Litigation Support/Expert Witness/Investigations

CMRA provides expert services in both investigations and litigation. As true "experts" who have extensive hands on experience and whose practice is balanced between sharing our expertise with clients who are trying to avoid/solve problems and those who are litigating/investigating problems, we are uniquely qualified to provide advice and testimony.

CMRA has been involved in investigations and disputes arising from most of the financial meltdowns in the past 20 years. We have prepared expert reports and/or testified in numerous high profile cases involving complex financial instruments and have participated in several high profile investigations.

CMRA was called "The Red Adair" of financial engineering by Grant's Interest Rate Observer and was hired by the Fed as an advisor on the LTCM aftermath.

Leslie Rahl has been selected as a member of the prestigious "Panel of Recognized International Market experts in Finance" in The Hague.

Selected Assignments

Examples of meltdown-related experience include:

Current Crisis

  • Expert in $1.5B definition of "bankruptcy" and "limited 2 way payment" litigation
  • Expert in several SEC enforcement actions
  • Expert in TRS restructuring litigation
  • Expert in monoline CDS litigation
  • Expert in MBS fund litigation
  • Expert in Cva/Fva dispute
  • Expert in exotic fx derivatives $1B+ litigation
  • Expert in multiple Lehman related matters
  • Expert in multiple CDO investigations and litigations
  • Both a liability and a damages expert in a litigation related to margin calls, valuation, and events of default on a Total Return Swap on a bespoke portfolio of loans
  • Expert in litigation concerning margin calls and liquidation of exchange traded commodity futures and options
  • Expert on valuation in event of default on municipal swap
  • Expert on loss on complex, structured derivative in the context on the 17 month standstill in the Canadian ABCP market
  • Consulting expert in major bankruptcy derivative valuation case
  • Expert in SEC enforcement action based on lack of purported diversification
  • Expert in an arbitration on the business decisions in entering a swap vs other alternatives
  • Expert in litigation on the meaning from a practitioner's perspective of insolvency and default under ISDA
  • Valued a portfolio of 200+ non-agency RMBS and provided an expert report in a regulatory investigation
  • Expert in an ABCP litigation
  • Provided advice in several pre-litigation reviews of valuation of complex derivatives in bankruptcy
  • Expert in liquidation of large, MBS hedge fund
  • Expert on valuation of ABS/MBS portfolio that was liquidated
  • Expert on liquidation of 40K OTC derivatives in a bankruptcy
  • Valued complex structured products in counterparty bankruptcy for several SPV's
  • Advised a major dealer on valuations of over 40K level 2 and level 3 credit and mortgage derivatives in a counterparty bankruptcy
  • Advised on interpretation of 1987, 1992 and 2002 ISDA Master Agreements
  • Consulting experts on hedge fund CDO litigation
  • Expert witness in operational "Best Practices" for CDS
  • Advised sovereign wealth fund in redemption valuation and other issues for an emerging market hedge fund
  • Advised on issues related to losses incurred in short duration bond fund


  • Provided analysis of commodity derivatives

Tech Bubble

  • Analyzed the corporate governance issues surrounding a recapitalization of a media company

Columbus Day Mortgage Meltdown

  • Advised on interpretation of 1987 ISDA agreement
  • 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 the issues in a litigation relating in numerous margin calls of an MBS hedge fund for a large broker/dealer

Russian Debt Crisis

  • Consulting experts on hedge fund CDO litigation
  • Advised on the unwinding of an emerging market hedge fund with over 100 derivative positions including valuation and market practice issues
  • Provided an expert report and testimony in a London based arbitration regarding interpretation of ISDA documents in light of the Russian debt crisis

1997 Asian Flu

  • Consulted re market practice re credit derivative swaps with Korean counterparties

1994 Meltdown

  • Orange County
    Analyzed the circumstances surrounding Orange County's margin calls (pre-bankruptcy) and blew the whistle, see WSJ article – re: CMRA's bailout effort)
  • Askin
    Provided valuation and market practice expert report and testimony in the Askin/Granite Funds meltdown
  • Bankers Trust
    Was hired by the Federal Reserve, SEC, CFTC, and NYS Banking Commission to conduct a comprehensive review of the derivatives business of Bankers Trust post Proctor & Gamble/Gibson Greetings
  • Breaking the Buck
    Advised money market fund concerning "breaking the buck" as a result of investments in mortgage backed "kitchen sinks" in 1994

In addition, we have provided expert advice, reports and testimony in a wide variety of litigation

