Saturday, June 27, 2009

A story of risk management: Rebonato and RBS

Riccardo Rebonato still (amazingly enough) holds a senior role at the Royal Bank of Scotland (RBS). He recently wrote a book called the Plight of the Fortune Tellers and was interviewed by Russ Roberts of EconTalk.

In that interview, it's incredible to hear Rebonato distance himself from "quants", whom he calls "the instruments" of the banking system. Rebonato however is in fact the ultimate quant. Years back he left Barclays (a subsidiary known as BZW) after his department took a massive loss. For many years now Rebonato has been the global head of market risk management and quantitative analysis at RBS.

So was Mr. Rebonato an "instrument" of the RBS bankers? Greenwich Capital, RBS's US trading operation/broker dealer was running a massive whole loan and securitized mortgage portfolio. The bank was also aggressive in building a structured credit portfolio globally. In fact RBS made Citi look like your local community bank an some respects. So this begs the question - what was Mr. Rebonato doing while RBS was amassing it's portfolios? The answer is simple. Mr. Rebonato was writing his book.

RBS share priice

RBS effectively became insolvent, and after a series of UK's version of "TARP medicine" (equity injections) has been nationalized by the UK government.

Having said all this, Mr. Rebonato makes some good points, particularly about Value at Risk, regulatory capital, and the famous regulatory "MULTIPLIER" (which we touched upon a few days ago.)


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