Transcript Subprime - Structural View

The Advantage of Innovative Thinking
GRAVITAS Capital Advisors, Inc.
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Understanding Risk and Maintaining
Controls
“Audit Committees Responding to Global Challenges”
3rd CAACM Annual Conference – St. Lucia
Presenter:
Eric Guichard
GRAVITAS Capital
GRAVITAS Capital Advisors, Inc.
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Context
 Hampered
global liquidity
 Global economic slowdown
 Collapse of CL Financial
 Collapse of Stanford Financial Group
 Question: What
have we learned?
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CL Financial
grown corporate conglomerate – felled by
collapse in global liquidity
 Highly diversified operations
 Home
– Banking, insurance, real estate, chemicals…
 Key
player in majority of industries
 Complex corporate structure
 Rescued by Government of Trinidad & Tobago
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Stanford Financial Group
Conglomerate – felled by collapse in
global liquidity
 Global presence
 Financial
– LatAM, Carib, USA, Asia
 Highly
diversified operations:
– Banking, Research, Private Equity, RE…
– Significant philanthropic activities
 Aggressive
Corporate Strategy
 Accused by US SEC of Fraud and Deceit
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Corporate Complexity
 How
much complexity is too much?
– Who decides?
– How does one decide?
– Should oversight drive complexity?
 Complexity,
information and oversight?
– Quality of information in complex structures?
– Quality of audits in complex structures?
 Corporate
complexity and Board Membership
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Re-thinking Corporate Strategy?
 How
much of the Audit Committee’s findings feed
into corporate strategy?
 Should
complexity be avoided?
– Cost/Benefit?
of Corporate Conglomerate – end of “toobig-to-fail”?
 Death
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Competition and Corporate Incentives



Global competition, lax regulations and global liquidity
have led to greater corporate risk-taking
Corporate incentives have focused on S/T results with
devastating results
What is forgotten is that Corporate Incentives:
– Determine corporate culture
– Influence individual behavior
– Affect corporate going concern

Shouldn’t reviewing Corporate Incentives be part of Audit
Committees purview?
GRAVITAS Capital Advisors, Inc.
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New Product Development

Stems directly from corporate incentives
– Proposition, Revenue model and Exposures


CDOs, CDS,…
Is there an alignment between product development and
going concern?
– Does Audit Committee know what exposures are?

What process should be put in place to oversee link
between NPD policy, implementation and implications?
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What are Effective Controls?

Dangers of tailoring policy to last crisis

Universal importance of Transparency (“Sunlight”)

Understanding corporate trade-offs
– Complexity vs. Controls
– Competition vs. Incentives
– Aggressiveness vs. Liquidity (Risk/Return)
GRAVITAS Capital Advisors, Inc.
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Implications for Audit Committees?

CL Financial and Stanford Group raise key concerns about
– Corporate Incentives and Corporate Going Concern
– Transparency of Core Operations


Knowing what are Corporate Net Exposures (operational/regulatory)
Corporate Strategy vs. Corporate Liquidity
– Audit Committee Composition in face of Corporate Complexity
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In Conclusion



Post-crisis environment will put significant pressure on
Audit Committee to play more objective roles (public
accountability)
Regulatory frameworks are bound to tighten making
corporate profitability relatively difficult. This will result
in greater consolidation and increased corporate
complexity.
The onus is now on Audit Committees to get it right.
GRAVITAS Capital Advisors, Inc.
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