  • Drafted expert report in Delaware Shareholder derivative suit raising issues concerning redemption of several classes of preferred shares
  • Provided an expert analysis and report in a corporate pension dispute
  • Reviewed remedial procedures adopted by a major broker-dealer as part of a settlement of SEC enforcement action involving front-running and submitted report to the SEC as to their sufficiency
  • Prepared expert report and was deposed in Federal Tax Court case involving long-term repurchase agreements
  • Drafted expert report in arbitration involving alleged mispricing of settlement prices and volatilities on options traded on the New York Future Exchange
  • Provided expert consulting regarding the valuation of a complex purchasing option embedded in a contract
  • Provided expert report and testimony on behalf of a large European bank in an arbitration related to the profitability of an unusually long term option
  • Provided a "fair value" opinion to a large bank on illiquid securities
  • Provided expert testimony and analysis in a Federal Court trial involving FX options
  • Analyzed a complex CLO and provided an expert report in a dealer/investor dispute
  • Provided an expert report and testimony in Federal Tax Court regarding a complex derivatives structure
  • Provided an expert report in an inter-dealer dispute over interpretation of asset swap and repo agreements
  • Provided an expert report in London litigation arising out of the Sumitomo copper scandal
  • Provided an expert report in a case involving late trading

Recent and Upcoming Speeches re: Litigation

November 2011

Lehman Derivatives Framework, "Flip" clauses, and Greek CDS - Peter Niculescu
18th Annual Distressed Investing Conference
Read the press release
November 28th, 2011

September 2010

Structured Products and Derivatives Litigation and Valuation - Leslie Rahl & Peter Niculescu
NY State Bar Association Derivatives and Structured Products Law Committee Meeting
September 21st, 2010

May 2010

Valuation of Derivatives and Structured Products in Litigation / Derivatives and Structured Finance Risk Management - Leslie Rahl
NY State Bar Association Derivatives and Structured Products Law Committee Meeting
May 25th, 2010

CMRA in the Press re: Fiascos

The Wall Street Journal

Role of Bond Insurer ACA at Heart of Government's Case
By Serena Ng

A small bond insurance company that imploded after taking on too much exposure to subprime mortgages is at the center at the government's case against Goldman Sachs Group Inc.

"If ACA performed an independent analysis and concluded that the [Abacus] portfolio met ACA's criteria, I'm not sure what the issue is," says Leslie Rahl, president of Capital Markets Risk Advisors, a derivatives and structured finance consultancy in New York.

In essence, "one sophisticated market participant thought that the portfolio was a good 'buy' and another a good 'sell' -- that happens all the time in financial markets and is what makes markets," she adds.
(April 2010)

Fed carrying losses from Bear portfolio
By Henny Sender in New York

The US Federal Reserve is sitting on significant paper losses on the real estate assets it acquired in the Bear Stearns rescue, with much of the red ink coming from debt used to back some of the most high profile buy-out deals of the bubble years.

Peter Niculescu, the former chief business officer of Fannie Mae who is now with Capital Markets Risk Advisors, said he nonetheless believed that the Fed could have used more demanding criteria.
(February 2010)

American Banker

Viewpoint: Lesson Learned in '30s: End Marking to Market
By Peter Niculescu

A lot of attention has been paid to mark-to-market accounting of late, with recent congressional hearings and proposals by the Financial Accounting Standards Board to modify impairment accounting and valuations.

But few know that there is even an argument that the decision to end this method of accounting for capital helped end the Great Depression. Disclosure of market marks, by contrast, is not a problem and, in fact, should be extended and enhanced. Using mark-to-market accounting in profit and capital calculations is the culprit: It contributes to a vicious spiral.

In 1938 the Office of the Comptroller of the Currency ended mark-to-market securities evaluations in banking, saying, "Bank investments should be considered in the light of inherent soundness rather than on a basis of day-to-day market fluctuations" (Federal Reserve Bulletin, July 1938). The remaining years of the 20th century did not suffer this contribution to exacerbating banking crises. Even the deep recession of 1981 and the subsequent savings and loan and banking failures were less disastrous because capital was not marked to market. Gradually over the last decade, the mark-to-market approach has come back into accounting theory and capital calculations — and with it extreme financial instability.

Going back further, financial history shows an irregular pattern of financial meltdowns every few decades throughout the 19th and early 20th centuries. The marked-to-market balance sheet was then thought of as a natural means to assess bank and trust company capital. But when markets become distressed, marking to market causes cascading financial failures. Every depositor tries to flee a bank that cannot sell its illiquid assets, and the institution fails.

