In his new book The Accidental Investment Banker, Jonathan Knee introduces us to the phrase IBG YBG, which means “I’ll be gone. You’ll be gone.” This might be whispered between investment bankers when an inconvenient fact comes to light during due diligence on a company they are about to float. “Don’t sweat it” is the implication. Investors may be burned. The investment bank itself may be burned, but by then, the bankers themselves will have cashed their bonuses and be long gone.
IBG YBG comes up all too often in financial risk management. This past week, an inexperienced risk manager posted to the forum riskchat.com to get advice on how to deal with an options trader who’s portfolio is so huge and convoluted that he can’t perform basic analyses on it. The risk manager isn’t provided essential tools to perform his job, and the trader refuses to work with him.
For anyone who has worked in risk management a few years, the situation sounds familiar. It has IBG YBG written all over it. The novice risk manager doesn’t tell us what firm he works for. Let’s suppose it is a hedge fund. Hedge fund managers routinely pay themselves 2% of assets plus 20% of profits annually. On a multi-billion dollar fund, that could easily amount to $100 million a year. What do managers care if a trader’s activities or reported profits are questionable? IBG YBG. The managers just have to hang in there for a year or two, and they will all retire multi-millionaires. Why investigate? Instead, they can hire a novice risk manager, don’t support him, don’t give him resources, and don’t back him up when he complains he can’t get answers from a trader. Plausible deniability; look the other way; IBG YBG—it’s all the same thing. As long as they can avoid actual fraud, managers will be safely out of the way when investors are picking up the pieces.
The 1995 Barings debacle was a classic case of IBG YBG. Managers loved the bonuses they were earning due to Leeson’s reported earnings, and they were careful not to investigate the hundreds of millions of pounds they were sending him in Singapore to cover margin calls. The Joseph Jett affair also reeked of IBG YBG.
Enron was a case of IBG YBG in which—and this happens often—managers went beyond avoiding explicit fraud and started engaging in fraud so long as they felt it wouldn’t be discovered. Things got out of hand.
Risk managers tend to distinguish between market risk, credit risk, operational risk and liquidity risk. I guess we could add IBG YBG risk to the list, but this would be misleading. Market, credit, operational and liquidity risk, more often than not, are just symptoms of IBG YBG risk. Firms that run on IBG YBG are the ones that suffer crippling losses due to market, credit, operational or liquidity risk. At well run firms, IBG YBG isn’t a factor. Those firms monitor market, credit, operational and liquidity risks, but they aren’t going to suffer crippling losses from them. In such firms, these risks aren’t so much risks as they are details to be monitored and managed in a professional manner. Only at IBG YBG firms is there a real risk of things blowing up.
This isn’t news for experienced risk managers. I am just putting words to what is common knowledge.
IBG YBG risk often is an issue with low-probability, high-impact risks. Responsible parties may ignore such risks, hoping to be long gone by the time a crisis actually hits. Studies indicated that New Orleans would fill up like a soup bowl if it were directly hit by a major hurricane. Politicians didn’t fund the expensive levy work that was required because, well, you figure it out …
Economists have their own terminology for IBG YBG. For them it is a type of “agency problem”—the problem that in a principal-agent relationship, the agent is likely to pursue his own interests instead of those of the principal. The agency problem exists between government officials and their electorate. It exists between corporate managers and shareholders. In that context, the solution economists often turn to is improved corporate governance.
Financial risk management, as it is practiced today, is powerless to address IBG YBG. Where IBG YBG reigns, risk managers (if they exist at all) report to managers involved in the IBG YBG. No, a better solution is corporate governance, and this is why serious discussions of risk management so often become discussions of corporate governance. I will discuss that in my next posting.