Embed Size (px)
DESCRIPTION
Magazine mailed to 26,000 Wharton Business School alumni who live or work in New York, New Jersey and Connecticut. Magazine can be read online at www.readwny.com
Citation preview
WCNY helps bring best & brightest to Wharton!
Letter from the President � � � � � � � � � � � � � � 2The Wharton Store! � � � � � � � � � � � � � � � � � � � 3WCNY Helps Close the Deal � � � � � � � � � � � 4Club History — The 1960s� � � � � � � � � � � � � � 6Jeannette Chang, W’08 � � � � � � � � � � � � � � � � 7
MANAGING RISK WHARTON STYLE:Allen Levinson, W’77, WG’78 � � � � � � � � � � 8Dana Michael, W’82 � � � � � � � � � � � � � � � � � 12Humberto M� Salomon, W’97 � � � � � � � � � 16Neerav Agrawal, ENG’03, W’03 � � � � � � � � 18Steve Wiggins, WG’98 � � � � � � � � � � � � � � � � 20
Take the Call! � � � � � � � � � � � � � � � � � � � � � � � 22Membership Benefits � � � � � � � � � � � � � � � � � 23Calendar – Upcoming Events � � � � � � � � � � 24
SUMMER 2013 ISSUE
WCNY helps bring best & brightest to Wharton!WCNY helps bring best & brightest to Wharton!
SUMMER 2013
Letter from the President
Wharton Club of New York – Magazine
The future of the WCNY looks … brilliant! We know because our Club hosted two welcome receptions for 167 newly admitted New York-based graduate students to the Wharton School. As part of their decision making process, the new admits wanted to meet alumni. By the number of those who enrolled, our club helped the school reach new applicant enrollment records!
Whether the world they graduate into is more fraught with risk or not, depends in part on the work of five alumni who understand, assess, monitor, and mitigate risk. In this issue’s interviews, Alan Levinson, W’77, WG’78, teaches about the power of securitization; Dana Michael, W’80, explains how to manage a firms’ internal risk; Humberto Salomon, W’97, tells how the world of risk management has changed since 2008; Neerav K. Agrawal, ENG’03, W’03, describes risks of hedge fund financing, and Steve Wiggins, WG’08, shares about building and selling risk models.
Through our series on club history, we just learned that the Wharton Graduate Business School Club of New York was founded way back in 1962, by Paul Paulson, WG’59! Paul, who is still active in business, tells of their motives and success, 51 years ago! And today, Jeannette Chang, W’08, Chair for the WCNY Special & Social Events Committee, creates fun and unique social events for all alumni. Join in!
The Joseph Wharton Awards Dinner is on October 3rd, and tickets are already in short supply. Be sure to sign up early!
To reach over 30,000 Wharton alumni members in the NY metro area, please contact:
Chair,Sponsorship Udi Chattopadhyay, W’01 Phone (917) 952-5581 [email protected]
Kenneth Beck, WG’87, P’16Chief Executive Officer, CEO Connection
President, Wharton Club of New YorkT 646.416.6991 | F 646.292.5129
[email protected] | www.ceoconnection.com
MagazineEditor Kent Trabing, WG’[email protected]: www.readwny.com
FRONT COVER: Wharton MBA Students in Huntsman Hall
President Kenneth Beck, WG’87, P’16
CEO Connection [email protected]
ExecutiveVicePresident George Bradt, WG’85
PrimeGenesis Executive Onboarding [email protected]
VicePresident,FinanceRosemarie Bonelli, WG’99
Chartis Global Surety and EcoPracticeChartis Inc., a subsidiary of American
International Group, Inc. [email protected]
VicePresident,
Marketing&Communications Peter Hildick-Smith, C’76, WG’81, P’13
Codex-Group, Publishing Audience Research [email protected]
GeneralCounselandChiefLegalOfficer
Steven E. Sherman, W’72Shearman & Sterling LLP
VicePresident,CareerDevelopment Charles S. Forgang, W’78, P’11
Law Offices of Charles S. Forgang [email protected]
VicePresident,BusinessDevelopment Regina Jaslow, W’97
Penn Club of New York [email protected]
VicePresident,VolunteerServices
Diana Davenport, WG’87 The Commonwealth Fund
VicePresident,ProgrammingJennifer Gregoriou, W’78
Jennifer Gregoriou, Management Consulting
•
The Wharton Business School Club of N.Y. 75 Rockefeller Plaza, 18th Floor
New York, NY, 10019Phone : (212) 463-5559
Web: www.WhartonNY.com
Executive Committee
The Wharton Club of New York Member Benefits Program Features — The Wharton Store!
Now for summer, members can show their school colors, and get a 15% discount on all Wharton Store apparel and accessories ─ thanks to the latest program from WCNY Member Benefits, led by Faith Ann Kiely, W’90.
It all started in 2004, when four Wharton MBA students, full of love of school, used a class project to improve upon the offering of Wharton-denominated articles, by establishing the Wharton Store. Thanks to
the initiative of Alex Amado, WG’04, Eric Mehl, WG’04, Nicholas Schmidt, WG’04, and Carolyn Yu, WG’04, you can look as smart as you are, in T-shirts, hats and fleece jackets, as well as sweatpants, cardigans, polo shirts ─ even customized business cards!
Today, the store is managed on campus, at its Dietrich Hall location, 3620 Locust Walk, by Wharton staff through the school’s Finance & Administration Department. The store also serves students, faculty and alumni, 24/7, around the globe, with the latest trends in college fashion, at its convenient online location https://estore.wharton.upenn.edu, where it offers international shipping.
As a Wharton Club of New York member, to receive your 15% discount on products, simply go to the online store and register, and when requested by the ordering process, enter your code: ALUM15%.
The Wharton Store also takes suggestions. Send your ideas to [email protected]
Official Wharton School Tee Shirt
Official Wharton School Tee Shirt
Hat and Women’s Fleece Jacket
TAKEADVANTAGEOFTHIS
EXCLUSIVEWCNY15%
DISCOUNTONOFFICIAL
WHARTONSCHOOL
APPAREL!
3WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
GettinG into the world’s best business school is no easy task.
The Wharton School MBA Admissions Office works just as hard, not only to admit the very best students, but to ensure they attend. WCNY assists Admissions to close the deal, in strategic ways.
A display of this cooperation is the newly admitted student receptions, held in partnership with all alumni clubs from Mumbai to Manhattan. On Thursday, April 4, The Wharton Club of New York hosted 130 new MBA admits at the Penn Club. Everyone mingled for an hour, while enjoying an excellent buffet put on by the Club. Ankur Kumar, C’00, W’00, WG’07, Director of MBA Admissions and Financial Aid, opened the evening by welcoming the new admits. Kenny Beck, WG’87, President of the WCNY, then went around the room asking new admits to introduce themselves, which they clearly enjoyed, and then offered some personal stories about the depth and breadth of the power of the Wharton Alumni Association. Regina Jaslow, W’97; Charles Forgang, W’78; Jennifer Gregoriou, W’78; and Lauren Cochran, WG’09, offered their experiences at the school and in the Wharton alumni community. The evening wrapped up with new admits and alumni breaking into small groups to continue discussions.
As Director of Member Marketing for the Penn Club, Regina has gained a long term perspective. “Having the Wharton Club of New York host the annual MBA admits event at the Penn Club is a fabulous way not only to welcome the admits, but also to introduce them to the greater Penn community that Wharton alumni get to tap into. Wharton has 91,000
alumni worldwide (30,000 in the NY metro area) and Penn has 290,000 alumni worldwide (54,000 in the NY metro area). These numbers and the New York club emphasize to these admits the strength of our alumni community as compelling reasons to enroll at Wharton.