This problem was recognized in 1931, and the regulators tried to mitigate the effect by reducing the impact of marking to market. It did not help until, in 1938, they repealed it.

Marking to market works like this: Securities have to be marked down through profits and capital at current market prices if there is a reasonable chance of a loss of any principal, even if these are fire-sale prices. The banks that invest in securities risk being rapidly made undercapitalized. They have to sell securities to reduce their capital needs and capital exposure. As distressed investors sell, security prices drop, prompting more distressed selling and risking more undercapitalization. The vicious spiral kicks in.

The phenomenon was well known in the Great Depression. Friedman and Schwartz, who wrote the definitive monetary history of the United States, put it this way: "Banks had to dump their assets on the market, which inevitably forced a decline in the market value of those assets and hence of the remaining assets they held. The impairment in the market value of assets held by banks, particularly in their bond portfolios, was the most important source of impairment of capital leading to bank suspensions, rather than the default of specific loans or of specific bond issues."

A contemporary observer, R.W. Goldschmidt, made the same point in the 1930s: "The depression of bond values, which started as far back as 1929 in the field of urban real estate bonds and reached foreign bonds and land bank bonds in the course of 1931, began to endanger the whole banking structure and notably the large city banks the moment first-grade bonds were affected in a most dramatic way."

Distressed prices are generally far below the expected payments (the "inherent soundness") that the investor will get over time. Risky, distressed securities must surrender a large risk premium.

But what of true marking to market? The complete marking to market (not just of financial assets) of all financial institutions' balance sheets should be reported quarterly (not just annually). It is not required or disclosed today for most banks or insurance companies. If it were disclosed, it might show that most major financial institutions in the country have negative marks. But what does that mean? Only that if everybody tries to sell at the same time, it can't be done.

It emphatically does not mean the institutions should be shut down. If they are generating positive cash flow, then they can borrow and lend and will probably generate good returns in the long term. The regulator can decide to shut them or not, making an assessment of long-term viability. But do not look at distressed asset prices as the only indicator.

Capital based on the mark-to-market approach is only an accounting theory, not a fact. Capital is widely misunderstood as being cash on hand, a stock of gold coins in some deposit box. Nothing could be further from the truth. Capital is an accounting concept that mixes accrual accounting for loans and liabilities with accounting for securities that is sometimes accrual but becomes mark-to-market when securities become distressed. So we get stability until markets melt down, then dynamic instability when the vicious spiral gets going.

Mark-to-market accounting is required to affect only securities assets, not loans and not liabilities. Half of financial intermediation happened through the securities markets until the meltdown began. Marking to market now stops securitization. Nobody can afford to invest in securities if they risk a mark-to-market hit to their capital.

Intermediation can only happen through loans or securities that have no realistic risk from marking to market (such as the mortgage-backed securities of government-sponsored enterprises). Bringing back securitization requires the end of capital marking to market, and rapid economic recovery needs a revival of the securities markets as well as expanded lending by banks.

The OCC said it well in 1938: "By severing appraisal of bank investments from current market quotations, it is believed that the banks will be encouraged to purchase securities of sound business and industrial concerns, whether large or small, for their true worth and not for speculative gains." And "as the banks avail themselves of the opportunity, the necessity will be diminished for the creation of government agencies to furnish credit facilities which the banks should provide."
(March 2009)

The Wall Street Journal

Downpayment Insurance
By Peter Niculescu and Beth A. Wilkinson

Much of the government's housing policy to date has focused on helping struggling homeowners stay in their homes and resolving the problems caused by declining asset values. Both are important. But unless policies encourage people to buy houses and work off the current inventory backlog, house prices will continue to tumble.

One step toward this goal is to stabilize housing prices by reducing the risk of buying a home with little or no cost to the taxpayer. One solution is a government-sponsored downpayment insurance program for new home buyers. This could bring responsible home buyers back into the market and create a floor for home prices.

Here's how the program would work. Home buyers could purchase insurance for their downpayments: To qualify, they would have to keep the home for at least five years. The insurance policy would be written on an assessment of average home values in the neighborhood. If a homeowner can maintain or improve the home and sell it for more than his neighbor's, he gets any profit above the original purchase price. If home prices are lower when he sells, the homeowner gets to keep the downpayment.

To mitigate the risk to the taxpayer, the policy should be capped at 25% of the home value. Larger downpayments would not be fully insured, nor would larger declines in home prices. The program we're outlining is meant to temporarily stabilize home prices. Thus it should have a relatively short life, perhaps two years.

