Streamline Training & Documentation: David Einhorn on Risk Management

Thursday, January 08, 2009

David Einhorn on Risk Management

The Global Association of Risk Professionals (GARP) offers a wealth of resources at their website. As one especially topical example, I'd point to the discussion of "Private Profits and Socialized Risks" by David Einhorn that was posted on GARP's blog on June 18 of last year. Einhorn, a hedge fund manager, talks about:

The origins of highly levered balance sheets.

The trouble with Value at Risk (VaR) as a measure of risk. ("By ignoring the tails [of the risk distribution], VaR creates an incentive to take excessive but remote risks.")

Flawed opinions from the credit ratings agencies (e.g., Standard and Poor's, Moody's, Fitch).

Insufficient capital requirements for investment banks.

The fall of Bear Stearns.

Perils of a reverse-Robin Hood system, in which investment bankers benefit from profits, while generally less well-off taxpayers absorb losses.

The impact of the bailout of Bear Stearns.

A comparison of the situations of Lehman Brothers and Bear Stearns. (Einhorn was writing before the Lehman bankruptcy; he anticipated that the company would receive a bailout, whereas, in fact, it was allowed to fail.)

Einhorn writes clearly about an important subject in which he has extensive firsthand experience, so reading his whole piece is well worth the twenty minutes or so it will take you.

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Labels: Risk management

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