Making the Government a Corporate Risk Manager: corporate governance in default

Overcorrection is a very human failing. Having confronted a personal crisis stemming from some behavioral characteristic, human beings often shift their current behavior dramatically, at least momentarily. A trivial but instructive example is the driver who slows down well below a posted speed limit just after receiving a ticket for exceeding the posted speed limit. Of course, the overreaction doesnt last indefinitely. Behavior is too well anchored for that. Human behavior reverts to old, well-established modes in very short order. Mean reversion is not only a fundamental characteristic of markets; it is also an enduring aspect of human behavior. Continue reading

The Dimon Saga: “Bourbonism” déjà vu

Boards of Directors are kept creatures until unforeseen government actions panic them to think about what they should have been doing all alongpaying attention to risks taken by the managers. Government is now on the warpath against alleged corporate crimes. Will the governments current punishment cycle create panic in the Board at JPM

Remember AIG Eliot Spitzer, then Attorney General of New York, with eyes on the governorship, panicked the AIG Board over (largely unproven) charges against AIG concerning accounting issues. In 2005, the AIG Board fired Greenberg under threats by Spitzer to its insurance licenses. This left risk management controls to uninformed senior successors to Greenberg. (The new head honcho was Martin Sullivan who appears to have known nothing about what was going on at AIGFP and the Global Securities Lending unit). Look what happened to AIG subsequently The Government intervened, injecting capital to cover cash collateral demands that were threatening the solvency of AIG. Shareholder property was diluted.
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