CMRA in the Press 2007

The Blow-Up
This summer, as a meltdown in the subprime credit market spilled over into other markets, all eyes were on the mathematically trained financial engineers known as "quants." Who are these guys?
By Bryant Urstadt

On Wednesday, August 8, not long after the markets closed, 200 of the smartest people on Wall Street gathered in a conference room at Four World Financial Center, the 34-story headquarters of Merrill Lynch. They were "quants", and they had a lot to talk about, for their work was at the heart of one of the most worrisome summer markets in decades.

The conference sponsored by the International Association of Financial Engineers (IAFE), and its title asked, "is Subprime the Canary in the Mine? "Subprime" borrowers are home buyers whose poor credit history means they don't qualify for market interest rates.

The panel was moderated by Leslie Rahl an MIT graduate and the founder of Capital Market Risk Advisors. Her job is to advise companies on risk and help them understand the products quants invent. But understanding was in short supply in August. Some of the quants' financial products had collapsed in price, with unexpected consequences in another financial sector: the trading of equities.

And was subprime the canary in the mine? Leslie Rahl, for instance, cautiously told me in a follow-up e-mail that it is "looking more and more like the answer is yes." Many signs have suggested so, from job losses to a continuing credit drought to a weakening dollar, but that history has not yet been written.

As a prelude to the panel discussion, Rahl, asked the audience to predict whether credit spreads would shrink or widen in the coming months. She was talking about the difference between the price of a treasury bond and the price of a riskier corporate bond, a standard Wall Street gauge for the health of the economy. A widening credit spread is generally seen as a sign of uncertainty, and a narrow spread as a sign of optimism.

"How many think spreads will widen?" she asked. The hands of about half of the smartest people on Wall Street shot up. "And how many think they'll narrow?" The other half—equally smart—raised their hands. "Well," she said. "That's what makes a market." If they didn't know, nobody could.
(November/December 2007)

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

"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."

"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.

"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.
(September 13, 2007)

Risk Management Decoded
By Liz Peek

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."
(September 13, 2007)

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)

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)

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)

Rest later; check pension plan now
By Jonathan Peterson

In February, a Bush administration working group concluded that discipline of the marketplace was sufficient to safeguard investors. Still, the lack of oversight and transparency means that hedge fund investors have a particular burden to learn about the risks they are taking on, observers agree.

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."
(May 13, 2007)

Microfinance Emerges as Next Frontier for Securitization
By Chidem Kurdas

Using capital markets and financial innovations from other asset classes, micro loans can be packaged so that the investment is diversified and risk-controlled, said Leslie Rahl, president of Capital Market Risk Advisors. There is broad interest in getting a reasonable return for the risk, she added. …It may not be the grand slam you made on a private equity investment but it is a market return, and it is not correlated to the rest of your portfolio, said Barbara Lucas, partner at Capital Market Risk Advisors. Visiting West Africa last year, Ms. Lucas met women who lived in extreme poverty and could not have borrowed from traditional sources. Instead they used micro loans to build businesses. They were able to improve their families' nutrition and send their children to school, she found. "All of us individually can make a difference to these people," she said. Ms. Rahl pointed to a difference between other types of socially responsible investing and microfinance.
(July 11, 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)

"It's Good to Be King" for Blackstone, Fortress
By Susan Antilla

Blackstone, though, is not a corporation. As a public company, it will be run by a legal entity known as the general partner, which is owned by Schwarzman, Peterson and 55 other senior managing directors. Could shareholders successfully sue those owners if their ethics went on tilt? Ribstein says it would be a dicey bet under the law in Delaware whether unitholders could "pierce the veil to get to the individual owners."

"They're trying to give themselves maximum flexibility, which is the history of the hedge-fund industry," says Barbara Lucas, partner at Capital Markets Risk Advisors, a New York consulting firm that specializes in hedge funds and risk management.
(April 24, 2007)

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

"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)

New York Women on Wall Street
By Erin Arvedlund

Women on Wall Street for the first time are raising serious money in the millions of dollars and emerging as a fundraising force in the same way they blazed a career trail among their male peers in finance.

Three groups in particular-- 100 Women in Hedge Funds, High Water Women and 85 Broads are gathering Wall Street women and their wallets together to carve out a niche at raising money for hands-on philanthropy, as well as mentoring, networking and empowering lower and middle-class women. In dollars, they have yet to rival Wall Street-fundraising giants like Robin Hood Foundation, which became famous for raising $81 million in a single night. However, they were founded, and in large part funded, by men, who dominate hedge funds, alternative investment and other wealthy Wall Street bastions.

This new wave of women hails from Wall Street also, but their fundraising and their causes are more hands-on, that is, the women add their own sweat equity, and want to single out causes that support women and children.

Women have a long tradition of supporting philanthropy, although in the previous centuries it was often their husband's money.

"We, as women, weren't necessarily raised to write our own checks. As we become more responsible in the business world, we are trying to do that," says Leslie Rahl, President of Capital Market Risk Advisors and a founder of High Water Women. "We need to make women more aware that they often aren't as generous as men, in part, because they were never trained. Or, no one ever asked us!"
(April 7, 2007)

Wall Street women: dress code of silence
By Christina Binkley

On Wall Street, it's still baby steps, as women like Leslie Rahl can attest. Rahl, president of Capital Market Risk Advisors in New York, ran the derivatives business for Citibank for 10 years in the 1980s; it was she and her colleagues who called in the SEC when Orange County, Calif., was going under. And she recalls the old standard, mannish suit-with-a-bow. "Many of my colleagues wore those stupid little women's ties," says Rahl, who says she never owned one.

Today, she says, she has carved out a look that is careful and correct, yet still feminine. "It's very important for women to be women and not little men," she says. But she doesn't trust the vagaries of designer labels. She relies on the advice of her favorite Upper East Side boutique, Miriam Rigler, which provides her staple of pant suits for board meetings, sweaters and jackets for hedge-fund clients.
(March 29, 2007)