Analysts and investors have blamed Merrill Lynch’s losses tied to subprime loans to poor risk management. Former CEO of the New York Stock Exchange (NYSE), John A.Thain, joined Merrill Lynch to help them restore their reputation after the subprime mortgage problems. (Ref 3) Thain saw that the losses were due to poor risk management programs and poorly supervised trading practices. He saw that Merrill Lynch had a risk committee which did not function. Thain’s goal was to avoid undue risk taking which could bring down the house. To implement this he had mandated weekly meetings with heads of fixed income, equity and risk. He wanted to bring more accountability to risk management.
In spite of these efforts, Merrill Lynch’s shares dropped. Over the past year, Merrill Lynch’s shares dropped over 68%. To avoid a bankruptcy situation like Lehman Brothers, Thain initiated a deal with Bank of America. Bank of America bought out Merrill Lynch to create the nation’s largest retail bank. This cost Merrill Lynch its 94 years of independence.
Daily trillions of dollars are transferred worldwide in funds and securities through financial systems. The magnitude of this exposes the financial institutions and their customers to very high risk of deliberate and accidental fraud. Many government and industry regulations and standards such as International Financial Reporting Standards (IFRS), Basel II, Basel III, PCI and Sarbanes-Oxley (SOX) require compliance by these financial institutions to take steps to mitigate risks and protect them from fraud. These strict regulations were unable to prevent the big slide in the stock markets in September 2008. Future solutions to the financial meltdown must include raising security standards in the financial industry, such as the use of biometric systems.
REGULATIONS AND STANDARDS
International Financial Reporting Standards – (IFRS)
These standards are becoming global standards for preparing companies’ financial documents. They are developed by International Accounting Standards Board (IASB) and are adopted by over 12,000 companies in over 100 countries globally. ERP systems such as SAP ERP financials provide compliance solutions for IFRS.
Basel II & III: These are issued by the Basel Committee on Banking Supervision, which is composed of representatives and senior authorities from the central banks of the G-10 countries. These accords are recommendations on banking laws and regulations.