Obama Financial Regulatory Overhaul Blueprint Released

The Obama administration today released their much anticipated blueprint for financial regulatory reform.  As expected, it outlines several goals of a reform effort.  The goals include the following:

1. Promote Robust Supervision and Regulation of Financial Firms


2. Establish Comprehensive Regulation of Financial Markets


3. Protect Consumers and Investors from Financial Abuse


4. Provide the Government with the Tools it Needs to Manage Financial Crises


5. Raise International Regulatory Standards and Improve International Cooperation

While these are noble goals, the blueprint document offers little in terms of specific actions other than the creation of more agencies and committees to address the concerns.  This will result in greater regulatory complexity and reduced governmental accountability.   For individual companies, this will certainly require greater investment in compliance programs to address the new governmental requirements.  Since the requirements are unknown at this point, companies will be well served to have a nimble and flexible infrastructure in place in order to adapt to the new regulatory regime.  Are you prepared?  Wheelhouse Advisors provides cost-effective solutions to help companies meet the increasing risk management and compliance demands.   Visit www.WheelhouseAdvisors.com to learn more.

Mark-to-Market Mess

Former Federal Reserve Chairman Paul Volcker recently provided some interesting insight into the role of mark-to-market accounting in the current economic crisis.  In a speech to the International Institute of Finance, Mr. Volcker noted the following.

There isn't much doubt that attempts to enforce strict application of mark-to-market accounting procedures has contributed to confusion, uncertainty and inconsistencies among financial institutions. There is a strong case for reviewing the application of so-called fair value standards to commercial banks, insurance companies and perhaps certain other regulated financial institutions.

The problem is not only the difficulty of measuring value in highly disturbed market conditions. More broadly, strict mark-to-market accounting -- entirely appropriate for trading operations and investment banks -- may introduce a degree of volatility in reporting incompatible with the basic and essential business model of banks, which inherently intermediate maturity and credit risks.

There is no doubt that mark-to-market accounting contributed to the death spiral of many institutions as they tried to mark positions to a market that temporarily ceased to exist.  While mark-to-market accounting is noteworthy in its attempts to provide greater transparency, it currently possesses some very serious unintended consequences that must be rectified.

Risk and Reward Debate Heats Up

The debate over incentive compensation plans role in excessive risk taking at major corporations is heating up.  In today's Wall Street Journal, an article provides a good overview of both sides of the debate and what companies can expect from potential government regulation.

"There's not an easy cause and effect relationship" between pay and risk, says Don Delves, a Chicago compensation consultant. "We don't know how to do it yet."  Nonetheless, federal officials want companies to try. Treasury Secretary Timothy Geithner Wednesday recommended companies assess pay packages to discourage "imprudent risk-taking." Soon after, Securities and Exchange Commission Chairman Mary Schapiro said the agency is considering requiring companies to disclose "how compensation impacts risk-taking" in annual proxy statements.

Is your company prepared to assess risk associated with pay packages?  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.

More Risk Management Work Remains

A recent survey demonstrates the need for more work to improve risk management practices at financial institutions across the globe.  Results from the survey conducted by Deloitte show that while great strides are being made in strengthening corporate governance, the supporting risk management infrastructure at many institutions continues to be a work in progress.  The following are some significant findings from the survey of 111 financial institutions across the globe.

• Seventy-three percent of the institutions surveyed had a Chief Risk Officer (CRO) or equivalent position. As an indicator of the role’s importance, the CRO reported to the board of directors and/or the CEO at roughly three quarters of these institutions.


• Only 36 percent of the institutions had an enterprise risk management (ERM) program, although another 23 percent were in the process of creating one. Among institutions with $100 billion or more in assets, 58 percent had an ERM program already in place. The institutions that had ERM programs found them to be valuable: 85 percent of the executives reported that the total value (both quantifiable and non-quantifiable) derived from their ERM programs exceeded costs.