I asked Ankur about the value of these welcome receptions. She believes alumni clubs’ participation in this process is essential. “Candidates are eager to meet alumni and learn about their experiences at Wharton and after.
“The student shared that she had chosen Wharton over another program because of that evening and, specifically, as a result of the accessibility of our alumni at the event.”
WCNY Helps Close the Deal On Bringing the Best and Brightest to Ensure They Attend Wharton!
“THESTUDENTSHAREDTHATSHE
HADCHOSENWHARTONOVER
ANOTHERPROGRAMBECAUSEOF
THATEVENINGAND,SPECIFICALLY,
ASARESULTOFTHEACCESSIBILITY
OFOURALUMNIATTHEEVENT.”
Kenny Beck, WG’87, President of WCNY, regales and beckons!
4 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
The receptions are an incredible opportunity for our admitted students to receive that firsthand perspective.” “Whether they are looking to return to New York, or to cities around the globe, they have the opportunity to meet and build relationships with alumni. For our alumni, these events provide meaningful ways to engage with new students and provide mentorship as they embark on their MBA journey. We’re lucky to have such a diverse alumni community, who hail from every part of the globe and every industry, and who are so engaged with the School.”
”The two receptions that the WCNY hosted are vital because New York is our largest market, and wonderful because of the way they personalize the conversation about Wharton. We’ve heard students rave about their experiences at the New York receptions.”Regarding how the receptions support those who have committed to attend as well as those who are still deciding, Ankur explained: “Candidates are in various phases of their decision making, so these events are about celebrating with them, welcoming them and helping them learn more about Wharton.” I have seen the power of these interactions, whether that means they made a new connection, or learned something about an industry in their city that impacts their experience — or for those still making up their minds, they had a conversation that helped them make a fully informed decision.”
Kenny Beck notes, “Ankur Kumar and her
team do a phenomenal job. Add to that the talent and volunteer efforts of Jennifer, Lauren and their team, and you really have something special. We do this because we want to prepare prospective students to become productive members of our amazing alumni community. The candidates tell us no other school does anything close to this. It is great for the school, great for the admits, and great for the WCNY.”
“The WCNY University Relations Committee, responsible for all communications with the University, organized this year’s event” explained Jennifer Gregoriou, WCNY Vice President of Programming. “Gilles Guillon, WG’04, and Ade Adedeji, WG’06, deserve credit for developing strong relationships between the Wharton School and the WCNY over the years they headed the University Relations Committee. That torch was passed this past admissions cycle to Lauren Cochran, who brought her professionalism to these two receptions. Lauren took the time to meet one of the attending students after the reception. The student shared that she had
chosen Wharton over another program because of that evening and, specifically, as a result of the accessibility of our alumni at the event. Looking forward, Lauren and the University Relations Committee are exploring ways for alumni engagement with some new initiatives and, of course, looking forward to welcoming the Class of 2016.”
THETWORECEPTIONSTHATTHE
WCNYHOSTSAREVITALBECAUSE
NEWYORKISOURLARGEST
MARKET,ANDWONDERFUL
BECAUSEOFTHEWAYTHEY
PERSONALIZETHECONVERSATION.
New Admits introduce themselves at the WCNY Welcome Reception
5WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
thanks to our alert readers, we learned that the Wharton Club of New York began
long before we thought. We had reported in our Winter 2012 issue that our Club was formalized by constitution in 1970, and that the first Joseph P. Wharton Dinner was held at the Waldorf-Astoria in 1972. All true; however, there was in fact a club well before 1970.
The Wharton Graduate Business School Club of New York was founded in 1962 to 1963 through the efforts of Paul Paulson, WG’59 — along with Bob McDonald, WG’58; John Proudfit, WG’59; Bob Sachs, WG’58; John Main, WG’59; and David Michealson, WG’59.
We were able to reach Paul Paulson, residing in Greenwich, Connecticut, who served as the Club’s first President. Paul reached back 50 years to share
this account of its founding. “At the time, in 1962, I was on the Executive Committee of the Wharton Graduate Business School formed by Dr. Donald Blankertz, the Director of the Graduate Business School Division. I had a lot of respect for Don Blankertz. He excelled at raising funds for the school from New York-based alumni. Don was concerned that the lack of a formal Wharton Graduate alumni organization in New York inhibited the Graduate School’s ability to raise funds and generate favorable publicity for the Graduate School versus the school’s competitors. Based on these conversations, we decided to start the Wharton Graduate Business School Club of New York.
“We began with social events and then later included guest speakers who worked in finance, industrial management and marketing fields. These events were held at the Williams Club, formerly located at 24 East 39th Street, as were our monthly meetings.
“There was considerable discussion about including Wharton undergraduate alumni in the Club. This idea was championed by Dr. Willis
Wynne, who was the Dean of the Wharton School from 1958 to 1971. We resisted the merger, because many of the Graduate Business School alumni felt they had allegiance to the Graduate Business School but also had allegiance to their respective undergraduate colleges or universities. Therefore, when it came to fundraising, they were less likely to contribute to a total Wharton fund.
“As interest grew among the Graduate School alumni, our organization became more vibrant. The Club took a significant leap in 1970 under the enthusiastic leadership of Bob Bedell, WG’68. I continued to serve on the Club Board for several years and watched the organization flourish.”
While Paul was President, he was the managing director at Compton Advertising, became President of Doyle Dane Bernbach, and later started an advertising agency called Isidore & Paulson, which he sold in 1993. Finally, he formed Paulson Marketing Services, a marketing consulting company.
If you wish to share information about the Club’s history, please write to [email protected].
History of the Wharton Club of New York — The 1960s
Founding President, Paul Paulson, WG’59
Memento Box given to Paul, which states: “Paul Paulson Founding Director Wharton Club of New York”
Memento Box given to Paul, which states: “Paul Paulson Founding Director Wharton Club of New York”
Memento Box given to Paul, which states: “Paul Paulson Founding Director Wharton Club of New York”6
Jeannette Chang, W’08Chair for the WCNY Special & Social Events Committee
Jeannette Chang, W’08, organizes superb social events for New York alumni.
She just forgets to take photos of them. In April, she arranged for 43 alumni to attend a Brooklyn Nets game, including a pre-game chat with NBA C-suite execs, owners of the Philadelphia 76ers, and the chairman of the Brooklyn Nets — all of whom are also alumni. Thirty-three alumni enjoyed a night of comedy on Broadway. Seventy-seven alumni attended a happy hour at Johnny Utah’s, and 21 gathered at a golf and brewery social at Chelsea Piers. This is impressive, considering her commitments as an associate at an asset management firm and as an Executive Board Member of PennPAC, a pro-bono alumni consulting program.
What is your role at the Wharton Club of New York?
I am the Chair for the WCNY Special & Social Events Committee. Our goal is to organize events where alumni can come together in a fun and social setting and meet new friends or reconnect with old ones. We have hosted several different kinds of events over the years, including various alcohol tastings (wine, beer, scotch, champagne, gin and, most recently, tequila), dinners, food and bike tours (but not at the same time!), sporting events, golf outings, chocolate tastings, happy hours … and the list goes on. We have a fantastic committee, with Amy Lan, WG’09; Pelli Wang, W’07;
Michael Phillips, WG’10; Mayuko Hamazaki, WG’10; and June Lee, WG’03. We are constantly searching for fun ideas for our members and, of course, ways to incorporate alcohol, as that seems to be the best motivator to get great turnout for our events!
