Thursday, February 13, 2020

Risk Management and Policy Decision-Making Essay

Risk Management and Policy Decision-Making - Essay Example It inculcates â€Å"planning of the risks, identifying the risks, analysing the risks, developing risk response strategies and controlling and monitoring risks to determine how they have changed.† 1 in large and complex, multinational financial organizations like MF Global, several players play an integral role in the risk management in the firm as well as oversight role that is played by the regulator. Diagnosis of the situation leading to the filling of bankruptcy on Halloween, October 31, 2011, by futures and options broker MF Global, reveals lapses of key players in the risk management process, which led to the giant company going under with reportedly over $ 1.2 Billion of customer money missing.2 2.0. MF GLOBAL: FAILURE OF KEY PLAYERS Various players had a role to play in the risk management processes. They included the management, regulators, investors and credit rating agencies. The management led by the CEO Jon Corzine had the primary role to identify, analyse and pla nning for the risks, as well as developing risk response strategies and constantly monitoring them to ensure their effectiveness as well as adherence to the legal and regulatory framework. Within the organization, these duties are spread within several departments, and individuals to ensure an internal control mechanism. Consequently, the CEO, directors and risk managers had a direct role to play in risk management processes. On the other hand, the regulators role prior to the filling of the bankruptcy was one of oversight to ensure that MF Global complied with the legal framework including accounting, and disclosure requirements. Following the disclosure that the firm had problems, the regulators intervened, and when it was clear that the damage had been done, a decision was reached that to protect the customers; it was paramount for the company to liquidate.3 With regards to the investors, the panic in taking their money from the company put the company in cash strapped position t hat led it to engage in panic selling of its assets. Credit rating agencies such as Moody’s and standard and poor’s also contributed to the downfall. They were under fire for waiting, until the last few days, to flag MF Global’s exposure to European debts even though disclosure had been made in May.4 By the time the agencies worked, there were serious doubts among MF Global trading partners and the downgrading the rating agencies only accelerated the downfall of the firm. 3.0. BEGINNING OF THE END: DEFECTS, WEAKNESS IN RISK MANAGEMENT AND EMERGENCE OF THE PROBLEM Upon the appointment as the CEO, Corzine embarked on an aggressive European strategy,5 investing heavily in sovereign debts of other countries such as Spain, Italy, Portugal, and Ireland (which, at the time, were thought to be super -safe.6) The uncertainty of these debts made their yield even more than that of the U.S treasuries. Under his watch, MF Global discovered means to twist the accounting rules . The rules made it to be legitimate for a firm, say MF Global, to purchase an asset, for example, the debts of Spain paying for it using a loan that was secured by the asset. MF Global would derive its earnings from the difference between the interest rate it was earning on the Spain debt and

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