Financial reform lacks ‘cover‘for risk managers


Thursday, 17 Jun 2010


Efforts to reform United States banking after the worst financial crisis since the Great Depression fall short because they don‘t empower risk managers, according to Cliff Rossi, who held that job at three of the country‘s largest mortgage lenders that helped fuel the housing boom.

”What‘s missing in all this is there is no air cover for risk managers who actually have a backbone to stand up and say they disagree” with lenders‘practices, Rossi, a teaching fellow at the University of Maryland in College Park and managing director of its business school‘s Center on Financial Policy and Corporate Governance, said on Tuesday in a telephone interview with Bloomberg News.

Too much attention is being paid to the ”exotic, exciting, complex, lack-of-transparency type of securities” used to sell risky mortgages, rather than the decisions by banks to build portfolios of similar loans or invest in the bonds, said Rossi, 52, a former senior risk officer at Countrywide Financial Corporation, Washington Mutual Incorporated and Citigroup Incorporated.

Many of those choices reflected business heads and senior executives ignoring internal warnings on what might happen with mortgage products with brief histories if home prices stopped rising after record gains, Rossi said. The job of risk managers to hold people ”back from the brink” was made impossible because individuals leading the lenders focused on boosting revenue and didn‘t want to listen to talk about the ”probabilities” of credit quality worsening, he said.


US lawmakers are now resolving differences between two versions of financial-overhaul legislation sparked by the crisis and taxpayer bailouts of companies including Citigroup and American International Group Incorporated Regulators, including the Securities and Exchange Commission have already begun to adjust rules including those for money-market funds, credit ratings and mortgage disclosures.

Policy makers should also consider ideas such as encouraging corporate-governance structures in which risk officials report to independent members of banks‘ boards and requiring regulatory reviews of risk managers‘ departures to ensure they aren‘t being forced out, Rossi said.

At one lender where he worked, the risk-management department”was referred to as the ‘business-prevention unit,‘ and looked at as a cost center,” he said. Across the industry, warnings from risk managers often put their employment in jeopardy, Rossi said. ”While regulators‘job is not to be engaged directly in the business decisions of these firms, I also believe they could have a role to play, in that they could have veto power.”

The quality and independence of risk-management divisions should factor into the cost of insurance on customers‘ accounts because ”an institution that takes subsidized government- deposit insurance should be subject to what oversight is necessary to ensure its safety and soundness,” he said.

At the least, the jobs of chief executive officers and board chairmen should be separated because CEOs often are as interested in their short-term profits, rather than long-term safety, as any other employee, Rossi said.

Former Citigroup and Washington Mutual officials were among individuals testifying to government panels this year who said their companies knew their underwriting of mortgages was shoddy as risky lending boomed. Last month, the Mortgage Bankers Association‘s Research Institute for Housing America released a study by Rossi titled”Anatomy of Risk Management Practices in the Mortgage Industry.”

There‘s ”certainly nothing wrong” with the idea that risk managers should report to board members, which would be a strengthening of directors‘ responsibilities similar to what was done with company accounting in 2002‘s Sarbanes-Oxley Act after book-keeping scandals such as at WorldCom Inc., said Christopher Whalen, a bank analyst at Torrance, California-based Institutional Risk Analytics.

At the same time, expecting regulators, who generally”don‘t have much of a clue,” to police employment probably is pointless, Whalen said. Chief financial officers and chief operating officers already have enough power to halt reckless risk-taking, he said.

”Other than having compensation tied to, say, medium-term performance, I don‘t know how else you get constituencies that are already on the stage to do what they‘re supposed to do,” Whalen said. From October 2007 until last August, Rossi served as the chief risk officer for consumer lending at New York-based Citigroup. In the eight months before that, he was the chief credit officer at Seattle-based Washington Mutual, which went through four individuals in the post in less than three years. Regulators seized Wamu‘s bank unit in 2008 and sold most of its assets to JPMorgan Chase & Co.


From the start of 2004 until joining Wamu, Rossi was chief risk officer at Calabasas, California-based Countrywide‘s bank unit. Countrywide, roiled by home-loan losses, sold itself to Bank of America Corp. in 2008.Countrywide, in contrast to the other two, didn‘t suffer from challenges in understanding its risks because of data and technology issues created by mergers, Rossi said. Citigroup‘s risks were boosted in part because it lacked a large national branch network, leading it to buy more loans made by others, Rossi said in presenting his paper last month at a conference held by the Washington-based Mortgage Bankers Association.

”A lack of humility” among top executives plagued all three companies, he said in the interview.





Comments are closed.