WIFE Week in Risk (ending Sept 11th)

[David Harper CFA FRM]

Reputation (Wells Fargo)

• Next Test for Wells Fargo: Its Reputation (The bank’s image is at risk following a $185 million fine for ‘widespread illegal’ sales practices) http://www.wsj.com/articles/next-test-for-wells-fargo-its-reputation-1473462195 “The San Francisco bank, with its folksy stagecoach logo, has positioned itself as a solid, Main Street lender that avoided the excesses of the financial crisis and other missteps on Wall Street. That image is in danger now of being challenged by disclosures of improper account and product openings by employees unveiled in an enforcement action the bank entered into Thursday.”
• WTF WFC http://thereformedbroker.com/2016/09/09/wtf-wfc “If you tie people’s pay or employment to a given outcome, you’re going to get more of that outcome. Which is fine, but there will be unintended consequences that may or may not be foreseen. In this case, ruthless new account opening targets led to 2 million fraudulently created accounts. Which is unbelievable, unfathomable. Until you remember that just a decade ago the same thing was happening with lending and mortgages … This is way worse than JP Morgan’s London Whale. That didn’t touch anyone outside of a handful of traders in a remote office. This one involves ordinary people, lots of ’em. The scope of it is amazing, even if the dollar amount is not terribly consequential. Just the idea that something like this could be so widespread, within one of the most respected companies in America, is mind-boggling.”
• Wells Fargo Opened a Couple Million Fake Accounts https://www.bloomberg.com/view/articles/2016-09-09/wells-fargo-opened-a-couple-million-fake-accounts “So that's about 2.1 million fake deposit and credit-card accounts, of which about 100,000 -- fewer than 5 percent -- brought in any fee income to Wells Fargo. The total fee income was $2.4 million, or about $1.14 per fake account. And that overstates the profitability.”
• Here is the full text of the CFPB’s Consent Order http://trtl.bz/2ckJg3x

Low rates and cash

• Cash in a Box Catches On as Swiss Negative Rates Bite (Demand surging for insurance to protect cash stores from theft, Businesses resorting to vaults as banks pass on negative rates) http://www.bloomberg.com/news/artic...ches-on-in-switzerland-as-negative-rates-bite “Helvetia Holding AG said it charges about 1,000 francs ($1,020) a year to insure 1 million francs, a fraction of the 7,500 francs a company would pay to park the same amount in a bank for a year -- assuming the lender passes on the full charge. But that amount doesn’t include the cost of logistics such as transport or security features like reinforced walls, guards and alarm systems.”
• Now Companies Are Getting Paid to Borrow http://www.wsj.com/articles/now-companies-want-to-borrow-money-for-free-1473165990 “German consumer-products company Henkel AG and French drugmaker Sanofi SA each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years.”
• The Curse of Cash: An interview with Kenneth Rogoff http://blog.press.princeton.edu/201...er-currency-an-interview-with-kenneth-rogoff/ Book is here http://amzn.to/2coMxQn

Banks

• Banks: Too dull to fail? (Regulators have pushed the sector to behave more like utilities, but similarities only go so far) https://www.ft.com/content/63fdcdcc-6f84-11e6-9ac1-1055824ca907 “Some of the decline is down to the economic environment — anaemic growth combined with slimmer margins based on ultra-low rates has trimmed profits. But the big constraint has been regulation. Banks have to fund themselves with far more equity and relatively less debt — a logical response to the excessive balance sheet leverage of the pre-crisis years, but all the same a shock to the system. Those capital requirements have tripled or quadrupled when headline numbers and tighter definitions of capital and asset risk are factored in. At the same time so-called liquidity rules have obliged banks to hold far bigger pots of cash — redundant money — and take less risk by limiting the extent to which potentially lucrative long-term loans can be funded with cheap short-term money … There is, however, a second change that is bringing utility-market dynamics to specific areas of banking. Most obviously, it is happening in the area of payments — an unexciting but core part of banking, where commoditisation is taking hold as an already utility-like function attracts competition from technology companies.”
• Basel Faces Opposition Buildup as Scandinavia Rejects Risk Plan https://forum.bionicturtle.com/thre...uildup-as-scandinavia-rejects-risk-plan.9838/
• Regulators Make New Push, and Goldman Could Take the Brunt (Fed wants Congress to repeal banks’ authority to engage in merchant banking, while the central bank and OCC seek to limit commodities-market activities) http://www.wsj.com/articles/fed-con...ley-curtail-commodities-businesses-1473358575 Here is the report http://trtl.bz/sec620
• Matt Levine on the regulators’ report: Merchant Banks and Bond Lies https://www.bloomberg.com/view/articles/2016-09-09/merchant-banks-and-bond-lies “In a client memo, Sullivan & Cromwell said: The recommendations are extraordinary in two key aspects. First, if adopted, they would severely disrupt well-settled financial and economic expectations. Second, and relatedly, there is no identified problem of any significance that has emerged, in the Financial Crisis of 2008, or otherwise, that would have been prevented had these recommendations been enacted previously.”
• Risk Review: CCAR http://www.riskmindslive.com/risk-review-ccar/
• Amazon-Wells Fargo Student-Loan Plan Ran Into Political Obstacles http://www.wsj.com/articles/amazon-wells-fargo-deal-hit-political-obstacles-1473195380
• Falling revenues put pressure on investment banks https://www.ft.com/content/57dde0f8-712e-11e6-a0c9-1365ce54b926 “A 10 per cent ROE has long been considered a rough-and-ready benchmark for a company making good use of shareholders’ money. But the average for the Coalition group this year is expected to be 5.4 per cent, ticking up only slightly to 6.6 per cent in 2017.”
• Stress Tests Show a Correlation between Credit Risk and Operational Risk at Banks http://trtl.bz/2cwFSF4 “The risk exposure analysis shows that credit risk and operational risk exposures increase simultaneously across banks in a cross-sectional analysis. This is a remarkable outcome and not a favorable one, since it decreases diversification potential.”

