TRANCHED: Life after CDOs, Week 14
One year ago today the credit crunch entered popular vocabulary with the meltdown of two of Bear Stearns' hedge funds. Twelve months on, newspapers remain full of speculation as to when it will come to a close. One article, in the Economist was written anonymously by a risk manager at a bank explaining the enormous failings that lead to the writedowns of the past 12 months. The tone of the article was one of almost utter resignation, as if the author had been so thoroughly beaten by his experiences of the last year that he has given up and felt it wise to confess all.
Having been on both the risk and front office side of the business, this reaffirmed to me that of all the places in to be in a bank, the risk department offers the least upside. In good times risk is treated with gratuitous contempt as if the reason for its existence is purely to put up roadblocks to prevent trading desks and structuring teams earning revenue.
This treatment continues until eventually the greed that drove the inevitable bubble comes home to roost and the bank in question begins to haemorrhage money. Practitioners within risk teams are then hauled in front of management to explain how they could have got things so fundamentally wrong. All of this, combined with comparatively small bonuses makes risk an uninviting prospect.
Of all the problems investment banks now face, I think this is the one that needs to be fundamentally rethought. I understand from friends at hedge funds that the balance of risk management and revenue generators in their sector of the industry is generally far more amicable and sensibly thought out.
I can't pretend that I'm not guilty of trying to corral the risk management function. I remember trying to convince our risk managers of the virtues of warehousing leveraged loans so that we could go to clients with ready-made portfolios for them to use in CDO structures. We produced reams of evidence that we felt told a powerful story and even used senior pressure to get the outcome we desired. It was only a matter of timing that prevented the proposal going ahead. Had our pressure worked, my former employer would have been left with billions of loans that were sliding in value - simply for the sake of us trying to earn a few more million in fees.
The pressure we put on the risk department was probably typical of that seen across the City during the boom times. Now that the worst has happened, it's once more the guys in risk who are facing the barrage of questions. Until this imbalance is solved, a career in risk seems an unpalatable option.
