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Andrew Waxman
Andrew Waxman
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Ten Most Significant Operational Risks of 2012

Andrew Waxman takes a look at the most significant operational risks, including the Facebook IPO and Knight Capital Fiasco, that occurred on Wall Street in 2012.

6. Mergers and Acquisitions

Another year and another billion dollar settlement for Bank of America, this time, $2.43 Billion to settle a class action lawsuit brought in 2009 in regards to the ill-fated acquisition of Merrill Lynch. HP also announced an $8.8 billion impairment of its 2011 $11 billion dollar acquisition of Autonomy, of which $5bn was linked to the alleged accounting improprieties and disclosure failures. Both events highlight the risks of acquisitions and the critical importance of due diligence and financial reporting.

7. Anti-Money Laundering

British banking giant HSBC agreed to pay a record $1.92 billion to the US federal government for failures in its anti-money laundering controls. This was the second major anti-money laundering settlement with a British Bank in 2012, following the settlement reached with Standard Chartered Bank. In obtaining these settlements, regulators clearly signaled their intent to continue to crack down on the issue.

8. Trading Risk Management

Jamie Dimon, JPMorgan’s chief executive, called the trading strategy that produced his bank’s very significant losses in the now notorious “London Whale incident” as “flawed” and “poorly executed.” The incident served as a reminder of the importance of consistent risk management practices, integrity of valuation procedures and risk modeling tools across the whole investment bank platform.

9. Position, Price and Interest Rate Mismarking

The Libor interest rate manipulation scandal that led to very large fines for the banks involved and criminal charges for some has of course been very big news in 2012. Also worth noting, however, was the charging of three Credit Suisse traders by US federal prosecutors for their actions in 2007 to conceal losses by allegedly deliberately mismarking positions in their credit trading portfolios. Both these cases highlight the critical importance of ensuring the integrity of independent valuation processes in banks and the challenges in doing so.

10. Natural Disaster and Business Disruption

New York and New Jersey suffered the brutal effects of the worst storm in its modern history and both the financial and human losses and impacts were far greater than were ever imagined by business continuity and disaster planners. Given the occurrence of two hurricanes in successive years on its shores, the East Coast and its business community has been put on notice that things cannot go on as usual. Expectations need to be revised and better plans put in place to prevent and mitigate the worst effects of volatile weather systems.

Andrew Waxman writes on operational risk in capital markets and financial services. Andrew is a consultant in IBM's US financial risk services and compliance group. The views expressed her are those of his own. As an operational risk manager, Andrew has worked at some of the ... View Full Bio
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