How much will it cost taxpayers? Maybe nothing. Housing is going through a powerful correction but will revive over time, and the economy will too. If, as is most likely, the insurance helps to arrest the drop in home prices before five years are up, taxpayers will pay no claims but keep the premiums.

Even if prices do keep dropping, the cost will likely be less than most of the other stimulus measures being proposed. To incur a monetary cost to the taxpayer, the person who bought a home over the next two years would have to sell it, and average prices in his neighborhood beyond five years would have to fall. Most homeowners at that point would choose to stay in their homes, knowing their downpayment is still safe. For those who are at risk of default and have to sell, the taxpayer will make payments straight into their pockets, reducing the chance of foreclosure.

At that point, downpayment insurance becomes an automatic stimulus package that only kicks in when it is really needed.

Since virtually all conforming mortgages are now being underwritten by an arm of the government (the Federal Housing Administration, Fannie Mae or Freddie Mac) the taxpayer is already exposed to the risk of default. For the Federal Housing Administration programs in particular, the government is bearing the full risk of further home price declines on home purchases with loan-to-value ratios frequently above 90% or 95%. This program merely extends the taxpayers' exposure by a fraction: the downpayment on home purchases going forward.
(March 2009)

CFA Magazine

When Proof Meets Pudding How have crisis-proofing strategies fared during the recent turmoil?
By Christopher Wright

In the July/August issue of CFA Magazine, the Portfolio Performance section looked at four basic approaches to crisis-proofing a portfolio: hedging, shorting, diversification, and "waiting it out." How do the four approaches look in light of the subsequent market crash?

Hedging doesn't always work perfectly in a crisis, as Leslie Rahl, president of Capital Market Risk Advisors in New York City, points out. Rolling hedges can go wrong—for example, rolling repos (repurchase agreements) in the current crisis and rolling futures in the 1993 Metalgesellschaft debacle. Managers should not count on being able to rebalance continually in a crisis.

Risk management cannot guarantee unqualified success in all market conditions, Rahl says, but those who work to reduce factor concentrations stand to do considerably better than those who do not.

The importance of measuring and managing counterparty risk also became evident in the recent crisis. Counterparties under stress from large losses attributable to inadequate capitalization, imprudent leverage exposures, or substantial share-price declines expose their trading partners to settlement delays, margin call increases, and risk of total loss. These hazards are not confined to over-the-counter (OTC) derivatives and are present, for example, in the choice of custodian or prime broker and in securities short-sale lending agreements.

Early Warning Signs

The 2008 financial crisis, in general terms, was preceded by easy money (accommodative monetary policy), loose lending standards (no-doc loans), speculative excesses (the housing bubble), massive leveraging by significant players (a U.S. rule change in 2004 resulting in investment banks bulking up), and wild growth in systemically important but opaque financial instruments (mortgage-backed securities, credit default swaps). All these factors had figured in previous crises, but the 2008 catastrophe was not exactly like any previous event—nor will future crises fit the same mold. So, what can asset managers learn from the debacle? Are there any indicators they can watch that will reliably signal future trouble?

Credit default swap prices on certain industries and specific names would have been predictive of the 2008 crisis, according to Rahl. But in her view, simply watching the same indicators every time is like gearing up to fight the last war.
(February 2009)

Globe Investor

Cover story: How Caisse's Bet on Quants Went Wrong
By Konrad Yakabuski

The entire global financial industry has been transformed in recent years by the intricate models that originated in the 1990s with a group of computer scientists and mathematicians at U.S. investment bank JPMorgan Chase & Co. The models, which fall under a broad category known as Value-at-Risk (VaR), use historical price movements and dozens of other variables to predict the extent and likelihood of potential losses on an investment.

If a typical poll claims accuracy 19 times out of 20, VaR could promise to be right 99 times out of 100. But it was useless in predicting what would happen when that one-in-100 moment arrived, much less a one-in-a-million meltdown.

Most institutions came to employ some form of VaR, but some placed more faith in it than others.

Those who did bank on it may, like the Caisse, be suffering the consequences now. Some experts believe that VaR has caused bigger losses at many financial institutions because it has a built-in bias in favour of highly leveraged investments. And since it assigns such low probabilities to nightmare scenarios, most institutions that relied on it never paused long enough to consider what would happen if the unthinkable arose.

"The failing is not in VaR but in the fact that many people stopped there," says Leslie Rahl, president of New York-based Capital Market Risk Advisors. "The quantitative approach is about one-third of the puzzle. You would also have to take into account a vast number of qualitative factors."

