There is, of course, always the choice of simplifying the matter and assume that risk “comes from not knowing what you’re doing”. If more people had followed this simple idea – from homeowners to Central Bankers – then past, present and future impacts from the crisis might have been less severe.

Article: US custodian banks hit by shift into cash

Excerpt: “Low interest rates have put tremendous pressure on custodian banks that manage funds for large institutions and retail brokerages, with the Federal Reserve’s commitment to near-zero rates through 2013 make it difficult to invest customer funds in safe investments that generate return.”

Article: Dismay of MF Global clients should spur change

Excerpt: “After Lehman collapsed, the UK government set up a new bankruptcy regime for brokers which was intended to ‘ensure the return of client assets as soon as practicable’. (…) Almost three months later, clients of MF Global’s London arm are still waiting for their money. (…) MF Global’s US trustee has distributed 72% of what is owed to commodities clients.”

Article: Warning on returns from MF Global UK

Excerpt: “[KPMG, MFG's administrator has warned] that customers might not get all their money back. Many clients did not realise their accounts were non-segregated until MF Global collapsed, according to Anant Shah, a fund manager at Whitepearls, a Mauritius-based family investment vehicle which claims to be trying to retrieve $35m in segregated accounts. He said the resolution in the UK was ‘disgracefully slow, given that real lives are being affected . . . it leads us as well as others to consider never opening another account with a UK broker’. Unlike counterparts around the world, such as the US and Canada, the UK has yet to return any assets to clients”

Article: KPMG defends efforts on MF Global claims

Excerpt: “The biggest issue for KPMG (…) is determining which clients have money in MF Global UK’s segregated funds. Those with non-segregated funds have been put into the unsecured creditors’ pool and (…) the issue was complicated by many customers looking to switch the status of their accounts in the final few days. (…) Under the new rules client monies are being used to pay for secured creditors.”

Book: “Lords of Finance: The Bankers Who Broke the World”

Excerpt [context: the partial collapse of the US banking system between 1931-33]: “the mounting bank failures intensified hoarding – $500 million dollars [approx. $100 bn today] in cash was pulled from banks. While most of this was stashed away in traditional hiding places – socks, desks, safes, strongboxes under the bed, deposit vaults – some found its way to very unconventional spots, including, according to congressional report, ‘holes in the ground, privies, linings of coats, horse collars, coal piles, hollow trees’. Anywhere but bank accounts.”

While some will try pushing from one side…

Article: Shake-up in US fixed income research rules (“new rules to deal with conflict of interest in fixed income research are set to be proposed by US financial industry regulators”)

Excerpt: “A recent report highlighted potential loopholes to equity rules (…). The rules did not prohibit bankers and analysts from talking outside the firm.”
→ does anyone really take it seriously that one could legislate this risk away? Sometimes an image is worth a 1,000 words, but common sense is worth 10^12 pages.

… others show for the umpteenth time that laws exist to be reinterpreted (bent? broken?) as the occasion presents itself…

Article: Basel III – the case for the defence

Excerpt: “In Europe, Paris and Berlin are again proving that they see no contradiction between railing against financiers while at the same time undermining hard-won global agreements on tighter regulation.”

… even because it is incredibly hard to comply with all the laws and regulations of all the countries (states? cities?) one operates in and still find time to actually get some work done.

Article: New rules are struggle for industry and regulators

Excerpt: “It is unclear whether a non-EU bank would have to set up a branch in the EU if it wanted to become a member of a clearing house based in the region. There is also confusion over how financial institutions operating globally would comply with Dodd-Frank, Emir, Mifid and legislation in Asia.”

However, on risk management issues, we tend to defer to Taleb (new talk posted inside – H/T Farnam St. Blog). Also inside are links to other recent posts on risk management culture.

The Taleb video:

Great bit from the video above: “People have this problem with risk management: they think it’s two separable items. You have this growth, and then you have the risk. They don’t understand that first, to get rich, you have to survive. People don’t understand this logical precedence of one over the other.”

Other recent Buysiders.com posts on Risk:

Risk management culture – Jan. 4th, 2012

“He was from Goldman Sachs” – Nov. 3rd, 2011

In fact, as the author of the book mentioned in the article notes, the fact is that “maximizing shareholder value” can mean a lot of different things to a lot of different people, and many of them are not aligned with the interests of long-term, risk-averse investors. That means the term can be used to justify all sorts of funny accounting and managerial games.

We wouldn’t go so far as the author does and claim it is the root of all shareholder-unfriendly moves, as well the possible future bane of capitalism, but it’s one more useful reminder to dig deep to really discover executives’, directors’ and controlling shareholders’ motivations.

What would seem like a semantics discussion is a fundamental difference between types of investors.

The excerpts put together below make Bob Kaplan’s speech music to our ears:

“The big deliverable coming from this risk management program is how important organizational culture and leadership are. (…) the first group of participants were surprised on how much time we spent more on culture and leadership issues than we did on technical issues. (…) the big difference between the successful and unsuccessful companies along this dimension is not that the successful ones had dramatically superior technical competence, (…) they recognized the importance of embedding the risk management function in the way they thought about their strategy, reviewed their strategy (…)”

Here’s the video (2:30):

The big point behind both stories: the protectionism that drives the huge taxation making imports so expensive in Brazil as to justify, in some cases, the airfare and hotel expenses.

Remember: “Culture eats Strategy for breakfast”.

A quick summary of Jon Corzine’s handle of MF Global, posted yesterday in the NYT’s Dealbook column, also shows some impressive similarities.