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Business - Written by on Friday, January 23, 2009 12:11 - 2 Comments

Don Tapscott
Financial services industry requires bold steps

A panel of financial experts met yesterday at the Rotman School of Management at the University of Toronto to discuss bold approaches to solving the global credit crisis and rebooting the financial system.  I was the Chair. Present were:

Dan Borge: Director, LECG, a global expert services and consulting firm. Former senior managing director and head of corporate strategy at Bankers Trust where he was the principal designer of RAROC, the first enterprise risk management system. Author of the Book of Risk.

John Hull, Maple Financial Group Chair in Derivatives and Risk Management, Professor of Finance and Co-Director, Master of Finance Program, Rotman School of Management, U of Toronto

Robert (Bob) Tapscott
, interim CEO, RISConsulting

Moderator: Chuck Bralver,
Senior Associate Dean – International Business and Finance, Fletcher School of Law and Diplomacy, Tufts University (former Partner and Vice Chair, Oliver, Wyman & Company)

Chair: Don Tapscott, Chair, nGenera Insight and Adjunct Professor of Strategic Management, Rotman School of Management, U of Toronto


Dan Borge:  “Risk management came off the track in part because it became so technical with sophisticated analytics that got ahead of risk management knowledge and basic human judgment.  The result was that opacity became a huge part of the financial system.

“The industry was infected with perverse incentives.  For example, you had mortgage originators with no stake in the outcome.  There were no incentives to ensure the viability of mortgages, and everyone ended up fooling themselves.

“In the summer of 2007, Citigroup CEO Chuck Prince told the Financial Times that he was aware of the risks Citigroup was taking:  ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’  Well, the music has stopped.”

Dan Borge answers questions U of T Rotman School of Management session on Risk Management 2.0

John Hull:  “We saw too many people with the wrong incentives. They thought ‘well, we all know that something is wrong but nothing is going to change this year, so I’ll play the game until I get my bonus.’  The system and products became too opaque, complex and exotic to understand.”

Bob Tapscott:  “Numerous attempts to restart the engine, and they’ve all been unsuccessful. To establish trust and stability the banks need a very different model – something dramatic will have to change.  Tinkering will not solve the problem.  Government throwing money at the problem is not working to restore confidence in the system.  We need a global forensic exercise to open up the entire financial services industry.  This will take leadership and requires radical thinking, baking transparency into the system, and sharing of intellectual property, such as placing algorithms into the public domain.”

Bob Tapscott answers questions U of T Rotman School of Management session on Risk Management 2.0

Don Tapscott:  “The incentives to the industry were toxic, akin to a bacteria. A cultural change is required to achieve a healthy system.  Transparency is required to purge the system of inappropriate incentives and behavior.  It’s never been more true that sunlight is the best disinfectant.”

According to Bob Tapscott, fresh capital and updated regulations are necessary but insufficient to restore confidence. Bankers and business leaders should embrace a comprehensive private sector solution entitled Wiki Risk Assessment Process (WRAP 2.0).  The proposal would rethink the basic modus operandi of the financial services marketplace and create a new operating model.

“The Wiki Risk Assessment Process creates a global community of expert modelers and modeling resources dedicated to unlocking today’s credit and structured asset markets.  This would be achieved through an open, transparent and collaborative process for valuing and risk-assessing non-government credit securities and related instruments and contracts such as CDOs and credit derivatives,” said Bob Tapscott.  ”By tapping the ‘Wisdom of the Crowd’, WRAP 2.0 would introduce transparency and peering to value and risk measurement benchmarking.  It will invite all of the best valuation modeling minds to collaborate in the process. This would contribute significantly to restoring confidence and liquidity in the world’s credit markets.”

Bob Tapscott referred the audience to www.WRAP20.com for more details concerning his proposal.


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Stuart Berman
Feb 9, 2009 17:22

Nice article.

The sentence that really catches my attention is: “To establish trust and stability the banks need a very different model – something dramatic will have to change.” It seems that the risk model adapted iteself very well to conform to the intents of the environment that is make sure the incentives and regulations are justified by way of the model and in the event of a failure blame an outside actor. In order to establish trust and stability the underlying system needs to be trustworthy (as opposed to throwing money at a clearly broken model that no one will stake their future on). Go back to the intentions; the expected outcomes; and the rationality of the regulations and the incentives and determine what would need to change to affect the value of that system to rational actors and there is a chance of fixing it.

Certainly some public humiliation of those who benefited from the ill conceived plans may also help deter those who would try to rebuild such a house of cards. On the other hand if those we have entrusted (whether they are public figures or commercial risk experts) only seemed to have been rewarded for their negligence then all bets are off. A tough political pill to swallow considering that the temptation will be to scapegoat individuals with arguments that will end up be less than convincing. (Perhaps a very good Wisdom of the Crowds test.)

Wikinomics» Blog Archive » Financial services industry requires bold steps
Feb 12, 2009 15:45

[...] I posted earlier, a panel of financial experts met at the Rotman School of Management at the University of Toronto [...]

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