Ms. Rahl, a derivatives expert who has advised the Caisse on risk in the past, recommends that institutions regularly conduct a series of "stress tests" to determine how prepared they would be to deal with sudden strains on liquidity.

"One of the stress tests they should do is [to see] what would happen if margin requirements are increased. I don't know if the Caisse was doing that. Clearly, a lot of people were not," says Ms. Rahl, who joined the board of Canadian Imperial Bank of Commerce in 2007 when the institution, hit hard by the subprime mortgage meltdown, moved to better manage its risk.
(January 2009)


Last Summer's Missed Opportunity
By Matthew Goldstein

With the Obama administration busy working on a new plan for bailing out the nation's crumbling banking system, one can only wonder whether government policy makers missed an opportunity nearly a year ago to nip the financial crisis in the bud.

Flash back to a year ago February, before Bear Stearns collapsed into the waiting arms of JPMorgan Chase, when there was a lot of talk about bailing out the bond insurers—also known on Wall Street as the monolines. Former New York State Governor Eliot Spitzer was in the news almost every day it seemed, warning that the weakened state of bond insurers like MBIA and Ambac posed a big threat to the financial system. Then Spitzer shot himself in the foot by getting caught-up in a dalliance with a high-priced call girl and disappeared from the scene.

Almost as quickly, the problems facing the bond insurers receded as a pressing issue. There was a lot less urgent talk about the bond insurers and their need to raise fresh capital in order to avoid painful ratings downgrades. In fact, in the weeks immediately following the collapse of Bear, there was a false sense of security that the worst of the financial crisis was over. Of course, Lehman Brothers bankruptcy filing on Sept. 15 and the subsequent budget-busting government bailouts of AIG, Citigroup and Bank of America have rendered that little bit of optimism a distant memory.

Even today, some think the government still might be better off bolstering the bond insurers rather than doling out tens of billions of dollars in a bank by bank rescue plan. Risk management consultant Leslie Rahl, president of consulting firm Capital Market Risk Advisors, says if the government recapitalized the bond insurers and allowed them to regain their Triple A credit ratings, it might provide the biggest bang for the buck. That's because it would enable a slew of banks that had purchased CDS, or bond insurance, to avoid taking future write-downs on the deterioration in the underlying insured assets. "On a pure dollar for dollar basis you may get more bang by propping up the monolines because you get a multiplier effect," says Rahl.
(January 2009)


The Federal Bailout Hasn't Fixed Bank of America
Bank of America’s Hasty Merrill Takeover Has Put its Future-and the Federal Bailout Program-in Question

By David Henry, Matthew Goldstein and Roben Farzad

Bank of America's (BAC) spectacular fall from grace has driven home two key points. First, even lenders that seem relatively safe from the credit storm can find ways to steer right into it, resulting in multibillion-dollar losses and brutal share sell-offs. Second, Washington's $138 billion rescue package of the Charlotte lender, cobbled together on the fly, is failing.

As the Obama Administration moves to change strategy to stabilize the banks, it will have to think bigger. The bailout, as it's currently structured, has amounted to little more than a temporary tonic to help BofA digest its controversial acquisition of brokerage giant Merrill Lynch. "It's a Band-Aid," Leslie Rahl, president of consulting firm Capital Market Risk Advisors, says of the government's remedy for ailing banks. "It's a camouflage, as opposed to a real solution."
(January 2009)

CFA Magazine

Cascades, Contagions, and Death Spirals
The next "Big One" is coming! So plan, now. But for what exactly? And how?
By Christopher Wright

We interrupt this market to bring you the latest crisis.

Regarding the slump in asset prices, "this was the first global bubble ever, in that it all spread across all asset classes and all countries with very few exceptions," says perma-bear Jeremy Grantham, chairman of Grantham, Mayo Van Otterloo & Company (GMO).

It is often said that in a crisis, the markets move in sync. (correlations go to 1.) Asset classes can also move in opposite directions. "Some correlations go to -1," says Leslie Rahl, president of Capital Market Risk Advisors in New York City. For example, consider the rise of REITs when the NASDAQ was collapsing in 2001.

Leslie Rahl says "People put too much emphasis on asset diversification and not enough on diversifying the more subtle risk factors such sensitivities to volatility, to flights to quality, to credit, etc."

Managers can profit from analyzing their holdings for the correlative effects of such common factors as instrument opacity, complexity, illiquidity, and leverage. The key is understanding a portfolio's risk-factor concentrations.

"For instance", says Rahl, "maybe you want a limit in your portfolio on hard-to-value investments that is independent of asset class."

