Resorting to Plan C

This week, the Washington Post revealed that the U.S. Treasury has launched an internal effort to determine the size and nature of credit risk across the U.S. financial system.  The effort is portrayed as the development of a last-ditch plan to understand the full scope of credit risk and where it resides.  Here is how the Post described the effort.

Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.

Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.  The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises, officials said.

This revelation is somewhat disturbing and promising at the same time.  It is disturbing that the government is just now beginning to work on an effort such as this, but promising in that they are working to prevent future problems rather than just cleaning-up after the fact.

Keys to Success for a Chief Risk Officer

In a recent article written by John A. Wheeler of Wheelhouse Advisors LLC, the evolving role of the Chief Risk Officer ("CRO") is examined.  Many companies are either elevating the role or creating the role anew.  To be successful, companies must be aware of what is ultimately required for both the role and the person assuming the position.  Here is a brief excerpt from the article addressing this issue.

The true CRO should be the champion and ultimate sponsor of ERM within an organization. To succeed in achieving this objective, the role requires the commitment and full support of both the board of directors and CEO. In addition, the role requires a unique skill set that combines a deep understanding of the business, an appreciation for risk management principles, strong leadership capabilities, and a strategic mind-set. This is a tall order for most organizations, especially when budgets are tight and short-term earnings pressures are so acute.

The challenges do not end there. At the core, the organization's culture must align with and support the ERM program. This means that its managers and employees must have a certain level of risk awareness as well as a willingness to own the risks they take. This is created by leadership emphasis from the CEO, CRO, and other senior management members. However, more importantly, the compensation and performance management structure must be designed to provide incentives for appropriate behavior within an organization's risk appetite.

Simply appointing someone to the position of Chief Risk Officer without understanding what the role requires or addressing the cultural implications will result in certain failure.  Wheelhouse Advisors can help your company establish the proper environment for a Chief Risk Officer to succeed.  To learn more about how Wheelhouse Advisors can help, visit www.WheelhouseAdvisors.com.

Regulatory Reform Details Begin to Emerge

Details of the Obama administration's plan for regulatory reform are beginning to trickle out and it appears as though the devil for financial institutions is truly in the details.  Here is what the Associated Press reported yesterday.

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn. They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.

Obama's plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies. "Without banning them we're providing some pretty heavy penalties for entering" the top group of institutions that could pose a risk to the entire financial system, said Diana Farrell, deputy director of the White House's National Economic Council. "The regulator might say to a large institution, 'Make sure there is very good reason to allow yourself to get that big, or that interconnected, or that complex because the penalties will wipe out any advantages, such as lower cost of capital, you might have.'"

Large financial institutions in the U.S. will face many regulatory challenges and should be preparing their companies for the imminent changes to come.  Many of these companies' strategic plans will be impacted by the new rules and the risks they carry.

Shifting Risk Landscape Requires Greater Focus

The current issue of Harvard Business Review is dedicated to providing insights and recommendations on managing in the new "post-meltdown" world.  One article focuses squarely on the impact to risk levels throughout an organization and how companies are responding.   Here is what they reported.

Since the recession set in, many shifts have occurred in the enterprise risk environment; some threats are rising, while others are falling. Security budgets are being cut deeply and pervasively—though not always in ways responsive to these fluctuations. Security directors must do more with less while helping their businesses clearly understand the shifting threats and ensuring that the most urgent priorities are addressed. For that reason alone, adopting an enterprise risk perspective as a recession coping strategy is itself an urgent priority.  The goal of enterprise risk management is to track, quantify and analyze these shifting thresholds of risk throughout an organization.

Companies must find ways to work smarter and more efficiently.  One of the most effective ways to streamline enterprise risk management is to adopt an integrated approach that aligns all risk related functions and eliminates redundant activities.  Wheelhouse Advisors can provide a quick diagnostic review to determine how your company can improve its enterprise risk management program in a cost-effective manner.  Visit www.WheelhouseAdvisors.com to learn more.

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.