing Oversight, Banks Go On Offense,” writer Amit R. Paley interviews risk management expert Mark Williams, Boston University School of Management alumnus (MBA ’93) and current executive-in-residence in the School’s Finance and Economics department:

The chieftains of eight of the nation’s largest banks could receive a tongue-lashing when they testify before a House committee today, but some on Wall Street have moved to preempt the withering criticism by proposing their own solutions to the economic meltdown….Mark T. Williams, an expert on risk management and a former Federal Reserve Bank examiner, said Wall Street has recently begun to elevate the importance of risk management as a good business practice, a trend that is typical once banks sustain enormous losses. He cited the increasing number of chief risk officers in financial firms.

“I call it the return of the nerds,” said Williams, a professor at Boston University’s School of Management and a consultant for Deutsche Bank. “We used to be the nerdy group that was just pushed aside into the back offices to crunch our numbers. Now risk managers are really at the tops of these banks.”

Bank executives hope their adoption of risk management will soften the anger from lawmakers, according to Williams. He said it is similar to a move by JP Morgan in the early 1990s to develop a risk-management approach for the industry before the government did. “They were very proactive in anticipating and heading off additional regulation,” he said. “They realized if they didn’t develop it then regulators would…I think the bank executives are going to cry uncle and finally say: We will accept more regulation,” Williams said.

Full article

Zvi Bodie tells CFO.com, “no risk” is right for pension investing

March 15th, 2010 in Finance, Risk Management, SMG Hot Topics

Companies are not competent to take risks with pension funds, Bodie argues

 

Zvi BodieIn the CFO.com article “Pension Investing: What’s the Right Level of Risk?,” journalist David McCann describes a split in the field of pension investing strategy, writing “Most plan sponsors should put more emphasis on liability hedging, one adviser claims. Another point of view: Take no risks, period.”

A proponent of the latter view is world-renowned investment expert Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University.   McCann reports:

Pension funds using liability-driven investment [LDI] strategies in 2008 strongly outperformed those using a traditional asset-allocation approach, according to Watson Wyatt.

The pension consulting firm constructed hypothetical LDI and traditional investment portfolios at the end of 2007 and tracked their performances throughout last year. The LDI strategy, designed to better match investments with liabilities by investing more in long-term bonds, earned a 0.2 percent return. The traditional strategy, focused on a broad range of corporate stocks and bonds, suffered a 24.6 percent loss…

Definitions of LDI vary markedly among pension experts, however, and Watson Wyatt’s is quite broad indeed. The only definition that makes sense to Zvi Bodie, a Boston University finance professor and a former consultant to the Pension Benefit Guaranty Corporation, is putting all funds in fixed-income investments. “The pension liability you’re trying to hedge is 100 percent fixed income, so I don’t see why any risk is merited,” Bodie told CFO.com.

That opinion is based on Bodie’s contention that companies are not competent to take risks with their pension funds. “The risks you should take are in your business, where you presumably should know how to manage those risks and add value,” he said.

And it follows, he added, that placing trust in pension consultants is not a very sound strategy either, because managing their own risk inevitably entails recommending moderate funding strategies that are not the best way to meet their clients’ liability-hedging needs.

“As a practical matter, if an adviser did tell you to be 100 percent fixed income and the stock market went up, they’re [out on a limb] because they went against the current,” Bodie said.

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