An overlooked common factor in the current credit crisis is vintage. MBS holders and credit rating agencies may have thought the assets behind these instruments were diversified by geography, but they didn't consider that different credit standards, some looser that others, in different years. "Most of these securities," noted Rahl, "were built with a high concentration of a single vintage.
(July/August 2008)

Institutional Investor

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)

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)


Don't Trust the Wall St rally
By Bethany McLean, Editor at Large

Up till now, all eyes have been on the losses that are hitting the financial sector from the acronym soup of new instruments such as CDOs and SIVs. Everyone is scared, and rightly so of the MUB (Monster Under the Bed) that might be lurking in supposedly safe havens.

The last decade saw the explosion of securitization – the carving up and redistributing of risk-the boom in hedge funds, and the private equity mania.

In a paper published in the fall of 2005, risk management gurus Leslie Rahl and Barbara Lucas of Capital Market Risk Advisors, noted that in the past decade, a lot of things have happened that aren't supposed to happen, from the interest rate hikes of 1994 to the 1998 collapse of LTCM to the 2001 terrorist attacks. Or as the authors put it, "once-in-a-lifetime events seem to occur every few years."
(March 23, 2008)


Subprime and Hedge Funds: Hard Lessons to Learn Here?
Emma Trincal, Senior Financial Correspondent

The subprime crisis has sent a jolt this summer through the global financial markets and across stocks, bond markets and even money market funds. But what exactly is the role played by hedge funds in this global shakeout? And what can the marketplace learn from it?

"If CDO and structured products are affected by further downgrades, many of such investors will be forced to sell the paper. This will cause a float of paper that will depress this market," says CMRA's Ms. Rahl. And as a result, hedge funds holding CDOs or MBS will be hit with further losses.

But managing liquidity risk won't be easy.

"We can't really measure liquidity," says Ms. Rahl. "Liquidity can change over time. Something can be very liquid today; then something happens and it becomes illiquid." In an illiquid market, managers will have to decide how much yield they need on any given instrument to compensate for the lack of liquidity. A firm with a lot of cash reserves can afford a margin of error in those risk assessments. A smaller fund with less liquidity can't.

Another way to control liquidity for a hedge fund is to impose longer lock-ups on investors. Opinions vary on this measure. "I don't know if hedge funds will resist the temptation to impose lock-ups, yet they should," says Mr. Easterling. "Longer lock-ups would only apply to new investors and would not impact existing investors. The only way to reduce the liquidity risk of existing investors is to lock-down the fund … and that is a death knell for a fund," he says.

"The trend of longer lock-ups already exists, but it will continue," says Ms. Rahl. "But you won't see extended lock-ups all across the board. There will be maturity ladders." Such a formula allows a manager to offer a fee schedule based on the length of the lock-up with the fees decreasing when investors agree to stay longer.

"People are focused on leverage, but what we're really seeing is embedded leverage," says Leslie Rahl, founder and president of Capital Market Risk Advisors Inc., a New York-based financial advisory firm specializing in risk management. "Some hedge funds have indirect leverage because they are holding structured products that are less liquid and which they can't sell. It's not clear whether leverage ratios are going to decrease as a result of this crisis. Actually, leverage levels are much lower than they were during the 1998 crisis."

Whether the critics are unfair or not, one sure way to protect a portfolio was to be skeptical about everything, including the ratings.
(September 13, 2007)

Pensions and Insvestments

Market volatility puts risk at forefront
By Jay Cooper

"In general, liquidity doesn't enter into the metrics used by pension funds," said Leslie Rahl, president of Capital Market Risk Advisors, a New York-based financial advisory firm specializing in risk management.

"In times like these, non-quantitative measures need to supplement normal risk reporting. The best defense is asset allocation, manager selection and effective risk due diligence," she added.

As part of their due diligence process, pension fund officials should also be asking managers how they value instruments like CDOs that do not trade on a liquid market, Ms. Rahl said. She said pension executives should be wary of managers who allow the trader to value those securities themselves.
(August 20, 2007)

Business Week

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)

Investment Dealers' Digest

The calm after the storm - or the eye of the hurricane?
By Suzanne McGee

Late February's stock market rout sent the Dow Jones Industrial Average to its largest one-day loss in more than four years, and sent prices on the riskiest kinds of debt into a nosedive.

Then something odd happened: The sky didn't fall.

But an important four-letter word - risk - has crept quietly back into the marketplace once more. Risk-aversion may not be dominating headlines today the same way it did three or four weeks ago, but it is lurking in the background, waiting for another opportunity to surface.

