"Mistakes Were Made"

SBF on the SDNY witness stand testifying in his own defense in his FTX fraud trial.

   

"The biggest mistake was we did not have a dedicated risk management team, we didn't have a chief risk officer. We had a number of people who were involved to some extent in managing risk, but no one dedicated to it, and there were significant oversights."

Right. Understatement of the century thus far.

 

I know a thing or two about financial risk management—back in the days of actual money. From my 2008 post Tranche Warfare:

"THE BEST THINGS IN LIFE ARE 'FEE'"

That was the oft-repeated sarcastic and cynical joke in executive circles at the privately held subprime VISA/MC issuer where I worked in risk management. My own initial supervisor, the hastily installed VP of Risk who'd been brought over from Collections, would candidly say in private that according our customers credit was like giving whiskey to alcoholics.

But, hey, it's legal. And, if we don't do it, someone else will.

"Churn & Burn"

I was hired initially in March of 2000 as a temp tech writer brought in to compose documentation for a pending OCC examination, and subsequently offered a permanent position as a "risk analyst" once they learned of my applied stats background and SAS programming fluency. When I arrived the operation was classic subprime "churn & burn," bordering on the "predatory" (some would say they'd crossed far over that border). Huge upfront and ongoing transaction fees charged to the financially desperate made it nearly impossible to lose money, heavy charge-off losses notwithstanding. Burn 'em up and churn new accounts.

At the outset of my tenure, the "Risk Department" was one effectively in name only, consisting of two holdovers of the prior risk manager's pro forma regime, one a quite saavy statistician, the other an econometrician -- both of whom had their eyes on the door.

There wasn't much "risk" to manage beyond those posed by nagging class-action litigation and pending consent decrees that were a familiar feature of the subprime domain (and cynically viewed simply as a manageable cost of doing business).

The new VP of Risk, though, set about to build an effective, "best practices" risk department, one eventually staffed by a platoon of astute MBAs and statisticians recruited from far and wide, one whose subprime credit risk modeling and portfolio management and operations analytics became the envy of the sector. The bank's portfolio and profits grew steadily and impressively, and charge-off losses declined impressively. We sailed through our regulatory examinations. The OCC eventually characterized us as "Best-in-Class" [pdf]. While most other subprime players crashed and burned during this period (including the largest issuers such as Providian and NextCard), our little bank had moved away from the reckless and predatory and into "near-prime" marketing territory...

We made successive record profits every year of the five I was there (my annual bonuses were very nice). We had financial risk by the throat. Market risk; interest rate risk; regulatory risk; reputation risk; operations risk; portfolio risk—all involving actual money rather than digital casino zero-sum table games tokens.

 "The biggest mistake was we did not have a dedicated risk management team..."

Yeah, bro. In your own too-little-too-late post-crash words, "I fucked up."

 

See my prior posts on this sorry SBF-FTX Custerfluck.

 

BTW: Tangentially off-topic, but still, related to finance. I guess (online sports gaming).

 

HALLOWEEN DAY UPDATE

 

I've been following a number of these YouTube crypto podcasts lately. This young woman, Carly Reilly, is interesting. I have no idea as yet as to what her Sheet is.

What an old coot I am. Below, Michael Lewis at the SBF trial.

 

UPDATE: OF FAR MORE IMPORTANCE

The IDF bombed a northern Gaza refugee neighborhood on October 31st, killing and wounding an as-yet unknown number of Palestinian civilians. Israel claims the target was a senior Hamas commander and his subordinates. The entire apartment neighborhood was reduced to large rubble-strewn craters by a reported six large aircraft-dropped bombs.

Click image.

"...No third party is going to step into Gaza to fight the insurgency planned for Israeli troops, rebuild the infrastructure and society shattered by war, and solve the long-standing problem of governance that Hamas’s armed presence has ensured will endure. Israel is on its own, and so it must find an alternative both to leaving Gaza quickly, thereby allowing Hamas to reemerge, at least as a political entity, and to staying and battling the inevitable insurgency.

Whatever Israel decides to do now that its ground attack in Gaza is under way, it needs to understand that no deus ex machina will swoop in and save it from the accumulated consequences of its actions since 1967. When the smoke clears, yet again, Israel and the Palestinians—and not anyone else—will be left to cope with their self-inflicted disasters."

OH, AND, BY THE WAY

 

Humans are crazy.

More to come...

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