Category Archives: Financial Risk Management

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A Revolution in Risk Modeling

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Let’s hear it for Jesper Andersen and Toby Segaran, two geniuses who saw an opportunity after AAA-rated companies began to fail in the midst of the economic collapse. Their solution?  Sounds obvious — a more effective corporate credit risk modeling system.

So the two entrepreneurs and analytics gurus put their heads together to form freerisk.org, which is:

a project with the goal of making freely available the data, algorithms and tools necessary to perform risk modeling. We believe that risk management is too important to society to be an arcane subject or competitive advantage.

And the risk management community screams “Hallelujah!”

Most of the numbers are crunched by a team of volunteer finance fanatics who rate companies using crowdsourcing. The site even offers an open application programming interface (API), which lets users design their own risk-crunching models.

Will this site serve to forever correct the corrupt and biased ratings of agencies such as AM Best, Moody’s and Standard & Poor’s?  Maybe not, but it’s a great alternative.

One Rousing Resignation Letter

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As if you haven’t heard enough AIG news, Edward Liddy, the CEO of AIG, was sent a 1,500 word resignation letter by soon-to-be-former employee Jake DeSantis, who, like Liddy, accepted a $1 annual salary in return for large bonus payments. DeSantis, of AIG’s Financial Products division, penned a powerful, and quite eloquent, letter claiming Liddy’s actions are unjust and those “in the financial products unit have been betrayed by AIG and are being unfairly persecuted by elected officials.” It is because of this that Santos, and presumably more to follow, is resigning.

DeSantis points to the fact that the blame is on the credit default swap losses and not the financial products division. He swears to keep his $742,006.40 after-tax retention payment because most of those receiving the bonus “have done nothing wrong and guilt is not a motivation to surrender our earnings.”

And though he has refused to surrender the money for which he was contractually bound to receive, he does have generous plans for it. As DeSantis himself points out, “some might argue that members of my profession have been overpaid, and I wouldn’t disagree.” So, instead of keeping all 2,000, he will donate 100% of the effective after-tax proceeds to those suffering from the global economic downturn.

This seems to put us in a difficult situation.

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Should the American people feel sympathy for DeSantis and others at AIG in his situation or anger over their steadfast refusal to return their taxpayer-derived payments?

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AIG Execs Finally Do Right

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It seems it was too much weight on the conscience of those AIG executives who received undeserved bonuses. Or maybe it was the call from New York Attorney General Andrew Cuomo to each of the 20 executives who received the highest rewards that did it.

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Either way, 15 of the 20 have paid back their entire bonus. Cuomo stated that approximately $50 million of the $165 million has been returned so far and he expects even more AIG employees will hand over their loot.

Cuomo said he expects to recoup about million, which accounts mostly for the amount paid to American employees. Bonuses paid to non-Americans will be difficult to recoup since it is out of their jurisdiction.

The Treasury Department, citing documents from AIG, said bonuses ranged from $1,000 to nearly $6.5 million for more than 400 employees and future employees.

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Seven employees received more than million.

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Awards of $1 million or more were paid to 73 employees, including 11 who no longer work there.

“I applaud the employees who are returning their bonuses,” Cuomo stated late yesterday. “I think they are being responsive to the American people.”

Well done Mr. Cuomo, but are the American people satisfied with an expected return of only half of the total amount paid out?