risk management

Risk Management Failures And Disasters

Risk management failures and disasters - relating to operational, credit risk and market risk including the Enron disaster.

Basel II Market Risk, Banking disasters - Don't ask Nick Leeson

Market Risk is the study and principles used to manage exposure to the Markets, commonly equities. Measures commonly used are Marked to Market and VAR.

OK, in the real world, it can mean stopping a Nick Leeson type disaster bringing financial organisations to their knees by not managing their risk properly. Although, Nick hid his exposures from his London based managers, there seemed to be an unwillingness of London to actually monitor the market risks he was taking.

Therefore, when Nick made a loss he was able to transfer it into another internal hidden account and keep on trading, whilst regularly making up excuses about why he required more and more cash to be wired over from London to cover his trading.

So a lack of market risk monitoring isn't the only reason Nick Leeson was able to lose so much money, but at least it would have shown his managers how risky his trading methods were before he started to hide losses from his superiors.

Credit Risk - What is it - Don't ask John Rusnack

Credit Risk often refers to loans and fixed income deposits in the Bonds and Cash markets eg a credit risk could be the failure of a counterparty to repay a loan.

John Rusnacks' (AIB) situation, was different to Nick Lessons', in that he was a bonds trader and traded over his trading limits. The bond market turned for the worse and he lost lots of money for his bank (AIB).

It's not just traders whose limit have to be monitored, companies who lent to Enron suffered millions of pounds of financial losses.

Although, Enron were meant to be financially sound, they weren't and when the losses at Enron were revealed, the power company went into liquidation and other institutions which had lending exposures to Enron lost their money - many companies are trying to claim back their money.

Spare a thought for the small shareholders of ENRON who lost all their money, as when a company goes bust, shareholders get nothing!

There are interesting new laws which are expanded upon in the Software for Sarbanes Oxley guide.

Interestingly, when Enron were in trouble, but before it was know, a financial analyst guessed and alerted his clients to get out of Enron. The analyst was then sacked as the bank he worked for also advised Enron.

Operational Risk - What is it

This is risk of the operational side of the business, such as building burning down, computers crashing.