If alumni have an idea for an event, or want to get involved, what should they do?
Definitely contact us through the Wharton Club office! We are always looking for fun ideas whether it is a suggestion for a kind of event or a venue that you like. We would love to have anyone interested join our committee as well. The more people we have, the more events we can plan for our members!
What are your favorite events?
We try to keep our events diverse and look to appeal to as many members as possible, so it’s hard to choose, given how different they are. I would say that my favorite type of event is the alcohol tastings, as it’s a fun way to socialize.
You were President of Wharton Women, among other activities during college. Why do you like to stay involved?
I’ve always pursued extracurricular activities, and wanted to continue to be active post-graduation. This position is perfect, as it’s enjoyable and a great way to meet other alumni in the area.
Jeannette Chang, W’08
Nancy Roxas, WG’09; Jennie Choi, WG’09; and Amy Lan, WG’09. Golfing at Chelsea Piers.
7WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
You have heard that the whole is worth more than the sum of its parts. You’ve even said it. Now, you’ll be able to explain why! Allen Levinson, W’77, WG’78, recent principal of Credit Risk Advisors, and
board member of the Wharton Club of New York, shares in his professorial style, how to use financial risk management tools without hurting yourself or the economy.
What does the word “risk” mean in the context of business?
Risk occurs when you make a conscious decision, to place economic resources onto a probability distribution of alternative outcomes, where you believe the expected returns are attractive enough, that you can live with the possibility of a negative outcome. Uncertainty is the unpredictability of future outcomes. If an investor puts resources into a venture where the outcome is uncertain — say, investing in a startup company — then she will make some assessment of the probability of success or failure, but she is uncertain about how much risk she’s taking. Risk is when, in a fully informed manner, you choose to invest resources in a set of future outcomes, based on a probability distribution that you think you have assessed well.
How does risk work within financial institutions?
Banks and other financial institutions work hard to get the opportunity to take into their credit portfolios exposure to major borrowers, who need funds to, for example, finance a takeover, expand their businesses or refinance existing debt obligations. The bank has a credit officer who assesses the creditworthiness of the borrower. She assesses the riskiness of that one transaction, by developing a probability distribution of outcomes, to calculate an expected return on this investment. Outcomes could include ─ the borrower pays every dollar back; defaults and pays nothing back; or struggles, and the loan needs to be restructured.
Let’s assume that the bank knows at the transaction level what the riskiness is — and how certain it is about that. It now has these various credits in its portfolio. As each of those assets has a probability of default, what is the probability of two of these credits defaulting at the same time? Are they independent, or are they correlated? Let’s say the credit officer is prudent. She does not want her bank to fall apart by losing too much money all at once. She doesn’t want to lend to everyone in the same industry who has the same credit risk profile. However, she has a lot of capital and needs to make enough loans to ensure sufficient returns for her shareholders. Dealing with correlations is important, and it is an area where, due to insufficient analysis and historically little amounts of data, people often erroneously assume independence. “Illusory diversification” of this sort often leads to severe financial losses.
The Powerful Economic Driver of SecuritizationAllen Levinson, W’77, WG’78
Five Interviews on Managing Risk
BenjaminFranklinwrote:“Themanwhodoesthingsmakesmanymistakes,buthenevermakesthebiggestmistakeofall-doingnothing.”Riskisafundamentalaspectofhumanlifeandnowheremayriskbemorehighlyregarded,measuredandmanaged,thaninfinance.Eachissueweexploretheincrediblebreadththatalumnirepresent.Inpastissues,intervieweeshailedfromthemedia,non-profit,publishing,energy,andsportssectors,aswellasentrepreneurs.RiskisanactualsciencethatWhartonexcelsin,asdothesefivealumni.
8 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
How do banks assume independence and/or miss correlations?
In 2008, we saw that one way sophisticated financial institutions become unprofitable was by illusory diversification. I learned this back in the 1990s, when I was looking at portfolios of commercial real estate that were exceptionally well-diversified by size of borrower, by type of loan and by historical track record of the operator. It turned out that the assets were exceptionally correlated: The loans were all collateralized with commercial real estate. When the dominoes began to fall, it was one after another.
Financial institutions assume a variety of types of risk against their capital: interest rate risk, credit risk, currency risk, commodity risk and equity risk. One risk that financial institutions often miss is exposure to liquidity. If I own something and have to sell it at that moment, but can’t find a buyer, it is worthless. Unanticipated liquidity risk hit us all in 2008, because major financial institutions assumed that all their risks were independent.
If you go back to your basic Wharton financial textbooks, every asset has a market value. If you produce a portfolio of them and add up their market value, is this amount the value of that portfolio? For this to be true, the portfolio must be well-diversified. It must also be totally liquid.
How you can make a portfolio more liquid?
Liquidity requires easy access
to sellers when you build the portfolio and easy access to buyers when you decide to sell. Learning the current bid and offer prices of selected assets, and the prices at which transactions were recently completed (that is, “price transparency”), also helps greatly. For many types of securities — notably, commodity futures, stocks and options — exchanges have been established to promote liquidity. For other asset classes, such as bank loans, robust over-the-counter markets have evolved. In each case, the evolution of exchanges and other organized markets is enhancing liquidity for the associated asset classes. This evolution is continuing. As associated assets become more liquid, carefully crafted portfolios from these asset classes show improved liquidity as well.
In a 2009 Knowledge@Wharton interview with you and Professor Richard Herring — Unfreezing Securitization: Restoring the Market’s Confidence in Itself — you described what happened to the securitization market, and a way forward.
During the 2008 to 2009 period, many securitization structures performed unexpectedly poorly. Loans used as collateral defaulted at an unexpected pace; the portfolios of collateral proved to be undiversified in this difficult market; and the value of the associated bonds plummeted. This story was so common
that investment losses at many institutions led to severe credit problems for the institutions themselves. Many of the institutions
holding such bonds were banks, often the underwriters of the deals. As these institutions saw their own creditworthiness deteriorate, their willingness to lend to their peers decreased substantially, and the credit markets froze. Like any sharp tool, securitization, which through the process of liquification and diversification drove economic growth since the 1980s, turned around and severely hurt those who had relied on it. Many institutions, regulators and financial pundits blamed the securitization process for the current crisis in the credit markets.
At that time, Dick (Professor Herring) and I were each pondering how to best unfreeze the credit markets and restart the powerful economic driver of securitization. We discarded the idea that securitization was primarily a dangerous process and that regulatory authority should be used to inhibit its use. We believed that investors could develop a new market-driven function, which would establish a rigorous process to ensure that key service providers (that is, accountants, lawyers, originating and underwriting banks, and rating agencies) would be diligent in disclosing relevant deal-specific data that was accurate and not misleading. If these service providers were monitored to ensure that the data provided to institutional investors was reliable, then investors could more accurately evaluate the risk and return associated with each prospective investment, and the
Excerpt from a risk management firm’s spreadsheet
9WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
market could perform substantially more efficiently, going forward.
This concept, with a lot more meat on the bones, created, at least in Dick’s and my opinion, a solution to this industry dilemma that did not require a substantial amount of new regulations. In a sense, we suggested that institutional investors, with their market clout, take on a regulatory role to ensure that investments in this area performed as advertised. The perceived risk inherent in each deal would more closely equal that which had been assessed.
What role did interest rates play?
