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Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

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Page 1: Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

Upside of Risk Management vs. Unintended ConsequencesWilliam McCabe

AGA – Montgomery County/Prince Georges County Chapter

March 11, 2015

Page 2: Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

History• Internal Controls Have Existed Since the Hellenistic Period

• Not Formally Detailed Until 1977 Under Foreign Corrupt Practices Act

• Previously Reporting and Transparency were the key risk management tools

• Sarbanes Oxley Made it Easier to Criminalize Bad Business Judgment and Complex Accounting in Hindsight

• SOX Was an (Un)-necessary Step at Best

• SEC Acts of ’33 & ‘34 prohibited fraud & deceit through reporting & disclosures

• Did not create an environment of government supervision

• American Capital Markets Dominated the World under these rules

Page 3: Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

History• 1980’s Drexel Burnham Lambert

• Michael Milken

• Rudy Giuliani

• 2000’s Tech Bubble Burst – Economic Externalities

• Eliot Spitzer pursued investment banks

• Cratering stock prices

• Exacting Expensive Settlements

• 2002 Spitzer went after Merrill Lynch - Settled for $100 M

• Proceeds went to Government coffers, rather than investors or stockholders

Page 4: Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

Currently • So Far this year Bank of America, JP Morgan Chase, Citigroup ,

Goldman Sachs have paid more than $50m, for supposedly misleading investors

• BP has paid a $13 billion penalty for Operational risk management

• Wasn’t until 1909 that Corporations were even capable of being found guilty

• Corporations had neither

• Bodies to be punished or

• Souls to be condemned

Page 5: Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

Criminalizing Business Conduct• When America was Founded There were only 3 Federal Crimes

• Treason

• Counterfeiting

• Piracy

• By the 1990’s – Over 300,000 Federal Statutes existed with criminal penalties attached

• Virtual double jeopardy for Investors, Stockholders, and Bondholders

Page 6: Upside of Risk Management vs. Unintended Consequences William McCabe AGA – Montgomery County/Prince Georges County Chapter March 11, 2015

Modis Operandi • Find a Large Company (may or may not have done anything wrong)

• Threaten Manager with Commercial Ruin

• Force them to pay enormous fines using shareholder money

• To Drop Charges (if any)

• Under a Secret Settlement - (no case law exists)

• No one can check the details (sealed settlements)

• Results - Increased government revenues

• In 100 years we have moved from requiring disclosure as the primary risk management tool, to in many cases criminalizing risk taking, bad decision making, and complex accounting issues