Wrestling with the gods of Risk – Why Do We Keep Coming up Short?

Many thanks to dré cummings and company for inviting me to guest blog with Corporate Justice. I am delighted to discover a forum like Corporate Justice. During my years as a practicing lawyer in New York, I had the opportunity to support clients who engaged in public and private, domestic and international business transactions including securities offerings, syndicated credit facilities and acquisitions and dispositions of businesses. I had hoped and am enthusiastic to embark upon the marriage of that experience with my dream job – law teaching (hang in there, for those planning to go onto the teaching job market next fall).

My current research focuses on a variety of aspects of financial markets regulation. I teach corporations, securities regulations and a seminar exploring the intersection of federal law and corporate governance. I recently posted to SSRN an article exploring derivative securities and hope to share and receive commentary on certain issues raised in the article.

Risk management has presented itself as one of the most interesting topics underlying my current research. The discussion of risk management is rich and complex. For over a decade, financial institutions and hedge funds have challenged regulation of exotic financial investment products like credit derivatives because these instruments, financial intermediaries argue, offer a valuable risk management tool. Even if instruments like credit default swaps assist some financial services firms by allowing them to hedge against risk, as the recent crisis demonstrates, these investment products engender grave concerns.

In my forthcoming posts, I would like to explore these and other concerns such as the pending legislation in Congress designed to address the recent financial crisis, the SEC’s allegations against Goldman Sachs and Goldman’s role in the use of derivatives to assist Greece in doctoring its national debt levels to facilitate the country’s acceptance into the Eurozone. Hopefully, each will offer an opportunity to explore noteworthy normative issues and cultural assumptions about risk management, financial markets and financial market participants’ innovative creation of products and investment strategies designed to defy the odds of risk.

Financial Reform Legislation

As Steve Ramirez noted earlier this week, Senator Dodd has released his new financial regulation bill which the Senate is likely to take up after health care is completed. The bill moves toward providing additional information to regulators about systemic risk and giving more authority to regulators to manage collapses when they happen, but will likely do little to prevent the next collapse. The bill is as Senator Dodd said:

“I’m not predicting that we’re going avoid forever, in the future, any kind of financial crisis. The question is: Are we putting in place the tools that will minimize when that crisis occurs so it doesn’t create the kind of economic carnage that we’ve seen over the last several years?”

The bill will not resolve many of the continuing ills present in the financial sector, such problems having recently been exposed in the Valukas report on Lehman Brothers. Still, the bill has the backing of Elizabeth Warren, chairperson of the Congressional Oversight Panel of TARP, despite the fact that the Senate bill situates the new consumer protection agency within the Fed and the status of the Volcker rule remains unclear. The bill appears to be a step in the right direction, even if Goldman Sachs lobbyists are likely to be unfazed by its provisions.