Part of what drove securitization into the ground was a period of wishful thinking on the part of institutional investors. Many institutions — most notably, pension funds and charitable endowments — felt pressure to earn sufficient returns that would allow them to fulfill their financial obligations without needing to tap deeply into their principal accounts. As market rates declined, this need put growing pressure on investment managers. To hit their necessary return targets, managers felt the need to buy relatively high yielding assets at a time when interest rates in general were dropping
significantly. To do so, they bought record amounts of bonds from securitizations. Their comfort that these bonds were not very risky came, at least in part, from wishful thinking.
As we discussed above, service providers, through their reported data, left plenty of room for the investment manager to assess the risk level of the associated investment as relatively low when compared against the promised return. As interest rates fell, fuel was added to this fire.
What is rewarding about your work?
The financial markets have benefited greatly as risk management capabilities have improved. Through efficient risk management, an institutional investor can buy assets that are attractive, and build them into a portfolio where they can make one plus one to equal three, earning attractive returns. The key is proper measurement and management of the risk that is inherent in such a portfolio. In the current environment, it is exciting to be safely building such portfolios, and in doing so, helping to achieve what financial institutions are about — intermediating capital. Personally, I have found that, over the course of my career, playing the role of risk manager in these processes has been very fulfilling.
What role can Wharton play in educating financial managers?
Wharton already plays an important role in a variety of areas. Many accounting classes emphasize the importance of financial controls. Without controls, investors cannot rely on third-party data to behave as advertised, and sophisticated investment products can fail.Finance classes need to focus on valuation of complex portfolios, using both quantitative and subjective forms of analysis. Sophisticated models can help
greatly. Failure to subjectively study the assumptions used in the development of particular models can lead to unexpected consequences. Finance classes need to help provide insight here. Macroeconomic insights help financial professionals of all sorts put their current activities into a longer-term perspective. All of the above helps foster greater expertise in financial managers and greater efficiency in financial markets. I know that Wharton’s Financial Institutions Center and other areas of the school have contributed greatly in these areas. Other business schools should be working to catch up.
What was your path from Wharton?
Upon getting my MBA in 1978, I joined Bankers Trust as a salesman and eventually became a trader of government securities. Interest rate risk was my first area of education. I went on to a variety of jobs in sales, trading and management. By 1990 or so, I became the bank’s loan portfolio manager, and helped develop the markets for loan securitizations and credit derivatives, and finally became chief of staff for corporate finance. In 1995, I moved on to Goldman Sachs, where I managed transactional risk management services. After this time, I became a partner in KMV Corp., an entrepreneurial financial technology company that provided corporate credit risk models to financial institutions globally. After we sold KMV to Moody’s, I partnered with two former clients to form a hedge fund called Credit Risk Advisors, which successfully managed a portfolio of corporate bonds and credit derivatives. Over my career, I’ve held an exceptionally large number of jobs, and I enjoyed every one of them. All in all, I learned a lot, and I had fun; and I still don’t know what I want to do when I grow up.
Allen Levinson, W’77, WG’78, working at home
10 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
estore.wharton.upenn.edu
SAVE 15% ON ALLONLINE PURCHASESPROMO CODE: ALUM15%estore.wharton.upenn.edu
Apparel | Accessories | Print
SUMMER 2013
EXCLUSIVE TO
WCNY M
EMBER
S!
WhY do some companies grow steadily larger, and others bounce
up and down? Why do some stay the course, while others collapse? Managing the firm’s internal risk is a good start. Call it Murphy’s Law, chaos theory or entropy — things happen. If the firm anticipates and effectively manages those things, then stability and growth are sustained. If not, well, do you recall the fraudulent trader Nick Leeson who brought down Barings Bank, Britain’s oldest investment house? If only it had Dana Michael, W’82, who is Senior Operational Risk Manager at Swiss Re. Dana, who also serves on the Board of Directors of the Wharton Club of New York, shares insights to
keep your organization on the up and up.
What is operational risk management?
Operational risk is the risk that a mistake is made, causing the company to suffer an economic loss or a financial recording error. Operational risk management (ORM) is a new discipline and only one component of an overall enterprise risk management program. Enterprise risk includes all the risks that can affect an organization, such as credit, insurance, merging, liquidity, regulatory and investment risks. Swiss Re, as a large specialized organization, retains departments to manage all these different aspects of risk. For example, we have actuaries who monitor investment portfolio risk ─ I’m in the operational risk aspect of it.
What is the key to managing operational risk?
It is to make sure you do what you plan to do. An example would be when we give a quote — we require that a second person looks at the quote, a four-eye review, to make sure that errors are not being made. If someone accidentally misplaces a decimal point, then a profitable treaty becomes a loss treaty. So, by having someone else look at it, we avoid that little error or mistake. “Treaty” is a reinsurance term for the contracts we negotiate
with our customers. When reinsurance began 100 years ago, agreements were often on the back of an envelope. Someone would say, “OK, I’m taking half of your risk, and if a loss happens, I’ll pay you for half. In exchange, I get half of your premium.” These formerly informal contracts became known as “treaties.”
Are you implementing these controls for Swiss Re’s clients?
No. Operational risk is within Swiss Re. We’re in the business of taking on customers’ insured risk, say, of hurricanes, and we receive premiums allowing us to pay off those claims. But we are not in the business and do not get paid a premium for accidentally writing our treaty wrong — so that is something that we try to get as close to zero as possible.
As a large international reinsurance company, we are the subject, ultimately, of Solvency II over in Europe. Solvency II is kind of the insurance equivalent to the Basel regulations in the banking sector. Solvency II basically says, “OK, you have certain types of risks out there. You need to place in reserve a certain amount of your capital to cover those risks. After you set aside your capital for those risks, how much excess capital do you have?” As part of Solvency II, one of the things we’re doing is something called “Risk and Control Related
Dana Michael, W’82, holding his class flag at a recent class reunion.
Driving Fast SafelyDana Michael, W’82 Senior Operational Risk Manager
12
Behavior.” We require that our executive management in our different divisions take responsibility for their risks from an operational standpoint, and make sure the controls around those are in place. It’s a “Tone at the Top” type of view of the world that management needs to own things, to make sure things are working, that you cannot rely on your auditors to find problems, and that you need to know your problems yourself and take care of them. We rolled out this initiative within the past two years, and now, it can affect our top management’s compensation. If they manage their own risks, then they should get the full bonus, but if for example, they write a treaty at half of the price that they should have, then that’s going to affect their compensation. If someone’s been identified as not having managed risks well in the past, they become very motivated to turn that around.
How do you train managers to maintain their controls?
How they manage controls is different, based on their product lines, but we want them to demonstrate positive risk-control related behavior, including having all the key risks identified for their areas. Managers can be blindsided by a problem they never thought about, so they need to think outside of the box and determine what their risks are. We have something called an “incident reporting process,where, if the controls break down, they need to write a report on that saying, “We failed to give it a second review, and as a result, the client ended up getting a quote that was wrong. Ultimately, the client didn’t make us stand by
the quote, but still, we made a mistake and need to fix it, going forward.” So, the whole risk and control behavior aspect is all around owning what your risks are, identifying when there are problems and fixing those problems.
The owners of the World Trade Center brought a suit against Swiss Re in 2006, which Swiss Re won.
We had given a binder (a high-level quote) that said we would cover its business. The full contract, which hadn’t been written yet, would have contained all the specifics, such as the amount of claims to be paid out, if one event or two events occurred, based on the amount of time in between the events or based on the cause. With the World Trade Center, the situation was that two planes went into the two buildings. If it was considered two events, we would have had to pay out more insurance claims than if it was considered one event. Our argument was simply that, whether or not the second plane hit was a different event from the first plane hit, there was no contract in place. Because it was a binder, without all the specifics written down, it was based on what was standard or customary for that type of quote. Luckily, we did end up winning it; it would’ve caused a couple of billion dollars of loss for Swiss Re had we lost the suit.