"We can't rewind the clock and go back to the environment where people felt as carefree as they seemed to in the first month or two of 2007," says Leslie Rahl, a founder of Capital Market Risk Advisors, a firm that has advised financial institutions on managing all kinds of risks since the mid-1990s, when the first derivative debacles roiled financial markets.

Rahl isn't fielding calls from clients desperate to extricate themselves from the fallout of a risk misjudgment. Still, she sees the turmoil of late February and early March as the first stage in a global repricing of risk that is long overdue, and she is urging those clients to "stress test" their portfolios in anticipation of more upheaval.

"While I don't sense that the market believes today that this is imminent, there is general agreement that it has to happen; in some markets, risk premia are as tight as they have ever been," Rahl says. "I think the future is more fragile than the market is pricing it today, and the biggest lesson of the subprime market's implosion so far is how quickly risk can be repriced."
(April 9, 2007)

Business Week

At this point, banks can't figure their their exposure

By Gary Silverman in New York, with bureau reports

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)

The Economist

In the case of Orange County, the financial products involved were fairly straight-forward. Problems arose largely because the county borrowed excessively to buy them
(June 6, 1998)

Investment Dealers' Digest

Post-LTCM, most funds ignore VAR
John Wagley

How quickly they forget. Ever since the near-collapse of hedge fund Long-Term Capital Management brought the threat of government regulation to this freewheeling industry, hedge funds have been promising better self regulation, including sophisticated risk management. But probably less than a third have actually implemented value-risk (VAR) techniques, the market-based methodology used to estimate potential future losses.

That's according to Capital market Risk Advisors, Inc., which recently surveyed U.S. hedge funds, most of them with less than $500 million assets, on their risk management techniques. While 75% of those who responded to the survey said they have a risk manager, only 57% are currently calculating their portfolio's VAR, according to the study's authors concede that respondents are likely to be heavily weighted with those funds that do have some risk management techniques.

Leslie Rahl, CMRA's President, said many hedge funds managers do not feel the need to perform regular stress test and go through sometimes complicated VAR procedures. "A lot of them feel they can be successful using their institution and past experience."
(June 5, 2000)


Orange County didn't know how much trouble its investment fund was in until Leslie Rahl spent her weeks sorting it all out from both coasts last fall.
(May 1995)

Los Angeles Times

The Critical Blunder That Brought Down a British Institution

Michael A. Hiltzikl; James F. Peltz
Times Staff Writers

As regulators, executives and markets try to sort out the futures and options trading that brought down Barings, the institution's critical blunder is becoming increasingly clear.

The bank made 28-year old Nicholas W. Leeson responsible not only for trading futures and options in its Singapore office, but for "cleaning" –that is, reconciling the firm's holdings with its books.

"That meant he was making his own margin calls," said Leslie Rahl, President of Capital Market Risk Advisors, a derivatives consultant.
(March 1, 1995)


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)

The Wall Street Journal Online

But No Cigar: How a Rescue Mission Failed, Just Barely, In Orange County - It's a Tale of Secret Codes, All-Nighters and Conflicts Amid a ‘Siege Mentality' - An Odd Kind of Government
By Laura Jereski
Staff reporter of The Wall Street Journal

SANTA ANA, Calif. - Early in the morning of Dec. 6, just hours before Orange County's final financial collapse, local officials came within a pen stroke of preventing the largest, municipal bankruptcy in U.S. history.

A rescue mission, operating in secret in New York and Santa Ana, had hammered out a plan to restructure the county's topping investment fund and avoid default. Time was critical. The fund was hemorrhaging cash, with loses at 1.5 billion and mounting. To avoid tipping off financial markets about any plans, the team coded its cellular-phone messages: Orange County was "Oscar."

After four days of round the clock meetings, the rescue team of county finance officials, consultants and Wall Street experts was within sight of its goal. To prevent a messy and costly liquidation of the fund's $20 billion portfolio, one of four big investment banks would be chosen to restructure the debt's and stop further losses. All that was needed was a green light from the county government.

The county hired Capital Market Advisors, a New York consulting firm, , last month to do some sleuthing in the portfolio. At that point, the county simply wanted to find out what the portfolio contained.

What CMRA found far worse than anyone imagined. For years, the fund's manager, County Treasurer Robert L. Citron, had been chalking up high yields by borrowing heavily from Wall Street brokers to buy even more bonds. That worked fine when interest rates were falling, but when rates turned back up this year, losses mounted. Instead of calling it quits, Mr. Citron doubled up.

