If time is short or you cannot bring yourself to read the Financial Crisis Inquiry Commission’s entire 633-page tome on Wall Street’s worst meltdown since the Great Depression, consider skipping ahead to Sandy Weill’s memorable cameo.
There on page 63 of the report, delivered in the former Citigroup chairman’s inimitable style, we learn what went so horribly wrong at Lehman Brothers, AIG and Merrill Lynch – and, of course, Mr Weill’s beloved Citigroup.
“If you look at the results of what happened on Wall Street, it became, ‘well, this one’s doing it, so how can I not do it, if I don’t do it, then people are going to leave my place and go some place else’,” said Mr Weill, who built Citi into the world’s largest financial-services company only to watch from retirement as the government rescued his former empire. Managing risk “became less of an important function in a broad base of companies”. The crisis exposed flaws in the way Wall Street measures and limits risk. As in past disasters, the industry and its regulators emerged from the downturn with reforms to empower risk managers and invest in systems to avoid future catastrophes.
These are well-meaning, overdue changes. But will they ensure any bank’s safe passage beyond the next crisis? Absolutely not. Sooner or later, Wall Street’s top executives will face the dilemma faced by Mr Weill. They will feel the same pressure, from shareholders, employees and even board members that they or their predecessors endured as the financial world descended into crisis. Banks have added hundreds of risk managers, who now have more equal standing with their revenue-producing peers, both in pay and responsibilities. In some cases, top risk officers report directly to the chief executive. Risk systems have been improved, with more stringent stress-testing embraced. Corporate boards have introduced risk committees. New capital requirements will make it more costly to hold riskier assets. Regulators will impose rules forcing banks to pay a bigger portion of employees’ bonuses over time, ensuring money can be “clawed back” for poor performance.
Monday, February 7, 2011
On Wall Street - Noise of the financial herd will drown out risk concerns