In terms of the operations risk, what worked?
It might have been more of what went wrong, because in theory, when we give the binder, it should go to contract as soon as possible so that the terms are clear. We had bad luck after binding, because there wasn’t time.
Who are Swiss Re’s major customers?
Swiss Re sells reinsurance protection to insurance companies so they can meet their clients’ needs. Swiss Re is the second largest reinsurer worldwide, and has a strong capital base to meet the needs of insurance companies’ retail
coverage. We cover a lot of different risks. Sometimes I don’t realize what we’re covering until after I’ve dug into something. Then, I’ll install operational risk concepts that are similar across whole divisions, as well as specific controls based on different risk profiles.
From the standpoint of our customers, reinsurance is a transfer of risk arrangement. Say, Travelers Insurance wants to limit its hurricane exposure in the United States. It brings in Swiss Re, and Swiss Re says, “OK, we’ll take $2 billion worth of hurricane exposure from you.” Then, the hurricane hits, and it limits Travelers’ exposure.
Where we benefit is that we pick up big blocks of risks that are diversified worldwide. We may do hurricanes in the United States, windstorms in Europe and typhoons in Asia. So, it may be bad in the United States one year, and bad in Asia another year, but overall, it diversifies our risk. For example, we had an $800 million loss from Hurricane Sandy, but from our standpoint, that was actually not a bad outcome. However, we had close to $2 billion losses when
13WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
it came to the tsunami in Japan, and the Christchurch earthquake a year ago, which hit our profitability. Swiss Re also issues catastrophe bonds. In exchange for a higher yield, if a major hurricane hits and a lot of claims are paid out, the bond will pay less principal back. This allows us to transfer some risk to the financial markets. The financial markets like that, because it’s an uncorrelated risk to other things like interest rates.
Can you share a day in the life of a senior operational risk manager?
I focus on the reinsurance business of North America, working with the reinsurance leaders to make sure they have their controls in place, have identified problems and understand where the risks are. I will go in and review risks of particular areas and try to help them with that. I do conference calls with Europe and Zurich and other offices worldwide. Recently, I visited our operations in Brazil. In order to meet Brazilian regulations, which require capital to be maintained there, and to stay closer to our clients’ requirements, we bought an agricultural insurance firm two years ago. So, I went there in March to look at its controls and operations.
In 2005, some financial institutions decided that they did not understand the derivative transactions occurring on their trading floors and exited those deals. Is that an example of ORM?
That may be more a matter of managing strategic risk. Swiss Re had a situation like that — we wrote a couple of credit default swaps back in 2007. Then, when 2008 hit, we took a loss of about $1.5 billion, and our stock price dropped dramatically — we ended up having to borrow money from Warren Buffett. He made a pretty penny — a 15% coupon rate, 20% early elimination — and if we didn’t pay it back on time, he would get 20% of the company. Our choice to write this business was more of a strategic decision. It wasn’t a case of someone not referring the investment to the right person to get an approval.
Does recognizing and effectively managing risks actually give rise to more daring, more creativity?
There’s an operational saying I’ve heard. Does having brakes on the car mean you go slower or faster?
Faster?Exactly. Because if you have
no brakes on the car, you have to drive very slowly, and coast to
a stop so you don’t crash the car. By having those brakes, those controls, you can drive a lot faster and brake to slow down when you need to. This allows you to reach your destination faster. Having controls
around operations actually allows you to do more and take more risks. One of the controls we have is worldwide credit limits on how much risk we want to take — so, let’s say, in Japan, we want to have only a $1 billion exposure for earthquakes, because Japan has earthquakes all the time. That allows us to write the $1 billion of business in Japan, but not go beyond that, because we decided in advance that we don’t have to lose sleep at night that we have taken excessive exposure. We know that, if we take a $1 billion hit, then the market will be fine with that. But if we took a $20 billion hit, our capital would get beaten up.
Is there a book that inspires you?
The Autobiography of Benjamin Franklin. Besides Franklin being the founder of the University, it’s interesting to see the way he establishes his paradigm in why he did certain things and how he valued his life.
How did you become Chairman of the worldwide Wharton Alumni Association?
After Wharton, I worked in Hartford. I didn’t know anyone in the area, so I joined a few groups to get to know people, and one of those was the Wharton Club of Hartford. We were a startup; I started out as a Board Member, and became Treasurer, and then became President of the Club. We had 100 people in the Club paying dues, out of 600 people in the Hartford area. When I moved to New York City, I joined the national Wharton Board.
What volunteering have you done recently?
I currently Co-Chair a Penn Alumnus National Benchmarking Committee, where we take on topics that the Alumni Relations Office is interested in. We try
Continued on page: 15
14
to find information from the surveys on what’s being done at other schools and provide feedback. I played saxophone
in the Penn Band, and the fun thing about that is, at homecoming, band alumni can sit with the band and go on Franklin Field with their families
during the halftime show. What my kids and I do is help spell out the word “Pennsylvania” in script form across the whole field. It’s fun.
Continued from page: 14
Your home is your most personal and largest investment.
Why trust just anyone to help?
Providing a higher level of
knowledge and service that
Wharton alumni expect.
©2013. Douglas Elliman Real Estate. Equal Housing Opportunity.
15
The Sixth C of Credit: Communication!
Humberto M. Salomon, W’97Director & Global Media Portfolio Manager,Citigroup Global Markets, Inc.
Humberto M. Salomon, W’97, loves his work and profession, and it shows.
He is happy, congenial and fascinated by the challenge of managing risk better.
What are your key responsibilities?
I am the Portfolio Manager responsible for managing the exposures to media clients for Citi’s Institutional Clients Group, particularly those covered by our Global Corporate and Investment Bank. The subsectors include large media conglomerates, publishers, newspapers, broadcasters, and gaming or casino operators across the
globe. I also am responsible for the regional risk management of exposures to U.S. and Canadian telecom, cable and satellite clients. My day-to-day work includes approving or declining credit requests, signing off on derivative trades for clients, reviewing documentation, conducting risk assessment, and stress testing the portfolio.
Another key aspect of the position requires being a subject matter expert for partners across the bank, including coverage, the loan syndicate desks, the leveraged finance desk, the securitization desk, rates, FX, legal and external regulators. Finally, but perhaps most importantly, I am a manager and mentor to analysts, associates and vice presidents who are building up their own risk assessment skills. This is one of my favorite parts of the role.
Citigroup is sensitive to the global markets. Is that also true for your sector?
Absolutely. The largest media conglomerates, while based in the U.S. or Western Europe, are global, and much of their recent growth has been in Asia, Eastern Europe and Latin America. Take, for example, the recent Iron Man 3 movie, which has been an enormous commercial success — people might be surprised to
know that over two-thirds of its gross proceeds have come from outside of the United States. Because we take a long-term commitment, in most cases, we lead or co-lead large syndicated bank facilities, and we must understand the dynamics of all of the regions that our clients operate in. As an example, strong growth of gaming operations in Macau and Singapore has helped shield global gaming operations from the stress in Las Vegas and other domestic markets during the recent financial crisis. Many clients come to Citi because of our global reach — we do business in over 160 countries.
Do media companies, newspapers and gaming operators share a common risk profile?
The common tie is that all of these industries are cyclical and generally reliant on discretionary consumer spending to drive growth. Even the strongest company in any of these sectors will often feel some headwinds in tougher economic times. Those in industries with secular challenges, such as newspapers and directories, see their weaknesses magnified by cyclical factors. In fact, the ability to monetize content in a digital world is one of the biggest challenges facing my sectors.
