Banks and Broker/Dealers

CMRA has consulted to many banks and brokers/dealers around the world on both proactive projects and investigation/litigation support matters. Projects for banks and broker/dealers have ranged from risk management, to governance, to valuation, to capital market strategy. The breadth of our client base (including hedge funds, money managers, funds of funds, investment banks, commercial banks, derivatives companies, institutional investors) as well as geographic diversity (we have clients on 6 continents) gives us a unique cross industry perspective.

CMRA's principals has been involved on the front line of every facet of the banking and broker/dealer business from trading to risk management to new product development to origination to documentation to legal issues.

Selected Assignments for Banks and Broker/Dealers

• Benchmarked the practices of many investment banks, commercial banks, and derivatives companies.
• Vetted many complex pricing models
• Assisted clients in building derivatives businesses, selling and exiting derivatives businesses, the creation of derivatives product companies and on the acquisition of a credit derivatives business
• Advised on all aspects of both OTC and exchange traded derivatives (swaps, options and hybrids)
• Conducted comprehensive reviews and risk diagnostics for a large cross-section of firms
• Advised several clients on Chief Risk Officer (CRO) roles, responsibilities and selection.
• Advised the Board of Directors and Senior Management of several banks on the measurement for all financial transactions including derivatives
• Drafted and reviewed risk management policies and practices for many banks, investment banks and broker/dealers
• Advised several clients on a charter for a Risk Committee of the Board
• Reviewed the CDO and CLO valuation and risk management approaches of several major institutions
• Assisted several firms in formulating "Risk Appetite Statements"
• Evaluated risk management practices of sizeable Korean broker/dealer
• Reviewed the asset/liability management framework and approach of several regional banks
• Evaluated market, credit, operational and liquidity risk management policies, practices and approach for many banks including an emerging market bank
• Evaluated risk measurement, limits, policies and procedures and reporting processes of several large banks.
• Engaged by a Japanese think tank to provide in depth research on risk management practices of major banks and investment banks
• Advised several firms on the structure of their Risk management Governance Committees
• Consulted on best practice for credit derivative swaps (CDS)
• Provided expert testimony on the complex commodity derivatives involved in Sumitomo's trading scandal on behalf of a large bank.
• Provided expert testimony for a large European bank in an arbitration regarding the valuation and profitability of an unusually long term exotic option
• Provided an expert report in a inter-dealer dispute over interpretation of asset swap and repo agreements
• Conducted a comprehensive review of Banker's Trust's derivatives business commissioned by the Federal Reserve, SEC, CFTC and NYS Banking Commission
• Analyzed by the valuations in a litigation relating to margin calls on an MBS hedge fund for a large broker/dealer
• Analyzed the issues in a litigation matter relating to margin calls and liquidation of hedge fund with significant mortgage backed and emerging market exposures for a large European bank.
• Analyzed a complex CLO and provided an expert report in a dealer/investor dispute.
• Provided valuation and market practice expert report and testimony in Askin/Granite Funds meltdown

Selected CMRA in the Press re: Banks and Broker/Dealers

VaR Enough?
Market turbulence tests the limits of Value at Risk
By Irwin Speizer

When an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. "You can't rely on VaR as your only metric," says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. "We recommend people use three to five different metrics. It's like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things."

A veteran of 35 years in the financial industry and a financial engineering pioneer, Rahl ran the derivatives business at Citibank in the 1980s before establishing her consulting firm in 1991. She preaches the importance of rigorous risk analysis and testing to cope with the impact of the types of investments she peddled in her earlier role.

Rahl recommends applying stress tests to see how a portfolio would react to sharp drops, market shifts, unusual situations or changes in underlying assumptions. Stress-testing models, which are included in risk systems, can reveal weaknesses that a simple VaR test misses. But Rahl says too many financial firms continue to rely mostly on VaR. Back in April 2000, Rahl's firm conducted a survey of risk practices and found that 45 percent of financial firms, including hedge funds, were not using stress tests at all. Although she hasn't updated the survey, she says she has noticed only a slight improvement since then.

"In risk management only about a third is quantitative," Rahl says. "A third is still a big part of the puzzle, so it is quite valuable." The remaining two thirds of the puzzle is where good risk managers earn their money. Ultimately, an accurate forecast depends on knowledge, experience and chutzpah.

"It has nothing to do with the computer," Rahl says. "It has to do with wisdom and experience."

And perhaps a bit of luck.
(June 2008)

 
Debtwire
Citibank responds, sues for breach of contract in credit default swap case
By Danielle Reed, New York

Citibank filed a response 23 April and countersued for breach of contract in its ongoing court battle with a hedge fund over a credit default swap.

