Citigroup's Model for Risk Management: LTCM?

I had to chuckle when I was pointed to the Financial Times article on Citigroup's new senior risk management hires. As luck would have it, one of the big new hires mentioned was a founding partner of LTCM:

Vikram Pandit, Citigroup's chief executive, has taken another step to stamp his authority on the financial services group by picking a close ally as the company’s new chief risk officer.

The appointment of Brian Leach to replace Jorge Bermudez, a Citigroup veteran who held the position for only three months, underlined the company’s desire to overhaul its risk management practices after suffering $20bn of mortgage-related writedowns.

Citigroup also announced the appointment of three other executives, including Greg Hawkins, a fixed income specialist who was one of the founders of Long-Term Capital Management, to bolster risk controls across the group.

Am I alone in seeing the irony here? I guess one could argue that the experience of having done something so badly in the past creates lessons and learning for the future, and let's hope that's the case. But man oh man, my "blink" response to such an announcement is: are you kidding me? LTCM and risk management? Isn't that kind of like "jumbo shrimp" and "army intelligence?"

And one other point; is it really best to hire an old friend as your new risk manager? Isn't this the kind of position where you'd like to see true checks-and-balances, without the burden of history and legacy clouding the discussion? Personally that's what I'd like to see but hey, I'm not running a trillion-dollar financial services behemoth, either. But the point still remains, risk manager is a role that should be as independent from the CEO as possible; in fact, one could argue that the position should report to either the Board Chairman (who shouldn't be the CEO to begin with) or a Risk Committee of the Board. And Jamie Dimon, CEO of JP Morgan Chase, perhaps had the most telling quote in the FT article:

“It is not risk managers’ job. It is the boss’ job to manage risk,” Mr Dimon told a meeting of Wall Street analysts on Wednesday.

It is comments like this that make me love Jamie Dimon's leadership. Of course he's absolutely right. Risk management should be providing the fodder for management decision-making, not making the decisions themselves. Ultimate accountability has to reside with the CEO as it relates to running the business, and the key drivers of performance in a financial services firm are capital allocation and risk management. Mr. Dimon clearly gets the joke. Whether his other Wall Street brethren take this to heart remains to be seen.

Hat tip: Yaser Anwar

Comments

[cf]

I like your thoughts about Hawkins. Total douche. Had a dinner with him during his Salomon days. He was saying how great the Arb stuff is. You can just "rape" the balance sheet.

Oh, don't be so quick to pat Jamie on the back. It was on his watch that they lost big dough in Russia back in the day.

[Yaser Anwar]

Byrne,

You need to read more carefully. 15 years of profits, do you call that Rogue Trading?

I guess to you then John Arnold of Centaurus Energy who has been averaging 150%+ since 2002 is a Rogue Trader too. Or maybe even Steven Cohen is a Rogue Trader eh?

The only reason the net income looks larger is because the rest of Citi's operations, like much of the Street, slowed dramatically.

They didn't have the cushion of the previous years (higher earnings through structured deals relating to mortgage/housing industry and generally more investment banking and PE related financing) so thats why his number didn't stand out, or looks a bit more inflated, just like Oil's move looks a lot more excessive in USDs than EURs.

Yaser

[Byrne]

Given that 10% of their profits are coming from a trader who is basically a rogue trader, but is actually making money (http://online.wsj.com/article/SB120414423054397257.html?mod=mkts_main_news_hs_h), perhaps an LTCM risk manager is appropriate.