Humberto M. Salomon, W’97
16 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
How have approaches to and perspectives on risk changed over the past five years?
The core credit analysis has not changed much since I graduated from Wharton in 1997. You still start with the five C’s of credit: character, capacity, capital, conditions and collateral. The big difference in how the Street approaches risk management is in the bigger picture of portfolio analysis. A significant amount of my time is focused on portfolio stress testing — through the analysis of concentrations and correlation.
We have gotten better at breaking down silos and better communicating across the firm. Although my primary responsibility is to manage our exposure to media names, I find that I am regularly sharing my views on the industry with partners at Citi’s Commercial Bank and the Citi Private Bank, and with partners in other industries and geographies. And it works both ways — I want to talk to other portfolio managers who manage other cyclical industries. An example of thinking about correlations would be to
consider automakers as they heavily influence the media sector through advertising.
Which risk tools do you deem most reliable?
On a company or deal level, management is first and foremost. I need to understand how they have historically dealt with banks and with other stakeholders, including their employees,
communities, vendors and any government agency. How have they managed through adversity? Before I even get to the hard analysis — I must get comfortable with management’s character and judgment.
After that, I rely on the core fundamental analysis of the audited financial statements. My team scrutinizes the notes to those statements. This analysis often generates additional questions, which we review with management. We perform due diligence with company’s auditors, counsel and management, and often will send in our own team to affect a multiday on-site field exam of the company’s operations. We also will sanity-check our views of credits by tracking external data, such as rating agency reports, and market indicators, such as bond spreads, equity prices, and behavior and pricing of credit default swaps.
In terms of the industry itself — we track the gauges for the particular space. For newspapers, we carefully track circulation trends. For media firms, we will track ad spend and ratings. For gaming companies, we will look at occupancy rates and gaming revenue trends, as well as regional indicators (table licenses in Macau or convention bookings in Las Vegas). We attend industry conferences and stay abreast of industry developments.
What was your path from Nicaragua to Wharton?
Interestingly — I am not even the only Nicaraguan Wharton alum on my floor here at Citigroup. Patti Guerra Heh, W’99, is a Director in our Healthcare Corporate and Investment Banking Group and sits across the floor from me.
The tradition for Wharton alumni in my family started with my first cousin Roberto J. Teran Salomon, W’77, who was very dear to me and who, along with his father and siblings, were a constant source of advice and guidance in my formative years. I would also later work for Jaime
J. Montealegre, W’73, another Nicaraguan Wharton alum who is one of the most respected and successful businessmen in all of Central America and who manages the Sigma Group. I suppose that I was introduced to risk management while at Sigma, as I was trading Russian/CIS securities during August of 1998, when Russia entered its financial crisis. That’s where I first learned that you cannot rely on statistical analysis of past behavior alone, to foretell the next crisis, because each one is different.
Anything you’d like to say to younger alumni?
I hope that readers thinking about their careers, give some thought to the risk management profession particularly those who enjoy getting into the nuts and bolts of things, what drives companies and industries, nuances of bond indentures and credit agreements, and having to do thoughtful valuations, etc. The work is challenging and exciting, because the risks confronting your clients, industries, markets and countries are always evolving.
Mostimportantly,Iamamanagerandmentorto
analysts,associatesandvicepresidentswhoarebuilding
uptheirownriskassessmentskills.Thisisoneofmyfavoritepartsoftherole.
17WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
On Being Positively SkepticalNeerav Agrawal, ENG’03, W’03,Head of U.S. Risk, Global Prime Finance, Scotiabank
Neerav Agrawal, ENG’03, W’03, as Head of U.S. Risk within the Global Prime
Finance business at Scotiabank, is at heart, a scientist, which to paraphrase Einstein, is someone who raises new questions, regards old problems from new angles, and thinks what if. Neerav graduated in 2003 from the Fisher Program of Management and Technology. He has also performed risk management roles at BNP Paribas and Bank of America.
What do you do?
The Global Prime Finance business at Scotiabank provides a spectrum of services to its clients, including clearance, execution and financing. One typical example of this is to provide financing to hedge funds and mutual funds for their trades
in stocks and bonds. Since I focus on U.S. equities, I look for big short-term moves in the S&P 500 and the VIX, which tracks its volatility.
How does a typical hedge fund financing transaction work?
If the client goes long (meaning an investor profits if the price of the stock rises), we are lending it cash, and if it goes short (meaning an investor profits if the price of the stock declines), then we are lending it securities. One of the most common strategies for hedge funds is long-short equity. They perform fundamental or technical analysis across equities and figure out what their buys are and what their sells are. They go long by buying stocks that they like, and sell short companies they don’t. Say, the hedge fund goes long on a security by buying $100 worth, and I say that margin is 10%. Then, the hedge fund puts up $10, and the bank puts up $90.
On the short side, we lend the hedge fund the stock, and if the margin again is 10%, then it has to put up $10. The margin we require is our protection against adverse price moves. The 10% is the amount the value of the stock can change before the margin is extinguished. If the long stock drops from $100 to $85 and the hedge fund put up only $10, then we have $5 of potential exposure to loss.
What risks do you assess and manage?
When we are determining how much financing to provide against a portfolio, we look at the market risk, and we consider the client’s credit risk. We have two mitigants — we take margin against our financing, and if it doesn’t cover the market risk, then we still have the credit quality of the client itself.
We focus on two main sources of market risk that can mitigate or exacerbate financial risk: diversification and liquidity. If Lehman Brothers was the only stock in your portfolio in 2008, you might have taken a loss, but if your portfolio contained different countries or different sectors, or it included a long-short strategy, then you might have fared better. We take a strong look at the diversification of a client’s portfolio in determining the amount of financing to provide. For example, our systems will recognize that, as a client’s portfolio becomes more diversified, it will be less risky, and we might require less margin.
On the liquidity side, when we are lending against securities, we take those securities as collateral. Say, a client buys XYZ stock. Once the execution occurs, we receive the stock on behalf of the customer and hold that stock as collateral in the customer’s account. If the customer defaults, we can liquidate its position in that stock for cash to repay our
Neerav Agrawal, ENG’03, W’03
18 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM18
loan. If at that time XYZ stock is illiquid, then its price will decline as we sell it, and we won’t be able to pay ourselves back fully.
Liquidity can be misleading. In the summer of 2007, the market itself did not move much, but hedge funds pursuing statistical arbitrage strategies, although they had their own proprietary models, held similar positions. They thought they were liquid, but the trades they were in were crowded. So when one of them needed to unwind its portfolio rapidly, it created adverse moves in other funds’ portfolios.
We don’t lend against anything that we can’t price, which means we deal only with public securities. If we can’t determine the price ourselves, we go to third-party vendors or look at quotations from brokers.
We are not concerned about slow moves in the market, even if they add up to large moves, because we can manage that. A sudden move has greater impact, such as the Flash Crash in May 6, 2010, an intraday move in the equity markets, or news about a large company, such as Enron, for example.
And Scotiabank’s upside?
Our upside is, if the client does well, then it will grow as a fund, and our relationship will grow.
I might have gone into risk management, but there was that Black-Scholes Model. Do you use that?
There are strong quantitative and qualitative aspects to risk management. On the quantitative side, Black-Scholes is important not so much because of the specific formula, but in the concept of looking at sensitivities
to inputs — such as looking at the impact on a portfolio if interest rates rise, if the S&P drops, or if the price of gold changes.
