A few months ago I rashly went on the record as saying that one of the benefits of the financial crisis was that in future investment banks would have much improved risk management functions. And I believed it.
Even now, looking back on it, it still makes sense. There was a clear disconnect not only between the rocket scientists on the trading desks who were taking on risk for their firms and the risk managers who were supposed to be supervising them, but in turn between risk management and the boards of some of the largest firms.
This was an opportunity. It was an opportunity for the board to upgrade their risk managers – hiring better people, investing in better training for the ones they had, raising their status and authority within the firm – so that they themselves could sleep at night. For the risk managers it was a chance to be better placed and of course better paid.
Even the traders who put on the positions had an interest in higher calibre risk managers who better understood the business and could work with them as a resource providing intelligent insight rather than playing the role of PC Plod.
So what has actually happened? My naivety was fully exposed the other day over lunch with a senior equity capital markets banker at one of the major firms. A lot of interesting financings are going on right now. Major restructurings in banking and mining, for example, have led to some significant capital raisings and a potential fee fest for the winners.
In the particular case my friend was talking about, his team had looked at the proposed pricing and the sizing and placed the deal in its overall market context, and they wanted as big a piece of the cake as they could get. They pitched their skills and expertise to the issuer, persuaded their own board members to call in favours with its top management to try to increase their firm’s ticket size, and eventually received an invitation to underwrite a chunky, potentially very lucrative amount.
At which point, the brave new world of risk management stepped in. Only it wasn’t a new world at all. It was the old world, but with attitude. Finally the little people were having their moment in the sun. The risk managers were essentially the same people – no new faces, no new skills – only this time they were in charge. The hot shots from the trading floor had to learn humility and prudence at the feet of black belts in the art of NoCanDo. And in the particular case my friend was bemoaning, this meant going back to the issuer – that’s right, the same issuer the chairman had called to ask for a bigger ticket – and say that in fact they felt better able to support their client with a somewhat reduced underwriting. So reduced in fact as to be almost out of sight.
At the Commitment Committee the risk managers pontificated about ‘managing exposures’. They did not actually propose any concrete measures, just wanted less of everything, because in their brave new world the safest firm is the one that does the least.
Inactivity has become a virtue, at least until the next bonus round, when perhaps somebody senior will wake up and realise that in a firm with a perfectly quiet trading floor – quiet because no-one is doing anything – nobody gets paid.
I hope this particular firm is an exception, in which case the brutally efficient evolutionary processes of the Square Mile will ensure that the necessary changes are made. If not, then a lot of hard working people are in for huge disappointment.
To all the risk managers out there, say after me: Risk is good. We like risk. Risk is what pays the overhead. We just need to price it properly. And if we don’t have the stomach for it, maybe we should be doing something else.