Financial Markets

1 response so far ↓

• 1 james j sheridan // Jun 23, 2008 at 12:33 pm

  While I agree with some of Mr Bookstaber’s comments related to Risk Managers being enabled to force reductions in positions etc., the most basic problems relate to the origination to package and sell mentality of the investment banks. In the case of subprime loans, There was no credible historical data to remotely suggest that the borrower’s downpayments, credit ratios and credit histories being originated would produce mortgage portfolios with acceptable performance(no matter how you define acceptable). This was how they originally entered the credit markets. The buyers then looked at the ratings(rating agencies) which were backstopped by financial Insurers as the basis for purchasing these portfolios. There was a lot of slicing and dicing to acheive these guaranties and ratings but the same problem exists today and it is why we have a credit crisis, no one knows how these portfolios will perform because there is no history to guide us. My prescription is that financial institutions should have an independent risk management function which is paid and incented by the Board of Directors not by the CEO. Personally if I was on the Board I would insist that they explain all portfolios especially new ones not only quantitatively but also in plain common sense language. Secondly, the regulators should meet with this risk management executive regularly to review all products and portfolios but especially new initiatives. Again new products can be good but one needs to have some history of performance before they can be originated in any significant volume

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