We do use statistical analysis — the most famous is value at risk (VaR), which in my opinion, is limited. Because the VaR calculation depends on historical data, it usually won’t predict anything worse than what happened in the past.
Then, there are stress tests, which you may have heard about — regulators ask banks what would happen if a series of events occurs. We run our own stress tests internally. The qualitative aspect is deciding which stress
tests to run. For example, the S&P dropped 18% in October 2008 over a period of five days. That had not happened since 1987. Looking at historical data, you might not go back that far. So, as a risk manager, you have to be able to step back from your models, and take a broader view of the risks you are looking at.
Could you define “prime broker”?
Imagine you are a hedge fund with a brokerage account at one firm, because it charges good commissions on stocks, and at another firm, because it charges good commissions on bonds. The problem is that you want to see all of your positions in one place, you want to enjoy diversification benefits for margin, and you want to consolidate your cash. The solution is a prime broker who steps in to handle all your
positions.Similarly, Scotiabank is a
prime broker for customers, which means we clear, settle and finance their trades, as well as facilitate their reporting. Since 2008, an interesting trend is for funds to look beyond costs to the credit risk of their prime brokers. This is called “counterparty credit risk,” and hedge funds paid more attention to it after the Lehman Brothers bankruptcy. This trend has benefited Scotiabank, since the bank is viewed as conservative and deliberate from a risk management perspective.
What do you enjoy about your work?
While my coursework at Wharton was important in developing my skills, when I graduated, I wasn’t thinking about risk management. I fell into it
because it fits my interests and skills. I’m a skeptic in many ways. One of the things I like about my job, which sometimes drives other people crazy, is that I question everything.
For my job, it is important to ask the question, “In what ways could I be wrong?” If something looks too good to be true, maybe there is something about it that I’m missing. What can go wrong in the market that can cause us to lose money on this portfolio? What else should I be seeing in this contract? What else should we ask our clients about their strategies? How can we structure a transaction to be mutually beneficial to the client and ourselves? It’s a key strength for a risk manager to be able to ask the right questions. It’s a matter of being curious.
Riskmanagersdon’tpredictrecessions—we
justthinkaboutwhatwouldhappenifoneoccurred.
19WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
Steve Wiggins, WG’98, builds, stress-tests and sells custom-made models
for hedge optimization, tail risk, high yield, risk-based pricing, portfolio economic capital and other Whartonesque works of creative minds. Steve explains the benefits of models, and what drives risk management, and how he helps firms today.
What is the value of risk analysis models?
Models exist as a parallel universe to fundamental analysis. Think of an asset manager who picks stocks and bonds to put in a portfolio — as a fundamental analyst, he will look at industry factors, management team, company history, balance sheet — and he will use this analysis to make a recommendation. Models perform the same type of function, but they use different criteria that are uncorrelated to the factors that the analyst would use. A model can be used to rank the attractiveness or risk of potential investments. This gives you the benefit of being able to look at your investable universe, using different systems. I have more confidence in making a selection if both systems produce positive signals.The other goal of a model is to be objective. Take three investments, each in a different sector, covered by a different analyst using the traditional five C’s of credit approach. Each analyst will have a slightly different methodology for evaluating the attractiveness of the investment being looked
at. When an investment committee comes together to decide if A is better than B is better than C, they are not comparing apples to apples in as pure a way as they would if they were using a model.
What are the drivers of how financial institutions think about risk today?
Dodd-Frank Act and policy changes at the Federal Reserve are two key drivers. The motivation is to avoid a repeat of the 2008 crisis, by making sure banks and insurance companies are and will remain well-capitalized even under adverse conditions. One guideline that the Dodd-Frank Act asks banks to adopt is the Comprehensive Capital Adequacy Review (CCAR), for stress tests. It mandates that 19, and soon more, banks in the United States must annually prepare a set of in-depth reports for the Federal Reserve, as to what is in their portfolios and how it will perform over the next several years and under adverse conditions. In the most recent submission, four of the banks did not pass, which highlighted gaps that banks tended to have in understanding risk in their own portfolios: a lack of data, and a lack of bottom-up modeling capabilities. The Federal Reserve wants banks to be able to forecast loss estimates for every asset on their books — not just by using generic top-down assumptions of the loss in a corporate loan portfolio.
What is Moody’s Analytics’ role?
Imagine a bank coming to Moody’s and saying, “We lend to companies in the Southeastern United States. Even though we’re a big bank, we don’t have that many loan defaults in our portfolio history, so it’s difficult to predict a default when we don’t have a large sample of default data.” Moody’s Analytics has data from other banks to augment the client bank, which provides it a sufficiently large sample. The second piece is to help it build a more robust default model.
Can you describe some specific bottom-up models?
Probability of default, loss given default and exposure at default models: All three of these models are needed to derive an expected loss calculation, which lets the bank know how much provision to set aside for losses. That translates to how much capital it needs to have
Putting Risk Models to the Test Steve Wiggins, WG’98 Senior Director, Credit & Portfolio Analytics,at Moody’s Analytics
Steve Wiggins, WG’98
20 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM20
to maintain the minimum capital ratios that the regulator specifies. That may mean the bank must raise more equity to boost its capital ratio, or it may need to sell assets to bring its risk down, given the amount of capital it has.
Financial institutions that hold fixed income portfolios need to understand how likely they are to realize a significant decline in the value of their holdings, and how severe that decline in value is likely to be. Economic Capital models attempt to do this by describing a probability distribution of potential future values of the portfolio, and it is the institution’s decision
to make as to what confidence interval they are comfortable with, such as 95%, 99% or 99.9%. The higher the confidence interval, the more capital that the institution has to set aside to ensure that it can remain solvent in the event that it experiences sizable losses in the portfolio.
What is your history at Moody’s Analytics?
In 2001, three years after leaving Wharton, I joined KMV, a
small but highly regarded risk management firm. Allen Levinson [also interviewed in this newsletter] hired me into KMV, and became my first boss there. A year later, KMV was purchased by Moody’s, its first acquisition among
many to build up its risk analytics and reporting capabilities. Each one of the acquisitions was a niche player — including Economy.com run by Mark Zandi, a renowned macroeconomist; Wall Street Analytics, which does modeling for structured finance; and Fermat International, a French enterprise data warehouse company, to give data and technology infrastructure for Moody’s projects.
We managed the acquisitions as a portfolio, but each firm maintained its own brand and was allowed to continue what it had been doing. In 2008, Moody’s decided to amalgamate these companies under a common brand, Moody’s Analytics, which became the second primary line of business, along with Moody’s Investors Service, the rating agency that everyone in the capital markets knows with more than a 100-year history.
How do you make sure that your models perform?
We spend a lot of time working to improve the accuracy and breadth of our models. On our side, we perform regular validation to recalibrate the models as we get new data from the economic environment. Additionally, clients back-test our models. We might go to a hedge fund and say, “We think you can use our model
to make better buy and sell decisions. They’ll say, “Prove it!” We’ll say to the fund, “How about you run an exercise where you look at your actual portfolio’s return, and then you go back and say, ‘If I had this model a year ago, and it gave me these signals — that these other bonds, for example, were attractive — and I should buy them and not the ones that I actually did buy.’ Let me hypothetically buy those and see what the performance would have been over the last year. If that performance was better, then the model is shown to have value.” That is the ultimate proof. If you can show them that you could have made their trades better, then they are sold. We’re happy to put ourselves to the test.
What makes your work interesting or rewarding?
