Category Archives: Financial Risk Management

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Cavalcade of Risk #139

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Welcome to the newest edition of the Cavalcade of Risk (CoR), in which we feature relevant and timely blog posts covering topics from small business risk management to fire and flood insurance to medical misadventures. These posts, and their authors, offer up unique and informative posts on all things risk management and insurance. Enjoy.

The next Cavalcade of Risk host is Jaan Sidorov at the always informative and interesting Disease Care Management Blog. Don’t forget to check out the next batch of blog posts on his site.

Wall Street Uses Risk Management?

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In attempting to describe the behavior on Wall Street in recent years, the term “risk management” probably won’t be near the top of anyone’s list. But when it comes to the nearing possibility of the United States defaulting on its debt, Wall Street embraces risk management with a passion.

Right now, the Federal Reserve is preparing for the possibility of default if the August 2 deadline for raising the government’s $14.3 trillion borrowing limit is not met. All signs (and common sense sprinkled with a bit of optimism) point to President Barack Obama and Congress finding an agreement to increase the Treasury’s borrowing authority in time to avert a default. If not, the world’s biggest economy faces rating agency downgrades and runs out of cash — soon.

To prepare for that possibility, financial players are “taking steps to reduce the risk of holding Treasury bonds or angling for ways to make profits from any possible upheaval. And even if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country’s market credibility.”

The rating agencies, which control the fateful decision of whether the nation deserves to have its credit standing downgraded, are surveying other entities that would be affected by a United States default — like insurance companies and states — and issuing warnings that a United States downgrade could result in several other ratings cuts. States that might be downgraded, in turn, are trying to reassure the market that they could still pay their bills on time.

Some say bond traders are optimistic, however — thinking there’s no way the House Republicans will blow the August 2nd deadline. But just in case, they’ve got a plan.

Now that’s some Wall Street risk management.

Words of Wisdom from Bill McNabb, President and CEO of Vanguard and Born Leader

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Vanguard President and CEO Bill McNabb does not believe in competing departments.

We are living in a changing economy where even the experts are unsure of what’s to come. It is imperative now more than ever before to have effective leadership in the next generation of managers as well as among those currently serving in managerial roles. With that in mind, it makes sense that the Wharton Business School would title their 15th annual leadership conference, “Leading in a Reset Economy and Uncertain World.”

I was able to attend this one-day conference yesterday, which was held on the Wharton campus in Philadelphia, and I must say, it was the best conference I have ever attended thus far. The first of eight speakers was F. William (Bill) McNabb III, head of The Vanguard Group, an investment company with $1.8 trillion under management, making it one of the largest investment management firms in the world.

McNabb didn’t land the job of president and CEO of this mammoth money managing machine by relying on luck. He knows a thing or two about leadership and he shared his wisdom with the 200 or so in attendance, starting off with what he calls “the leadership standard,” which entails:

  • Managing crew
  • Developing crew
  • Relationship management
  • Leadership impact
  • Business results
  • Conceptual thinking
  • Business acumen

Using a military analogy, McNabb asked the crowd if they would chose to be in a fox hole with those they manage. “You have to have total trust within your team,” he said. “This is the most important element to building a high-performing working group.” McNabb is adamant that complete trust within a team inevitably equals effective production and superior performance. Seeing the success of Vanguard, it’s hard to argue with the man.

One thing people may find interesting, and maybe a bit peculiar, is that McNabb does not believe in competition across different areas of the organization. “There are no competing departments,” he said. “We measure results holistically — actions are tied to the firm’s results, not individual results.”

When asked about how he measures the success of the firm, he quickly replied, “The only thing that matters for us at the end of the day is if we’re making money for our clients. We have no formal measurement of success — [the client’s success] is what we go on.”

Another audience member questioned the fact that he failed to mention the hot button term “innovation” during his entire presentation. Good question, I thought. But that thought vanished after listening to McNabb’s response:

“We don’t want to be innovative because we don’t want to play around with people’s money,” he said, adding that innovation should be left to research and development and manufacturing companies, not firms that handle other people’s money and act as fiduciaries.

Well put, McNabb.

Check back over the next several days for more posts relating to the amazing speakers I was fortunate enough to hear at the Wharton Leadership Conference, including Jen Deal of the Center for Creative Leadership, James Quigley, author of As One and senior partner at Deloitte and Colonel Jack Jacobs, NBC analyst and recipient of the Medal of Honor.

Risk Management in the News

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It’s a busy Monday morning for news regarding risk management. Here, I have compiled a snapshot of a few current events taking place within the discipline.

  • The Catch-22 of Supply Chain Risk Management: Steven Banker of LogisticsViewpoints.com tells how all of the things that can make for a lean and mean supply chain “can also cause a supply chain to become brittle and break in the face of disasters.” Banker uses the Japan earthquake and Toyota as an example.
  • ERM Supports Disaster Recovery Plans: Educational sessions at the 32nd annual Public Risk Management Association’s conference focused on how an enterprise risk management framework provides significant support for municipalities planning disaster recovery, business continuity and resiliency strategies.
  • Risk Management Needed to Prevent Future Food Scares: Focus Taiwan News Channel recounts how “public health scholars on Friday urged the government to devise a comprehensive food safety and risk management mechanism, including the regulation of chemical substances, to prevent more food scandals from happening in the future.”
  • Microsoft Buys ERM Software Vendor: The tech giant purchased enterprise risk management software vendor Prodiance “to add more compliance functionality to Microsoft Office.”
  • Reporting Key to Competent Risk Management: Risk.net reports how Eric Caban, an examining officer in the operational risk governance team at the Federal Reserve Bank of New York, warned that even though reporting is the key to competent risk management, it is often the area that is given the least amount of attention.
  • IMA’s Move on Managed Sectors May Help Risk/Return Approach: On MoneyMarketing.co.uk, Stuart Fowler discusses the flaws in conventional balanced management and why society welcomes the IMA’s provocation.