Citigroup Acknowledges Poor Risk Management

We all know Citigroup has the biggest assets in the world, but Citigroup was facing bankrupt and U.S Congress tried to help them with a bail out program. How could this happen to Citigroup? I found this article that published on October 16, 2007. A main problem in Citigroup was lack of collecting fixed-income. It was the time that ruin of sub prime mortgages, so Citigroup’s debt went up to $3.55 million. Citigroup analyzed that they had to focus more on managing credit-risk rather than market-risk. I think if Citigroup hedged against that, they would not face bankrupt. Also, other lender, which only dealt with prime mortgage users, did not have any problems with not paying their loans. Citigroup took excessive risks because they wanted larger profits. However, they should allocate those risks by hedging or insurance.

http://www.nytimes.com/2007/10/16/business/16citi.html?sq=risk%20management&st=cse&scp=11&pagewanted=print

Letters- Risk Management

This article talks about people's opinions on a Joe Nocera's, a columnist for New York Times, Column that talks about Risk at Value models. Risk at Value models can estimate loss of the worst situation.Mr. Venezia' opinion is that do not trust too much on Value at Risk models because it did not prevent Katrina. I do not think people should not trust on Risk at Value models because it did not prevent Katrina. I do not think Mr. Venezia suggested a good example because as we learn from today's lecture, disasters are very random, so it is hard risk managers to forecast and prevent those disasters. However, I agree with his next supporting ideas, even if Value at Risk models indicate 95 percent or higher of confidence level on certain events, at least 20 events in a year went opposite direction. Allan D. Grady, president of Financial InterGroup Advisors, mentioned that risk mangers focus too much on past losses to estimate future risk. I think the collecting the past data to predict future loss is the one way to reduce risks.This article is related to the article "Wall Street Lied to its computers,” and it focuses more on trust their risk management programs. However, this article "Letters- Risk Management" talks about although Value at Risk models is important models to manage risk you may not see a big picture of economic movements if you focus too much on numbers provided by Value at Risk models

http://www.nytimes.com/2009/01/18/magazine/18letters-t-.html?scp=1&sq=risk%20management&st=cse

How Wall Street Lied to its computers

Mr. Hansell, a writer of this article, said he watched many big firms fallen down due to bad bets on mortgage securities.He spent thirteen years to cover trading and finance, so he had to know about quantitative analysts ("quants"). This system estimates how much they might lose on the worst case events. However, Mr. Hansell thinks that Bear Stearns, Lehman Brothers, and other firms bet too much, and “quants” did not save them. He expected that Wall Street bosses ignored the warnings signs, which risk machines found on certain problems, to keep the more profits. In fact, most Wall Street people said risk management computer models basically underestimated the risk of the mortgage securities that is partly correct. The reason is that Leslie Rahl said people who operate risk management systems choose program to informs optimistic and simplified data for their convenience.If they try to trick on their risk management system, it is tricking to their companies. It does not mean that the computer systems solve the problems if they choose right risk management programs and put the right information in the systems. However, that is the mandatory and basic thing to do. Ms. Rahl mentioned that to run that systems, we need people who are honest and have enough experiences in real markets.

(http://bits.blogs.nytimes.com/2008/09/18/how-wall-streets-quants-lied-to-their-computers/?scp=2&sq=risk%20management&st=cse)

Enterprise risk management

Through big companies' ruin and bankruptcy, risk management is not a choice anymore; it is a mandatory and basic part of any business. Enterprise risk management helps companies to maximize profits by managing their risk. I think a big part of risks comes from employees such as a fraud. Section 404 of the Sarbanes-Oxley of 2002 required U.S. trading corporations to have a fraud risk assessment. For example, shareholders want to maximize their shares, so they elect a good CEO. However, the shareholders do not know whether that CEO works for a company or his or her profits. Thus, shareholders want to perform internal auditing often. Under COSO's research enterprise risk management makes companies to become more transparently through internal auditing. Every business has risk, so companies do not have to hide those risks. Disclose their current risks and potential risks to their shareholders, and inform them how to overcome with those. Then, the shareholders will trust more on the company.

http://en.wikipedia.org/wiki/Enterprise_risk_management)