The landscape is constantly changing. The regulatory environment is shifting, modeling techniques evolve, and the market environment surprises you. To pre-empt or respond to these challenges is refreshing. One day, I will be talking about economic capital to a large commercial bank or its stress-testing process, and the next day, I’ll be speaking to a life insurance company about how to improve its risk-adjusted portfolio returns or how to adopt a� more risk-informed limits system. I’ll speak to a hedge fund about using relative value analytics to generate higher alpha in its portfolios. Getting to speak with and learn from all sorts of people — from chief risk officers to traders, quants and portfolio managers — is very exciting, and I am constantly learning, which keeps me engaged. I also have the luxury of working with an exceptionally bright, talented, enthusiastic and intellectually curious group of people.
Wemightgotoahedgefundandsay,“We
thinkyoucanuseourmodeltomakebetter
buyandselldecisions.”They’llsay,“Proveit!”
21WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
the Wharton alumni community is one of the most exclusive and powerful networks in the world. One key element of our success is the willingness of
alumni to help other alumni. Take the Call is a simple concept: Wharton alumni should buy from, hire and help Wharton alumni. And if a Wharton alum calls us for any reason, we Take the Call.
The Take the Call Forum allows you to directly reach the Wharton alumni community. Just submit www.whartonny.com/forum.html, and it will be promoted to the 30,000 alumni in the New York metro area. Find opportunities offered by your fellow Wharton alumni. Help alumni get answers. Gain ideas and useful information. Here are some excerpts from the latest Take the Call Forum.
Get help with your NYC real estate needs
If you are thinking about selling, or need help making your bid competitive, I can give you real-time info and advice so that you can make the best decision about one of your biggest investments. I also put together a monthly NYC residential market update email. Email me if you’d like to be added to the list so you can stay on top of market trends. Thanks! Kate Pelet, W’02, at [email protected].
Baker Retailing Center — Managing Director
The Baker Retailing Center, a research center at Wharton focused on the retail industry, is currently searching for a Managing Director. We are looking for someone who has a good amount of experience in the retail industry. It is a senior position in the school with extensive interaction with C-suite executives. Here’s the link to the description and application process: https://jobs.hr.upenn.edu/applicants/Central?quickFind=197122.
Seeking President to lead graphics company
ProPoint Graphics is seeking a President to lead the Company to its next stage of development. This high-profile position requires a proactive strategist, who thrives on challenge, variety and accomplishment, and who will function effectively as a leader and role model within the Company. This is an exciting opportunity for a motivated, highly capable individual to create substantial value by leveraging the established foundation of a growing, profitable company. [email protected].
Space for public training class
We’re looking for a space within a corporate site in Manhattan to conduct 4-day public training class in the principles of Facilitation/Meeting Management. This training is our flagship course and will improve outcomes for anyone who stands in front of a room of people. Class is offered 3 times a year in NYC and is valued at more
than $2,000 per seat. Thanks, Diana Gurwicz, WG’97, at [email protected].
CFO - The Haddad Organization, LTD.
Principal job functions: Act as company liaison to banks, attorneys and accountants. Contract negotiations and reviews. Manage and administrate accounting department. Handle all aspects of the company insurance. E-mail: [email protected].
Young Professionals Happy Hour
Social Finance, Inc. (SoFi) presents the SoFi NYC Young Professionals Happy Hour at The Cabanas at the Maritime Hotel in Chelsea. RSVP here: http://sofihappyhournyc130814.eventbrite.com/ Join us for a night of networking, glamorous nautical ambience and an introduction to how SoFi is changing the student loan industry for you. Roland Archer, WG’04.
Marketing Brand Manager
I am a Wharton MBA and Director of Strategic Marketing at Educational Testing Service in Princeton, NJ. I’m looking to hire a marketing brand manager and would love to hire a Wharton alum with a strong marketing background and interest in the education industry. For more information: http://ets.pereless.com/careers/index.cfm?fuseaction=83080.viewjobdetail&CID=83080&JID=149247&type=&cfcend.
Renting a studio apartment
Looking to rent a studio apartment ASAP as close to #4 train as possible - area: Lex to York and 39th to 94th. Please contact: [email protected] with leads/ideas.
Financial position at Payoneer
Seeking an alumni with 1-3 years of prior work experience to join Payoneer in the company’s New York headquarters. Please contact: [email protected].
Take the Call!
22 WHARTON CLUB OF NEW YORK | SUMMER 2013 | WWW.WHARTONNY.COM
WHARTON CLUB of NEW YORK
You belong.Your acceptance to the Wharton School was a milestone in your education and your career, and the benefits didn’t stop when you graduated. Because you live in the New York area, you automatically belong to the Wharton Club of New York, giving you access to a family of more than 25,000 alumni in the area.
The Wharton Club of New York organized 120 club events in the last year - business events, career events, social events. Each one is an opportunity to build relationships, and meet other successful Wharton alumni and support the largest, most vibrant Wharton alumni community in the world!
You belong to the club, and the club belongs to you!
We want you to be a bigger part of the Wharton Club of New York. You can become a contributing member for as little as $95 per year, helping yourself while you help the WCNY to better serve you and other alumni.
YES, I want to be a Contributing Member of the Wharton Club of New York, giving me benefits including:
Please complete and mail to: Wharton Business School Club of New York, 75 Rockefeller Plaza, 18th Floor, NY, NY 10019
Questions? Contact Gabriela Sanchez at [email protected]
Name
Address
Town/State/Zip
Phone
Credit Card Number
Expiration Date
� Sustaining Member - $95/year � Silver Supporting Member - $500/year � Gold Sponsor Level - $1,000/year � Benefactor Level - $3,500/year – includes membership in the Penn Club
y More access to your fellow alumni y Eligibility for leadership positions
y 1/2 price on most WCNY events y Special, members-only discounts on special
services, and health insurance.
THE NEW YORK BUSINESS LEADS COUNCILWednesday, September 11 at 6:30 p.m.Location: Midtown (Address will be emailed to registered guests prior to the event.)Cost: WCNY Supporting Members - $0, Other Wharton Alumni/Guest - $40The Wharton Club of New York has formed a new Business Leads Council.This group will be highly results-oriented. Serious members are encouraged to apply. We will be working together diligently to leverage each other’s networks and propel member businesses to the next level.
WCNY: LEADS GROUPTuesday, September 17, 6:00 p.m.Location: O’Casey’s Restaurant & Pub at 22 East 41st Street, New York, NY, 212-685-6807Please RSVP by email to Ralph Pagan before Monday, September 16, to [email protected] Entrepreneurs, Consultants, Business Development Professionals, Small Business Owners, Sales Professionals, Lawyers, Accountants
INTELLECTUAL PROPERTY BOOT CAMP FOR ENTREPRENEURSWednesday, September 18, 6:00 p.m. to 7:45 p.m.Location: Midtown (Address will be sent via email to all registered guests 24 to 48 hours prior to the event.)Cost: WCNY Supporting Members - $10, Other Wharton Alumni/Guests - $40Intellectual property attorney Michael Steger will distill some of the key intellectual property issues entrepreneurs face. Michael regularly works with small and midsize businesses in a wide range of intellectual property matters.Join the Wharton Entrepreneurs Education and Resource Network for our next event.
2013 JOSEPH WHARTON AWARDS DINNERThursday, October 3, Cocktails at 6:00 p.m., Dinner at 7:00 p.m.Location: Metropolitan Club at 1 East 60th Street, New York, NYCome honor Ronald O. Perelman, W’64, WG’66; Jacob Wallenberg, W’80, WG’81; D. Wayne Silby, W’70; and Brett Hurt, WG’99.
WCNY–CALENDARCheck website for details! Whartonny�com/events�html
