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The Australian Prudential Regulatory Authority (APRA) has published a useful article in its Insight journal on the Australian approach to Basel II implementation. It makes useful reading.
That was the good news!
Late last night Lehman Brothers announced it would be filing for Chapter 11 bankruptcy protection, - a move that allows a bankrupt US company time to reorganise and work on a creditor payment plan. It was announced that Lehman’s broker-dealer division and its asset management division Neuberger Berman Holdings would not be included in the filing – presumably on the basis that these can be sold as growing concerns. Both Lehman’s and the US authorities had been involved in last ditch talks to see if a buyer could be found but it appears that the US government was not prepared to absorb Lehman’s debts and, one by one, all the possible buyers dropped out. It was also announced yesterday that crisis-hit Merrill Lynch was being bought by Bank of America in a £28 billion deal to create the world’s largest financial services company.
So another two financial institutions go to the wall – Sachesen Landesbank, Northern Rock, Bear Stearns, Roskilde, IndyMac, IKB, Fannie and Freddie plus others less famous– now Lehman’s and Merrill Lynch.
Also yesterday, ten of the world’s largest investment banks– Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Merrill Lynch (does BoA now pay twice?), Morgan Stanley and UBS – announced that they would be creating a $70bn liquidity fund to protect themselves in the case of further problems, effectively a self-insurance scheme.
But where does this leave risk management – which is what we all are involved and believe in? The markets were seen as sound 18-24 months ago – now they are crashing around us. Risk management is no longer the new kid on the block, it is a mature process – at least credit and market risk are. Saying “Oops, sorry, but we did not think of liquidity risk” does not carry much weight.
Bear Stearns, Fannie Mae and Merrill Lynch all had large and impressive risk teams. What happened? Was their advice ignored, or were their models ineffective? If the former, executives should be facing jail, not mega-payoffs. If the latter, if our models only work in static markets, we should be coming up with answers now. Why pay for a major departmental function if it cannot do what it is supposed to?
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