Whatever the outcome of this particular case, the mere fact that such issues are being litigated highlights a source of concern to longtime derivatives market participants: Namely, the growing participation of hedge funds in the CDS market. "One of the things that has been of great concern to me for a long time is [the] many new entrants to the credit default swap market, especially hedge funds who have not cut their teeth on less complex over-the-counter derivatives...before taking on large sized positions in CDS," said Leslie Rahl, founder and president of Capital Market Risk Advisors. A pioneer in the derivatives market, Rahl said she is "pro-derivatives" but fears that "some of the newer players don't fully understand the differences between a liquid, transparent securities market and the world of over-the-counter derivatives."
(April 28, 2008)

The multibillion-dollar question: Who's minding the shop at CIBC?

Leslie Rahl has an impressive resume'. She's founder and president of Capital Market Risk Advisors, a firm that, in its own words, has "played an integral role in the evolution of hedge funds, derivatives, structured securities and risk management for more than 15 years.

Ms. Rahl has given 35 years of her life to high finance, 19 of them at Citibank, including nine as co-head of Citibank's Derivatives Group in North America where she pioneered the development of the swaps and derivatives business. She graduated at MIT and its Sloane School of Management.

So she sounds like a perfect, if late, addition to Canadian Imperial Bank of Commerce's board of directors. Ms Rahl joined the board in May of this year, so don't blame her for the bank's most recent cock-up. But what about the other members of the board, and in particular the risk committee Ms. Rahl sits on? What burden of responsibility should they shoulder for CIBC's latest costly blunder?

CIBC says its board is meant "to supervise the management of the business and affairs of CIBC. The quality and independence of the directors, as well as adhering to high ethical standards, are critical to fulfilling the board's oversight obligations."

Ms. Rahl did speak about risk in general. Her advice to directors: "Ask tough questions." One hopes her appointment is more than window-dressing, that it shows the bank is serious about the mandate it givers the board. She has those credentials, after all. But you need more than that, apparently, Ms. Rahl is also the chair of the risk committee over at Fannie Mare – a lender whose subprime writedowns might go as high as $14- billion (U.S.), according to Barron's.
(December 31, 2007)

Amassing your governance capital
By Alice Korngold

On a nonprofit board, you will work with others to develop the organization's greater vision, revenue model, and case for support. Leslie Rahl, president of Capital Market Risk Advisors, points out that "you deal with matters of ethics that transcend what you learned in business school. You learn the dynamics of being part of a team of peers, of knowing when to defer to others, especially in situations where you are also ultimately responsible and accountable."

Rahl was asked to join the board of Fannie Mae in 2004. Her firm specializes in risk management, hedge funds, financial forensics, and derivatives, and she has authored books on hedge funds. She has an undergraduate degree from MIT and an M.B.A. from MIT's Sloan School.

Clearly, her business expertise qualified her to serve on the Fannie Mae board, but it was her nonprofit board experience that distinguished and elevated her as a candidate. "When they were interviewing me for the position," she explains, "the Fannie Mae board members spent a great deal of time asking me about my work on the board of 100 Women in Hedge Funds and my experience in chairing its philanthropy committee in particular." She adds, "Once I was identified for the Fannie Mae board, and my business qualifications were dear, my having served on a nonprofit board was definitely considered a plus."

Business background may open the door, but leadership experience gets you into the boardroom. Rahl was recently elected to the board of CIBC, a leading North American financial institution Hedge funds vary widely in the quality of their internal controls and disclosures, said Barbara Lucas, a partner at Capital Market Risk Advisors, a financial advisory firm. When it comes to the quality of hedge fund operations, "we see the good, the bad, the ugly and the indifferent," said Lucas, a longtime securities attorney. "It's really all over the place."
(Third Quarter 2007)

Risk Management Decoded
By Liz Peek

"Risk management" has a nice ring to it. Not only does it suggest that a hedge fund team, for instance, has pretty much thought of all the things that could go wrong — it has also, bless its heart, managed those nasty surprises.

Leslie Rahl, founder and president of Capital Market Risk Advisors and a board member of Fannie Mae, has an excellent perch from which to view the unfolding of this latest debacle. According to her Web site, her company is "the preeminent financial advisory firm specializing in risk management, hedge funds, financial forensics, and risk governance."

Ms. Rahl graduated both from the Massachusetts Institute of Technology and its Sloan School of Management and was formerly head of Citibank's derivatives group. She actually understands all those complex formulas that are supposed to identify risk. Numbers are to Ms. Rahl as Cheerios are to the rest of us: uncomplicated and easily consumed.

