Wednesday, December 26, 2007

Tom Daula on Morgan Stanley's risk management

(Rick Bookstaber) In light of the risk management problems that have occurred at Morgan Stanley, I thought it was interesting to run into this description of risk management at Morgan Stanley on the web. It was written by the firm's Chief Risk Officer, Tom Daula. It all sounds pretty reasonable to me. Given that things did not work out according to plan, it would be enlightening to know where these plans went astray.

Naked Capital draws our attention to a few key quotes:
“Doctrine of No Surprises”: Risk management processes are designed to ensure senior management has the information required to achieve these objectives....

Limits
−Established at various levels throughout the Firm from trader tobusiness and are defined in terms of risk sensitivities, concentrations and portfolio exposures

−Generally set at levels to ensure that a material change in risktaking triggers a discussion between the trader or trading desk and management
Now recall that Morgan Stanley's $9.4 billion loss took place on a single desk, and appeared to result from a very few positons (a position and a related hedge). It seems incomprehensible how this could have occurred (trades get in trouble, but the mystery here is how it got so large before it was shut down). Some readers object, but [Naked Capital] thinks [based on comments] from an insider in a position to know, that this disaster started out as an error, is plausible. Reconfiguring a trade to try to stem losses, and then trying to double your way out of a hole is classic behavior.

1 comment:

suzan said...

Nice article about risk management