Climate and ESG

• U.S. and China Formally Commit to Paris Climate Accord http://www.scientificamerican.com/article/u-s-and-china-formally-commit-to-paris-climate-accord/
• Adapting portfolios to climate change (BlackRock Investment Institute) https://www.blackrock.com/investing/insights/blackrock-investment-institute/climate-change “SAE’s [Scientific Active Equity’s] evolving BlackRock climate score uses 17 measures that rank U.S. companies in three areas: resource efficiency [carbon emissions, water usage, waste disposal], climate risks [carbon tax, temperature changes, disclosed risks] and climate opportunities.” Here is ft.com reporting on it http://trtl.bz/ft-bii-climate “BlackRock suggested investors should incorporate measures of fossil fuel usage, water consumption and carbon emissions as a percentage of annual sales into their assessments when they decide which companies to invest in.” Here is the 16-page report http://trtl.bz/bii-climate
• PRI launches A practical guide to ESG integration for equity investing (Q&A with CFA Institute) http://trtl.bz/2cD2kbJ The 118-page report is here http://trtl.bz/practical-esg

Finance (financial analysis)

• 2017 Guide to CFA Program Curriculum Changes https://www.cfainstitute.org/learni..._guide_to_cfa_program_curriculum_changes.aspx “Risk continues to be a four-letter word. Identifying, measuring, and managing market risk—the risk arising from changes in the markets because of movement in stock prices, interest rates, exchange rates, and commodity prices—is vitally important. Managing market risk relies heavily on the use of models that attempt to capture elements of prices as well as market sensitivities. But investment industry practitioners must also be savvy regarding deploying such models as value at risk (VaR)—understanding and appreciating their strengths and limitations and identifying when to supplement with another model/approach.”
• Investors’ need for start-up knowledge spurs new breed of analyst https://www.ft.com/content/61de9980-7093-11e6-9ac1-1055824ca907