Her take? "Risk management is all about thinking about two or three standard deviations from the mean. No one ever expects events to fall beyond that. Once in a lifetime events that fall outside that parameter have exponential, not arithmetic, consequences. Risk management is built around models, and models are built around assumptions. The models will work if things behave the way you model them to — but they never actually do. These events are somewhat expected, but we keep forgetting. You can't expect a computer model to anticipate changes. This is the big flaw — I keep reminding clients of this — that their assumptions are not the worst case."

"By definition, most risk people are young quants," Ms. Rahl said. Most, she said, do not carry their modeling back far enough to include similar events, such as the 1994 bankruptcy of Orange County, which she views as somewhat analogous to today's situation. "In 1994, the money funds broke the buck," Ms. Rahl said, referring to the unthinkable: a money market fund that experiences such credit issues with its portfolio that it no longer trades at a dollar. A similar deterioration in shortterm instruments occurred over the past two months, as a few money market funds got into trouble. The credit problems in the early 1990s stemmed from holdings of "inverse floaters" and the "kitchen sinks" — the names given to the leftovers of collateralized mortgage obligations after they had been sliced and diced and the higher-grade parts of the securities had been bought by savvier investors.

At the end of the day, we are reminded of the peril of investing in instruments so complicated that few could really understand them. "Even for me, who loves complex things, it's very complicated," Ms. Rahl said. That's all we had to know.
(September 13, 2007)

The Pain Moves Beyond Subprime
By Matthew Goldstein and David Henry

The ultimate worry is that the trouble in the junk-debt markets will spread to the traditional corporate bond market and create a full-fledged credit crunch that would threaten the economy. That scenario may be unfolding. Issuance of investment-grade corporate bonds fell 72% in July from June's level and 34% from July, 2006, according to Dealogic. And some say the subprime-mortgage and leveraged-loan markets are harbingers of wider credit troubles. …Adds Leslie Rahl, president of Capital Market Risk Advisors in New York and former co-head of Citibank's derivatives group: "Nothing stays rosy forever. We've been in a rosy world, with credit spreads at historically tight levels for some time now. But we seem to be leaving it."
(August 2, 2007)

Levered Bear Funds: A Peek into the Black Box
By Chidem Kurdas

"People forget that even when there's careful mark-to-market pricing, portfolio valuation does not necessarily reflect the actual price you'll get at execution," said Leslie Rahl, president of Capital Market Risk Advisors in New York. "There can be a huge difference between honest mark-to-market price and execution price."
(June 26, 2007)

The Synthetic CDO Shell Game Could the hottest market in all of fixed income be a disaster in the making?
By Bill Shepherd

"One of the questions people have to ask themselves is, how will these synthetic instruments behave in times of stress?" says Leslie Rahl, a former Citibank risk expert who now runs Capital Market Risk Advisors, a risk consultancy in New York. Normal risk modeling only approximates normal markets-the real test comes in extreme markets. And as Rahl likes to say, "We have a once-in-a-lifetime crisis every three or four years."

"If you want to get out early, it costs you," says CMRA's Rahl. "People don't fully understand the degree to which, if over-the-counter markets freeze up, there could be substantial differences between what a theoretical model tells you something is worth and where a buyer and a seller are willing to transact."

Even the skimpy historical record may be distorted by the ways that new entrants change market behavior. "There have been significant changes in how the credit markets work," notes Rahl. For instance, "the role of banks in working out bad credits has changed dramatically. Bondholders now play a much more significant role. So looking at data from the 1980s, probably there's little resemblance to the workout patterns and partners of today."
(May 16, 2005)

Where the jobs are: Chief Risk Officers
By Suzanne McGee

"Businesses need to be able to take risk in order to make money, but they need to know how to do so wisely," says Leslie Rahl, founder of Capital Market Risk Advisors, a New York-based consulting firm. Ms. Rahl, who is often consulted by headhunters or chief executives seeking a chief risk officer, says she sees the role as just as important as any other top-level executive position.
(May 4, 2005)

Corporate Governance
The Great American Corporate Director Hunt
By Susanne McGee

It's never been more vital - or harder - to attract qualified independent directors. Who needs the hassle? Yet good corporate governance depends on how companies cope with today's director shortage.

For more than two decades, Leslie Rahl had made her living analyzing risks, but she never come across one quite like this: In December 2003, Fannie Mae approached her about taking a seat on its board of directors

Rahl was honored, and in many ways she was the perfect candidate for the now-troubled mortgage lender. A star options trader for Citibank in the 1980s, she had opened her own consulting shop, Capital Market Risk Advisors, in 1994 and was soon counseling Orange County, California, on how to handle $2 billion in derivative market player, needed a financial expert on the board to replace former Goldman, Sachs & Co. chairman Stephen Friedman, who was leaving to join George W. Bush's administration as director of the National Economic Council.

