MORE LISTENING

I spent the weekend thinking about the topic of last Friday's piece.  If there had not been the mark to market mind set and requirement 5 years ago there is little question in my mind that the severity of the crash would have been less, but in the midst of this self-regulated intellectual exercise one important factor came clearly to mind:  I was making judgements based on the business of my time which of course was very different from the business of today and from the people who are employed in that business.

I have gone over this before but the mind set of my generation where "My word is my bond" and "the client always comes first," has been lost in the most "Caveat Emptor" environment manner of doing business we have ever seen.  It is today assumed that if one chooses to participate he is owed nothing other the lack of outright misrepresentation.  Likewise, internally, the emphasis is surely how can one walk right up to the line but not cross it, but  with a wink and a nod in recognition that the "line" is a wide and fuzzy thing rather than the clear limiting indicator that previous generations always seemed to recognize.

I have said that the wonderful thing about banking is that it is a subjective business, but it is then a vitally important to know who is the adjudicator of that subjectability within the organization and what are the limitations to his proper assessment thereof.  I regret to say that in recent years the management of the world's largest financial institution have been found wanting in the oversight of their institutions' activities and woefully dishonest in claiming that the monitoring structures are in place to protect, shareholder, depositors and clients.  To be blunt, structures were designed to allow the appearance of proper risk management when the reality was that those put into those positions were compromised from the start by, for example reporting lines, that went to those who were originating the risk rather than an independent authority which, incidentally, was the way it used to be in "The good old days."

So, before we begin to congratulate ourselves on what I believe is a far more intelligent approach let us understand that if adopted, we better have in place the structure and the people required to make it work.  Subjective, yes, but there must be complete independence between risk takers and risk evaluators otherwise we will simply repeat the mistakes of the past.

In my previous writings on this subject I propose the formation of a group of independent risk managers either completely separate from the institutions themselves or compensated by the institution but who would never serve in that role in the compensating institution.  I think this is an idea that should be revisited as it supplies the knowledge base immediately in a manner sorely needed.  It is not a though the people involved in financial institutions today don't know their job but that they are often compromised in attempting to do that job.  The most recent example in J.P Morgan and the case of the "London Whale."  The risk manager reported to the same unit head as did the Whale.  But of course, the Whale had the income stream and a big one at that.  Ask yourself, who gets the benefit of the doubt in that case?  Ridiculous.  It will be interesting to see if this suggestion is taken up or something akin to it  If not I am afraid that the change in regulations even to something better without structural change will lead to the same sort of disasters that we have just witnessed.  And that would be a catastrophe indeed.