Careers

• No quants need apply: new trends in risk hiring (Soft skills are growing more important in the recruitment of risk managers) http://www.risk.net/energy-risk/opinion/2469522/no-quants-need-apply-new-trends-in-risk-hiring “Because of these trends, risk managers need to juggle new and broader duties. And they don't necessarily involve creating Monte Carlo simulations in Matlab or modelling gamma risk in an electricity options portfolio. Instead, the focus has increasingly shifted to people skills: the ability to collaborate and communicate effectively with traders, executives and compliance officers … Others note that the risk manager's traditional toolkit has been undermined by the growing role of unpredictable, difficult-to-model factors in the markets, such as the recent Brexit vote in the UK, which roiled currencies and equities, or government renewable-energy policies, which introduce a weird new logic into energy trading.”
• The ‘Soft Skills’ Employers Are Looking For http://blogs.wsj.com/economics/2016/08/30/the-soft-skills-employers-are-looking-for/ An analysis of 2.3 million LinkedIn profiles shows “Communication, at the top of the list, was followed by organization, teamwork, punctuality, critical thinking, social skills, creativity, interpersonal communication, adaptability and having a friendly personality … Which ones won’t necessarily give you a boost? LinkedIn found the least in-demand skill listed on member profiles was business planning. Other skills that didn’t grab employers: emotional intelligence, team building, coaching, management, analysis, team management, resume writing and business.”
• There's a Simple Reason Why UBS Is Hiring So Many Quants http://www.bloomberg.com/news/artic...ment-s-haefele-joins-battle-to-recruit-quants
• Want a Hedge Fund Job? Knowing About Wavelets Improves Your Odds http://www.bloomberg.com/news/artic...job-knowing-about-wavelets-improves-your-odds “Scientists, mathematicians and programmers don’t come cheaply. Ph.D.s from top colleges can earn an entry-level base salary of as much as $150,000 a year at large hedge funds, and those with undergraduate degrees can earn $130,000, according to Options Group. After five years, some quants earn a base of as much as $200,000 a year. Research analysts starting at a hedge fund, with up to three years of experience in finance, can be paid $80,000 to $100,000.”
• Bank hiring: Wall St turns to machines to find better-behaved bankers (Why a US division of Deutsche Bank is using matchmaking tests to hire graduates) https://www.ft.com/content/b83108fe-72b4-11e6-bf48-b372cdb1043a “Koru, the company that carries out the profiling, says there are no right or wrong answers, and no politically-correct judgments — only comparisons of candidate responses with those of top performers at the organisation doing the hiring. If those people happen to be difficult loners who never back down, so be it.” The key indicators in Koru’s behavioural profiling are: Teamwork (Collaborates effectively with colleagues), Ownership (Takes initiative in the service of others), Polish (Communicates professionally and confidently), Impact (Ability to use time efficiently and target resources), Rigour (Holding analytical skills and ability to mine data), Grit (Tenacious and resilient in fast-paced environment), Curiosity (Capacity to learn quickly, also creative and innovative).
• Why Singapore’s kids are so good at maths https://www.ft.com/content/2e4c61f2-4ec8-11e6-8172-e39ecd3b86fc “The Singapore curriculum is more stripped down at primary level than in many western countries, covering fewer topics but doing so in far greater depth — a crucial factor in its effectiveness.”

Fintech and cyber

• Goldman Sachs Has Started Giving Away Its Most Valuable Software http://www.wsj.com/articles/goldman...ng-away-its-most-valuable-software-1473242401 “The firm’s motives aren’t altruistic; rather, many of the edges that once made Goldman’s traders feared and admired have been blunted. New rules have limited banks’ trading risks, and made it costly to hold large inventories of stocks and bonds on their books. And electronic trading has squeezed margins, dimming the clamor of trading floors across Wall Street.”
• FT Special Report: Cyber attack survival guide https://ig.ft.com/sites/special-reports/cyber-attacks/

Data science

• Data Science Foundations: Data Mining https://www.lynda.com/Business-Inte...Science-Foundations-Data-Mining/475936-2.html “Barton Poulson covers data sources and types, the languages and software used in data mining (including R and Python), and specific task-based lessons that help you practice the most common data-mining techniques: text mining, data clustering, association analysis, and more. This course is an absolute necessity for those interested in joining the data science workforce, and for those who need to obtain more experience in data mining.”
• Financial Analytics with R (book review) https://blog.quandl.com/book-review-financial-analytics-r-building-laptop-laboratory-data-science I can’t wait for this! Book here http://amzn.to/2coRKaz

Books and papers

• The Volatility Smile by Emanuel Derman http://amzn.to/2cP9ni0
• Book Release (Weapons of Math Destruction) https://mathbabe.org/2016/09/06/book-release-and-more/
• Benchmarking Operational Risk Models http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2829267

Other

• Whistle-Blowing Insiders: ‘Game Changer’ for the S.E.C. www.nytimes.com/2016/09/07/business/dealbook/whistle-blowing-insiders-game-changer-for-the-sec.html “Accounting shenanigans are notoriously difficult to uncover, especially for a company like Monsanto, which has annual sales of more than $10 billion and multiple product lines. The amount of the rebates was comparatively small, less than $100 million over two years, so it is unlikely it would have been noticed by the S.E.C. without a whistle-blower saying where to look.”
• The New Short: Find Industries Exposed to Exotic Hacking Attacks http://www.bloomberg.com/news/artic...-industries-exposed-to-exotic-hacking-attacks “Whether the short succeeds or not, the unique partnership between Muddy Waters and MedSec has jolted the investment community and created a model for a new way to make money in the market: Find a company or industry that is adopting internet-connected devices, check whether the gadgets are hackable, place your trades and publish the research.” The firm is http://www.muddywatersresearch.com/
• Satellite Startup LeoSat Secures Customer for High-Speed Trading http://www.wsj.com/articles/satelli...es-customer-for-high-speed-trading-1473145382 “LeoSat is promising its link will send data from New York to Tokyo within less than 130 milliseconds, almost half the 250 milliseconds it said it would take using current terrestrial fiber links.”
• The CEO guide to boards http://www.mckinsey.com/global-themes/leadership/the-ceo-guide-to-boards