• Roughly three quarters of the institutions had fully completed or substantially completed the work required to identify operational risk types, and to standardize the documentation of processes and controls for operational risk. Yet, only roughly 40 percent of executives considered their operational risk assessments and their internal loss event data to be well-developed. Other operational risk methodology areas, such as key risk indicators, external loss event data, and scenario analysis, were said to be well-developed by 20 percent or less of the institutions surveyed.


• Many institutions may have significant work to do to upgrade their IT risk management infrastructure. Roughly half of the executives were extremely or very satisfied with the capabilities of their risk systems to provide the information needed to manage market and credit risk. In other areas, such as systems for liquidity risk and operational risk, 40 percent or fewer provided ratings this high.

Wheelhouse Advisors is well equipped to address risk management challenges such as these.  Visit www.WheelhouseAdvisors.com to learn more.

TARP Compensation and Corporate Governance Standards Released

The U.S. Treasury released its proposed TARP standards for compensation and corporate governance yesterday. Among other requirements, the standards require members of the company's board compensation committee to sign the following certification.

“The compensation committee certifies that:

(1) It has reviewed with senior risk officers the senior executive officer (SEO) compensation plans and has made all reasonable efforts to ensure that these plans do not encourage SEOs to take unnecessary and excessive risks that threaten the value of [identify TARP recipient];

(2) It has reviewed with senior risk officers the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the [identify TARP recipient]; and

(3) It has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of [identify TARP recipient] to enhance the compensation of any employee.”

TARP recipients should brace themselves for more requirements such as these.  In addition, board members should begin educating themselves about their new responsibilities and potential liability.  Wheelhouse Advisors can help your institution navigate the new requirements successfully.  Visit www.WheelhouseAdvisors.com to learn more.

Missed Opportunity

The Wall Street Journal reported yesterday that the White House is backsliding on its goal to streamline financial regulations.  While not surprising in the highly politicized world of Washington D.C., the compromise may haunt the current administration and others for years to come.  Here is what the WSJ had to say.

The Obama administration is backing away from seeking a major reduction in the number of agencies overseeing financial markets, people familiar with the matter say, suggesting that the current alphabet-soup of regulators will remain mostly intact.

Administration officials had suggested they might push for major regulatory consolidation in the wake of the financial crisis. But now they expect to call for most existing agencies to have broader powers to limit risk-taking by financial institutions, say the people familiar with the planning.

Opportunities to reform and eliminate duplicate activities do not come around very often.  This is truly a missed opportunity of the greatest proportions.  Companies facing changes in regulation among the spaghetti-like structure we have today will need to spend more to comply with conflicting rules that may or may not reduce risk in the long run.

As the great Thomas Edison once said, "opportunity is missed by most people because it is dressed in overalls and looks like work."  That is certainly the case here.

What It Takes to be a Successful CRO

More and more companies are creating the new role of Chief Risk Officer ("CRO") to lead their efforts to manage the growing complexity of risks.  The complexity is increasing as companies begin to rely more on external service providers, make greater use of advanced technologies and operate in different areas across the globe.  To be successful in this mission, CROs must possess the right mix of demonstrated competencies and abilities.  This topic was discussed in a recent article in Business Insurance magazine.  Here is a sample of what they had to say.

In every company, establishing a clear chain of command is vital to success. Risk, as an ongoing companywide issue, requires that the CRO report directly to the chief executive officer and have the flexibility to recruit and manage a small staff globally. The expansive nature of risk management also necessitates that the CRO steward numerous strategic partnerships with internal constituencies and outside strategic partners. He or she should partner with the general counsel, chief operating officer, chief financial officer and the top internal audit officer, all of whom should view the CRO role as a complement to their areas of responsibility.

CEOs need a risk expert who can act as architect and engineer in building a comprehensive enterprise risk management infrastructure; one that spans all parts of the organization and provides a clear and easy-to-interpret real-time interface for senior management regarding all risk-related activity.

Searches to fill these new roles will be difficult due to the fact that there are few people who have experience in the role and/or the combination of skills to be successful.  However, the right candidate is crucial to establishing a program to manage risks effectively over the long-term.