But Rahl was also a little worried. She had never been a public-company director before, and the previous few years of corporate scandals and strict new regulations had refined then nature of board service, turning what had often been a cushy networking opportunity into a high-risk endeavor. Congress's quick response to frauds at companies like Enron Corp. and WorldCom – the Sarbanes-Oxley Act of 2002 – had heaped unprecedented legal and financial responsibilities on board members. Regulators, activist shareholders and trial lawyers increasingly were targeting directors for failing to question or prevent corporate misdeeds. Complicating things further for Rahl, federal regulations had just announced and examination of Fannie Mae's accounting practices following the company's disclosure of a $1.1 billion error in its third-quarter earnings statement.

So rather than accept the position right way, the risk expert embarked on several weeks of painstaking due diligence. She spoke with other Fannie Mae directors, scrutinized the company's financial statements going back several years and even asked her husband, a bankruptcy lawyer, to vet the offer from a professional perspective. After two months of checking out the company, she agreed to join its board. (Since then the accounting probe had prompted a huge earnings restatement and the resignations of Fannie's CEO and CFO.)
(April 2005)

Risk Pro for Fannie
By Barbara A. Rehm, Robert Julavits, and Geeta Sundaramoorthy

Fannie Mae is adding former Citigroup Inc. banker Leslie Rahl to its board of directors, filling the seat formerly held by Goldman Sachs & Co. alum Stephen Friedman, who joined the Bush administration as the director of the National Economic Council in late 2002.

As the president and founder of Capital Market Risk Advisors Inc., Ms. Rahl specializes in risk management and capital markets strategy. She previously ran her own consulting firm, Leslie Rahl Associates, which concentrated on swaps, options and derivative products.

Her years at Citi stretched from 1972 through 1991; she rose to co-head of the company's North American derivatives group. She holds two academic degrees, including an MBA from Massachusetts Institute of Technology.

"Leslie Rahl's experience in the financial markets and her understanding of the derivatives markets will bring us an extremely broad range of skills, which will benefit our board, senior management, and our company as a whole," said Franklin D. Raines, Fannie's chairman and chief executive, in a news statement. "Leslie has a keen understanding of financial markets and an interest in the mission of Fannie Mae, and we look forward to benefiting from her expertise."
(February 20, 2004)

Derivatives Under Fire X

Around Wall Street, the potential for vilification of all derivatives is no small area of concern. "When there's a car accident, " asks risk management consultant Leslie Rahl, "do you blame the driver? Or do you blame the car?"

... few doubt that new derivatives abuses will sprout to replace them. Rahl, who runs Capital Markets Risk Advisors, says she's not a big believer in rigid rules governing derivatives practices. "Those only encourage creative financial engineers to work around them," she says.
(May 20, 2002)

Buffett Unit's Exodus From Derivatives Raises Questions

"There is no doubt that the less liquid and more exotic the derivatives position, the more subjective the estimate of value is. Clearly, that was an issue at Enron in some of their positions," said Leslie Rahl, president of Capital Market Risk Advisors Inc., a New York derivatives consulting firm.

She said derivatives is "a business you either have to be in with commitment, and willing to take the risks in return for the rewards that can be repeated and willing to grow it, or it's probably not worth the effort to do it in a small way, because you need a tremendous amount of infrastructure, whether you have one deal or thousands."
(May 10, 2002)

Cover Story: THE GLOBAL CRISIS: FINANCE
UP THE VOLGA WITHOUT A CALCULATOR
At this point, banks can't figure their their exposure
By Gary Silverman in New York

The banks had to say something. As their share prices crumbled in response to Russia's default on August 17th, financial institutions around the world have scrambled to come up with numbers for their Russian losses. And that raises a question: is that all there is?

Just as perplexing is how to account .for derivatives and hedge fund losses. Capital Market Risk Advisors estimates total Russian derivatives exposure could be $65 billion.
(September 14, 1998)

New York Newsday

In the forbidding corner of the Wall Street jungle known as the derivatives markets, where the locals are known as hard-quants, rocket scientists or just plain nerds…Leslie Rahl is widely considered among the best of native guides for wary travelers.
(January 19, 1995)

Grant's Interest Rate Observer
Making a model

"What Red Adair is to oil and gas exploration, CMRA is to financial engineering
(August 12, 1994)