Brave new world

By Vince Calio

“Hedge funds and the derivatives market are making me nervous,” said Leslie Rahl, director of operations at Capital Market Risk Advisors, New York — the firm that sponsored Risk Standards Working Group’s original report.

“Hedge funds are taking huge positions that they never had before, so markets are behaving in unpredictable ways.” She added that carry trades, massive short positions and derivatives bets such as interest rate swaps could cost investors if the market turns against those strategies.

Ms. Rahl also warned that institutional investors need to better understand the risks presented by hedge funds and derivatives.

(July 11, 2005)
 

Hedge fund firms slow to join the party

By Christine Williamson

Institutional investors themselves are recognizing that there are “very large qualitative issues that have nothing to do with technology (and data). No system can ever fill all the needs of investors,” said risk consultant Leslie Rahl, president of Capital Market Risk Advisors.

Beyond the key hedge fund risks that can be analyzed quantitatively — valuation, portfolio characteristics, credit risk and stress testing, to name a few — institutions also need to perform regular qualitative due diligence, Ms. Rahl said.

“It’s the risks that can never be automated that investors have to go out and get answers for. I’m talking about issues like reputational and organizational risk. Like checking the governance processes of a hedge fund — the checks and balance. It’s not rocket science, but these issues are as important to risk analysis as anything you might use a computer for,” she said.

(July 11, 2005)

ERM requires practical approach to data analysis

By Regis Coccia

The goals of risk control are to ``know what risks you're taking, know what your tolerances are, minimize uncompensated risks and minimize unanticipated risks,'' said Leslie Rahl, president of Capital Market Risk Advisors Inc. in New York, a firm that provides consulting services to hedge funds and other investment managers. She previously was co-head of derivatives during a long career at Citibank.

Ms. Rahl likened identifying enterprise risks to a game in which a person identifies by touch an object in a box. ``Whatever metric you've adapted, you've got to pick several to get a picture of what's in the box,'' she said.

While stress testing capital is an important part of enterprise risk management, Ms. Rahl quipped, ``We seem to have a once-in-a-lifetime crisis every three or four years. We've got to deal as risk managers with the fact that these once-in-a-lifetime crises do happen.''

(May 9, 2005)

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)

The Great American Corporate Director Hunt

By Suzanne McGee

For more than two decades, Leslie Rahl had made her living analyzing risks, but she’d 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 derivatives losses. Fannie Mae, also a huge derivatives 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 redefined the 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 regulators had just announced an examination of Fannie Mae’s accounting practices following the company’s disclosure of a $1.1 billion error in its third-quarter 2003 earnings statement.

So rather than accept the position right away, 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 has prompted a huge earnings restatement and the resignations of Fannie’s CEO and CFO.)

“It seemed, and still seems, that I could be of value on this board, and that while it would be a time-consuming exercise, it wouldn’t involve an undue amount of personal liability,” she says. Besides, she adds, “I find tricky issues intriguing.”

Even Leslie Rahl, who brought a wealth of risk management expertise to Fannie Mae, benefited from some tutoring in the ways of the boardroom.  The mortgage giant agreed to foot a $6,250 bill for her to attend a three-day Harvard seminar to learn more about how to be an effective director.  “For someone who is used to digging deep into issues and problems, it is a challenge to step back and understand that a director’s role is to ask questions, not necessarily to have all the answers themselves,” Rahl says. “That’s one of the things that the course helped me understand.”

Consider Rahl and Fannie Mae.  Who better to serve on the mortgage lender’s board at a time when its capital markets and risk management practices are coming under harsh scrutiny than an expert in those fields?  “Clearly, I had no idea of the full magnitude of the events that would unfold,” Rahl says today, referring to the accounting controversy that since December has prompted the resignations of CFO Timothy Howard and CEO Franklin Raines, a restatement of earnings back to 2001 that is still under way and the conclusion by regulators that Fannie Mae is undercapitalized to the tune of $3 billion.  Still, she doesn’t regret her decision to join the board, even though her workload has expanded to include serving on a new compliance committee charged with helping to clean up the company’s accounting.

(April 2005)