Demands for Collateral

As the portfolio‘s value contained to slide the lender demanded that he put up more collateral. Those demands drained the fund of almost $900 million by Dec. 1, leaving it with only $350 million of quickly available money—just a fraction of what was needed to meet additional collateral payments of $1.25 billion falling due to the following Tuesday, Dec. 6.

Before the county officials could fully come to grips with the CMRA analysis, word of the fund's difficulties was spreading fast. So, the county called a news conference on Dec. 1st to announce a $1.5 billion "paper loss" roughly 20% of the value of the fund's principal.

The CMRA consultants, by contrast, recognized all the markings of impending financial collapse. The disclosure of Orange County's loss meant the county's once –accommodating brokers would quit bankrolling the tottering fund. In particular, Tuesday's $1.25 billion collateral payment loomed with chilling urgency.

Exploring the Options

On Friday, the CMRA consultants contacted every Wall Street firm that had avoided doing business with Mr. Citron to explore the fund's option and negotiate a workout. Four stepped up: J.P. Morgan & Co., Goldman Sachs & Co., Salomon Inc. and Swiss bank Corp. They were coded as "Joe", "Golf", "Sierra", and White Cross."

At 8 o'clock Saturday morning, CMRA and TSA Capital Management, a bond firm specializing in exotic securities, met with bankers at the Regency Hotel in New York. They shuffled half hour spots to accommodate the christening of one banker's child. By the time the Goldman bankers left, shouldering tuxedos on the way to their annual dinner, about 100 experts were filtering through the fund's financial data.

Wall Street Plan Blocked

In the meeting, the Leboeuf lamb lawyers, joined by Mr. Andrus the county counsel, blocked the Wall Street plan by throwing up two legal hurdles. First, the argued the fund's legal status was so unclear that they couldn't say who actually owned the assets. What's more, Mr. Andrus balked at indemnifying the fiduciary against any lawsuits that might arise over the sale of the portfolio.

On Tuesday and Wednesday, the fund's lender rushed to unload some $11.4 billion of its bonds. Late Wednesday, the county hired Solomon Brother – one of Wall Street white knights, which had been prepared to $1.5 billion of bonds from the county just the day before – to auction off the fund's remaining assets. Already the fund losses exceed $2 billion, while the yoke of bankruptcy court will hamper Orange County for years to come.
(22 December 1994)

Los Angeles Times

ORANGE COUNTY IN BANKRUPTCY Asking for Help Advisers: Orange County turns to a New York firm for expertise in handling its imperiled fund. The holdings may be sold piecemeal.
Debra Vrana
Times Staff Writer

From the pick-walled offices of a building adjacent to Grand Central Station, two women who helped pioneer the use of the complex investments known as derivatives-which ultimately helped force Orange County into bankruptcy-are frantically attempting to unwind problems in the county's troubled portfolio.

"Its like a tornado rocked through here," an exhausted Leslie Lynn Rahl said Wednesday afternoon, a day after her latest client became the largest local government in U.S. history to file for bankruptcy.

Rahl, 44 and her partner, formed Capital Market Risk Advisors Inc., in July to help clients work out problems stemming from risky investments gone sour.

Now, the fledgling firm faces an unenviable assignment: helping Orange County salvage as much as possible of its investment portfolio, which has lost $1.5 billion or more in value this year.

If anyone can do this its these two women," said Grover McKean, a senior vice president with Lazard Freres & Co, In Los Angeles, the investment banking firm that help devise a rescue plan for New York City in the mid-1970s and is putting together a proposal for advising Orange County. "They really know their stuff."

Rahl is considered an expert in risk management. Her company typically advises banks, mutual funds and large corporation on how to avoid or control losses from derivatives-investment contracts that derive their value from an underlying stock or index linked to such things as interest rates, commodities or foreign currencies.

"They are very good at valuing the securities down to last penny," said Robert J. Schwartz, Chairman of the International Association of Financial Engineers

Rahl, who has a bachelor's degree in computer science and an MBA from Massachusetts Institute of Technology, establish Citibank's risk management departments in 1983 and started her own firm seven years later.

Rahl said "derivatives are not to blame for losses suffered by Orange County. They say it is the way derivatives are used and monitored that creates problems."

Echoing Federal Reserve Board Chairman Alan Greenspan and others, she suggested that prudent steps be followed, such as clear policies when using derivatives, a real understanding of the structure of the complex deals and making sure the securities are properly valued.
(December 8, 1994)


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)