Who’s the Best on Wall Street: Risk Management Report Card
Rival bankers griped at this. But analysts said overall its liquidity was second to none, and its risk culture was strong. It also got fairly high marks for its capital hoard and sticking to its guns on trading limits. This last may seem ironic given that the losses at the CIO came because traders were allowed to run amok. But one of the first things JPMorgan did to fix the problem: Introduce granular trading limits at the CIO, which the firm acknowledged as a risk management failure.
Morgan Stanley comes in third, with liquidity its strongest suit. The firm has invested a lot in its risk systems since trader Howie Hubler lost $9.5 billion on one trade in 2007.
“Morgan Stanley has a long way to improve,” said CSLA analyst Mike Mayo. “Over the last decade they hired employees when they should have fired them, they fired employees when they should have hired them, they zigged when they should have zagged. And they are still trying to get the formula correct."
But Mayo has a lot of time for CEO James Gorman. Mayo published a report upgrading the stock in mid-July that also said Gorman should be sacked for the stock performance. About ten minutes after publishing the report, Mayo got a message that Gorman had called. He returned the call with some trepidation, but when Gorman picked up, the first words out of his mouth were “That wasn’t very nice!”
“It completely broke the ice,” Mayo said.
What followed was an intelligent discussion of Gorman’s efforts to turn the company around, and the time he has spent on cleanup. Mayo said it didn’t change his thesis at the time, but the conversation showed Gorman is “listening to investors on how to create shareholder value.”
Bank of America comes in fourth, just ahead of Citigroup. Analysts say both institutions are paying for their history of acquisitions. That has created legacy systems that have been difficult to coordinate. Analysts generally give Citigroup a lot of credit for investing in streamlining its systems, and shedding risky assets. Bank of America also gets kudos for slimming down, but analyst Schorr says on the systems side, it’s still playing catch-up.
(Read More: Weighing Risk: Not Sexy, But It Matters.)
The analyst who has the biggest bone to pick with Citigroup is Mike Mayo. He sees Citigroup’s failure to acknowledge a negative say on pay vote by changing its compensation hurdles for CEO Vikram Pandit as a risk management issue.
“The CEO sets the tone at these big banks,” Mayo said.
Citigroup has said that its chairman Michael O’Neill is following a board mandated process for addressing the say on pay vote which occurred at this year’s annual meeting. The process involves talking to lots of shareholders.
“I think it’s fair enough for the company to say, ‘Time out, you realize he made zero the year before and zero the year before that,'” said Nomura’s Schorr. “He didn’t create this mess. He came in to try and help fix it.”