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The Very Structure of Risk Management/Internal Audit Departments In Big Broker-Dealers Are J-O-K-E-S! Ask MF Global Clients
The WSJ reports Corzine Rebuffed Internal Warnings on Risks:
MF Global Holdings Ltd.'s executive in
charge of controlling risks raised serious concerns several times last
year to directors at the securities firm about the growing bet on
European bonds by his boss, Jon S. Corzine, people familiar with the
matter said.
The board allowed the company's
exposure to troubled European sovereign debt to swell from about $1.5
billion in late 2010 to $6.3 billion shortly before MF Global tumbled
into bankruptcy Oct. 31, these people said. The executive who challenged
Mr. Corzine resigned in March.
The disagreement shows that concerns about the big bet grew inside the company months ...
As I have hinted in "The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications"
I knew the ex-CEO of MF Global, and in particular member(s) of in the
internal audit staff - one of which I knew very well and trained. There
is one glaring FLAW in the structure of internal risk management and
audit in MF Global, and that was that it was WEAK! If internal audit
answers to operational executive management, then how can it truly crack the whip on its own boss. Now, granted, this is not endemic to
just MF Global, but it is truly a problem. Internal audit/risk
management needs to answer to a separate entity, apart from the CEO and
possibly apart from the Board itself if the CEO has had a part in
selecting the board. This way there is true independence and the
nonsense that you just saw with MF Global has a much less lkely chance
of happening.
Alas, such is life. For instance, why are you reading this through a
subscription blog versus PWC's audit report of MF Global? Hmmmmmm.....
- advertisements -
A risk manager, naturally prone
To deny an improvident loan,
Heard the boss say: "We're wishin'
To cut this position;
Not that of the loan, but your own."
http://www.limericksecon.com
Ummm...does the audit committee or 4-star-Acc't Firm or assorted "guarantors" get to see all the "side-letters" and other assorted "wink-winks" that really are just clever strokes of nontransparency, aka fraud?...that turns "trust" on its head?
Banksters' and other scammers' motto: Trust me. I am your friend.
Sound scary now? Like your friendly Congressman? Prez? Religious leader? Financial advisor?
Looking for an honest man? [hat tip to Diogenes ]
Yourself may be the only option....ouch!
Oxymoron of the year = Risk Management
Why not have the ratings agencies do the risk management or any sort of (un)enforcement?
Both are jokes in theory and practice!
Good stuff Reggie! Bear Stearns went thru 3 risk managers in the last 18 months before collapso!
The Inv banks have to send "monthly" reports to authorities, however what the "regulatoers" do not understand or know how to check on are the REPOS that "swap out" the SPOT positions for a day or so....falsifying the intent (and real risk) of the position only for the position regain its actual risk position a day or 2 later.
This should be considered fraud but the Inv banks take the position that they gave regulators all of the required information.
There are policies and procedures (real time risk limits that if pierced are reported to regulators) that can easily be put into place.
All investors should know that it will never be the Internal Audit function that ever finds or does much of anything barring obvious theft or malfeasance. They're managed by the CFO whose interest is in direct conflict with their function, and who most often have better relationships with the Audit committee (another joke) than the audit executive.
internal audit may be weak but the proposal to remedy it is almost laughably naive.....there is no ceo anywhere who would relinquish power to an independent board and such independence would be syntax rather than semantics....
back to the old drawing board for a better mouse trap...
the board was just as corrupt and naive as the ceo.....and i am sure that they were are respectably educated....
Great perspective, Reggie.
Corporate governance was a MAJOR failure at MF Global, and each board member needs to be personally sued for losses. It is also a major failure at other firms still recognized as "solvent."
The corruption needs to be called out and there MUST be consequences. The alternative is to just blow the whole system up and start over.
I also laugh when Washington points the finger and claims somebody elde didn't do anything about it. The ultimate group of corruptionists and conspirators, who happen to do nothing about national problems, either.
Unfortunately, the legal mechanism is broken, some times corruption-laden, and also very slow.
Great post Reggie - This issue of not evaluating risk against an investment has been part of the same trend which decoupled responsibility/accountablility when mortgages were grossly securitized - the 'give-a-shit' factor was removed from the equation as our beloved government provided loan gtds without oversight...The issue is clear - Call the regulations whatever you wish but once TRUE SKIN IN THE GAME is re-established & accountability/responsibility has been re-introduced then & only then will this nonsense cease to exist - Make principals of firms personally, severally, & jointly accountable providing liens on their personal assets & watch the contraction of reckless risk collapse -
somebody posted this earlier by Ann Barnhardt on MF Global, pretty good
http://www.netcastdaily.com/broadcast/fsn2011-1201-1.mp3
Reality; this scam is continuing. Get your money out now and buy Gold/Silver. That's what the billionaires are quietly doing. These prices won't last much longer.....
You are uninformed.
The fearful billionaires became bullionaires back in 2003-5.
You are very late to the party, which leads me to believe you don't actually know what "the rich" are doing, nor the price of gold.
Just put his ass in jail like every other crook. What part of trading and/or commingling client funds is legal.
You know who has inate risk aversion and would make awesome risk managers. Anyone serving in Congress or Government. I have yet to see one come forward that they lost or had any money with MFG.
Denninger has an interesting post on Ticker. http://market-ticker.org/
Now pay very careful attention, because part of the bankruptcy "reform" law in 2005 placed derivative claims in front of depositors in a business failure - including a bank failure.
They are like any other business liability. You have to settle outstanding bills first.
Perhaps it would be best to consider secured debt for large banks.
http://www.youtube.com/watch?v=BwuTHjoOOtk
"...or you'll wind up in jail." yeah right.
reggie risk managers don't keep their job if they don't find a way to let the big boys do whaat they want. didn't we see this over and over in some of the big banks prior to the financial crisis
very few have any clue of how to manage risk.
http://expose2.wordpress.com
I happen to be one of the guys they got rid of. If you did not want to play along, goodby. Fuck'em, they need to go to jail.