The Great Debate

JPMorgan’s astonishing $2 billion-plus quarterly loss due to trading in credit default swaps from its London office spotlights the crucial role of the chief risk officer (CRO). What exactly are risk officers supposed to do? Is the CRO someone who fills out reports, becomes a fall guy for misplaced strategy or, as a key executive, makes management aware of the risks and has input to decisions made by the senior management team?

Taking on the role of a CRO is not for the faint of heart – even the title grants you a certain degree of unpopularity. You’re the bearer of potential bad news when it comes to strategic decision making. It is your job to provide your boss and peers with possible outcomes of scenarios they often don’t want to hear about. Yet, you are the first to be thrown under the bus when a risk suddenly surfaces and your company has no mitigation plan in place. You can’t say “I told you so,” so you roll up your sleeves and quietly prepare for the next event. Of course, every risk a company faces cannot be predicted and proactively avoided. As recent worldwide financial, economic and societal events have illustrated, it has become critical to employ a process driven by foresight.

To understand how to develop and implement a risk management strategy, we must first learn which emerging risks CROs are most concerned with today. According to a recent survey co-sponsored by the Joint Risk Management Section of the Society of Actuaries, Canadian Institute of Actuaries and the Casualty Actuarial Society, the top two risks reported were financial volatility and failed and failing states. Risk managers also cited cyber-security and the overall interconnectedness of infrastructure, followed by the threat of a Chinese economic hard landing, an oil price shock and regional instability.

From a broader perspective, the survey explains which emerging risk categories most distress risk managers. The economic category leads the pack (56 percent of managers named this as the biggest concern), followed by geopolitical (22 percent), technological (8 percent), societal (5 percent) and environmental (4 percent) risks.

The survey also polled risk managers on the role of strategic planning and incorporating the potential effects of evolving emerging risks into the decision-making process. This revealed that recent events such as the Japanese devastation, Middle East political unrest and European sovereign debt crisis have had great influence on the concerns of risk managers about future risks. The year 2011 marked the largest economic impact of physical disasters in history, which included flooding, monsoons, fires, earthquakes, volcanic eruptions and tornados.

The following is a guest post by Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. You can also follow him on twitter. The opinions expressed are his own.

As Congress was approving financial reform legislation yesterday, Goldman Sachs agreed to pay $550 million to the SEC to settle a civil lawsuit that claimed Goldman had misled investors in a subprime mortgage product as the housing market began to collapse three years ago. The settlement marks the beginning of the end of Goldman’s public humiliation for its relatively small part in the subprime debacle, but the firm still has a great deal of work to do to satisfy the conditions of its settlement, repair its relationship with clients and mend its damaged public reputation.

I have had a “neutral” rating on the forward operating results of GS since Q1 of this year and will leave that rating in place for two reasons. First, the carry trade reflected in record net interest margins in the banking industry is going to slowly diminish at GS and many other banks. Unless the Fed allows interest rates to rise soon, all of the assets of banks and funds will gradually re-price to near-zero. When the media waxes euphoric over the “trading” results of firms like GS, they fail to realize that much of trading revenue comes from simple interest rate spreads over funding.

– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.

— James Saft is a Reuters columnist. The opinions expressed are his own –

Government intervention or not, banks will be cutting up America’s credit cards at an unprecedented rate, with grave implications for the economy and company profits.

The U.S. Federal Reserve last week added more nutrition to its alphabet soup of rescue programs when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend up to $200 billion to investors in securities backed by credit-card, auto and student loans.