By : Edmond F. La’lang
Everyone recognizes that the U.S. is the temperature of risk management as banking and insurance industries. But that kept sticking financial tsunami of commercial banks, investment banks and insurance which raises the question naughty: where the role of risk management unit?
There are several risk management functions:
1). “Risk management is able to provide information and perspective to the management about all the risk profile, a fundamental change of product and market, business environment and the necessary changes in the risk management process”
In my opinion, this is a process of "validation and analysis of accurate data and appropriate" means if properly applied science of risk management has been able to answer correctly all the symptoms of symptoms of risk that will happen in the market. Because as it is known that Alan Greenspan himself realized that the existing risk analysis will never find the model and analysis to anticipate the risk, when and the magnitude of risk. Because of monetary economics and is currently unable to predict the accuracy of macroeconomic parameters, such as growth rate, risk rate, interest rate, inflation rate, and some other rate in the time series and changes in business environment and economics. That is why the economy is full of assumptions and calculations of complicated mathematical linear unable to accurately predict the magnitude and time changes in macroeconomic parameters. And how can one perform an appropriate and proper planning if only to revise various macro-economic assumptions, where the assumption is not necessarily true. It certainly would make the rate of economic development and business are also irreversible and not smooth so that helped spur the emergence of turbulence distrust due to "wrong predictions" with one result that is not to anticipate the emergence of systemic risk, especially risk subprime mortgages in the U.S. domestic market as well as around the world which has been closely intertwined.
2). “Risk management is able to convey the central issues of risk management policy formulation and its review”.
As mentioned above, how can management determine the appropriate policy formulation and accurate predictions, so it will not happen revisionists and trial and error patterns that are inefficient and ineffective in planning business strategies for investing in various sectors. Lehman Brothers Inc.. will also not be able to predict the vulnerability of subprime borrowers and weakening U.S. economy is fundamentally and structurally since 2001 due to competition with Chinese and Japanese products in its domestic market. The same thing happened on the economic team in the country and spur economic rate of private businesses are right on target as set out in the draft budget each year. This makes the progress of business and the economy is distorted by random and produce micro and macro business calculations that are not exactly referring to macro-economic assumptions. Thus can not be expected that the current risk management models can provide a central issue and fokusing to formulate risk management policies and rivewnya correctly on the macro and micro turbulensis and full of fierce competition.
3). “Risk management is able to calculate and measure the amount of risk exposure”.
.. I think that even if the existing risk management but will not be able to count on target with accuracy and speed can follow the rhythm of economic activity of business, if only based on linear econometric calculations, which at one time there risk of failure (fatigue in aircraft engines) will not be detected with good to be anticipated with the method of "early warning system" in order to reduce the risk of greater losses, due to the global turbulence.
4). “Risk management is able to determine allocation of funds as well-2 with a more appropriate risk limits”.
.. In my opinion that is okay, because risk management can properly share risk appropriately with the allocation of funds in various investment instruments. But if management risk insurance model to be used reduce/eliminate the risk with derivatives "Credit Default Swap" certainly will always cause systemic risk in the event of a failure (default) on the system such as sub-prime, where credit risk diderivatif even more, yes even more create a greater risk finansil although according to the econometric calculations can be spread but instead give a greater effect due to earthquakes are interrelated and form a giant building construction vulnerable to external shocks in the foundations of lower middle class borrowers are vulnerable to macroeconomic shocks.
.. This is one of the biggest mistakes of risk management that in order to minimize the risk is to divide and spread the risk to be shared is not heavy, like an insurance model, yes it is true does not felt, but if there is failure in the basement and then slowly pillars will give effect to "the WTC disaster the upper and middle like a red-hot stock and banking ", so in quick time as well as perpetrators of subprime giant building giant banking, investment banking and insurance giant hill is like a chunk of land that slides down due to gravity and also cause the victim under it like small country and the real sector which is already have declined slowly in accordance biorhytmic or decade cycle. So, "we do not fight the Natural Law"!
This has been my worried since Governor FED, Alan Greenspan to cut rates aggressively from 5.75% (2001) to 1.0% (2003) that would have the effect of low interest rates on business activities, in particular properties that will take credit blindly without even knowing the risk of future that once diderivatif tiered (10 levels) by the Investment banking and insurance, and wearing these cheap funds into the way of "Carry Trade" to be invested in countries that have high interest rates rather than to the real sector to support economic growth quality .. But that's one reason from God to restore U.S. economic bubble and the world to go back to basics so that people do not aggressively grow irrationally. Then there will be a chain reaction with high-speed collision so as to form an atomic bomb explosion in all directions and took the lives of so many in various lines and the surrounding region or similar cases of "Tsunami Aceh", the collapse of an old building has been fitted with a variety of detonators to the pillar- Its main pillars and detonated simultaneously would quickly collapse or a mass of land with steep slopes without trees bare soil binder will easily collapse or erosion by water saturation of the mass with the gravitational force (weight) will collapse and collapse and many casualties. So not only we need to conserve agricultural land as a place of culture, but also conservation finansil good in the business of stocks, bonds, forex, commodities and real terms.
5).”Risk management is also able to avoid excessive portfolio concentration”.
In my opinion, this is pretty good, but not yet know precisely the intrinsic of each portfolio, how their performance in space and time (time series), depending on the development and progress as well as risks that may exist and occur from each portfolio to be invested. Yes definitely do not put most of the eggs (funds) on a basket of sub-prime mortgages. So must be selected basketball portfolio with low risk according to the strains of bio-rhythmic time monthly (monthly) and annual (yearly) and not based on mathematical calculations and linear statistics are often wrong and inaccurate in predicting the presence of systemic risk and volatility of external risk.
6). “Risk management is able to create adequate reserves to anticipate the risks that have been measured and calculated”.
I think not too useful, because by knowing the risk of ups and downs of business conditions, we can accurately and quickly perform "strategy in and out" effectively and efficiently. If the market is bullish and the pros-perspective, we can do the strategy in an effective and if the market is bearish and turbu-lencies, we can efficiently avoid the potential risk of loss exists. This is the problem not being able to predict in a timely and correct, in addition to confidence factors to reduce risk strategy derivative model that precisely incorrect and adversely impacted. Reserves are necessary but do not overdo it because there will be a waste without a high value added. Reserves needed to cover possible risks that would arise in the future. For that there is need for penyeselarasan with the calculation of risk in point 5 above.
7) “risk management which is able to avoid the potential loss is relatively higher.
We do not know what the risk management unit and a year's time is not a short time to perform preventive efforts in addressing the potential risks to the eye:.
In my opinion, Lehman was too confident with the risk management of derivatives to eliminate the risk insurance model in which all policyholders will bear the risks that may occur in part or individual member of the policy holders are clearly not closely related to systemic risk derivatives storey building 10. Finally, the holders of subprime investments and derivatives that must bear the risk of loss and not all the policy holders, this is a fatal error method. Probably too late for Lehman and wrong in the calculation of the worst possible scenario (pessimistic scenario).
Lehman suffered liquidity risk (liquidity risk) and market risk that certainly occurs in the form of withdrawal of funds in a rush, so that the liquidity drought and the risk of volatile markets on investor panic and loss on the value of its shares on the stock market dropped drastically to be sold to cover losses on subprime. This is why Lehman was not able to meet its obligations (of default and loss of customer complaints), which is then extended to all lines of business of Lehman. Also, concentration risk because most are in one basket portfolio of subprime mortgages. Really do not put eggs in 1 basket.
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