At the height of the credit bubble, the financial juggernaut J.P. Morgan, led by CEO Jamie Dimon, exited the business of securitising subprime mortgages, when it was still booming. The decision was borne out of sound risk management principles – the identification, assessment and effective management of risk – allowing J.P. Morgan to weather the crisis far better than its rivals. From July 2007, when the crisis began, through the second quarter of 2008, J.P. Morgan took just US$5 billion in losses on high-risk CDOs and leveraged loans, compared with US$33 billion at Citi, US$26 billion at Merrill Lynch, and US$9 billion at Bank of America (Source: Shawn Tully, money.cnn.com, 2 September 2008).

Clearly articulated risk tolerance and processes

Dimon’s shrewd move demonstrated how risk management can be leveraged as good business practice, positioning a company to optimise earnings, while staying within well-defined risk tolerance levels.

Companies would be prudent to analyse their risk exposures and take the appropriate steps to either eliminate or mitigate their effects. The firm’s risk tolerance should be clearly articulated and processes put in place to keep losses within that tolerance. Firms would also do well to carefully consider the key risks they are likely to face over the next 12 months and what they should do to best manage those risks.

The following table provides a snapshot of potential risks and the ways to manage them:

Risk area Risk issues - examples   Possible risk mitigation measures     Clients Inability to appropriately service clients       • Who would you take on as clients, on what terms and who would you reject?   • Establish clear guidelines in terms of types of clients you take in, bearing in mind the impact of such decisions in terms of risks and opportunities.     • Ensure that the clients you take on are appropriate in every way. Considerations would include: » Do the cases involve issues that you are able to handle, in terms of technical expertise and service ability? » Are there conflicts of interest?       Client concentration           • Overreliance on one client’s billing creates a risk to the firm’s overall revenue.   • While you strengthen relationships with specific clients, you would also want to bring in additional business to lower each client’s percentage of overall revenue.     Business areas Overreliance on business areas           • Overreliance on one or two business lines may have a negative impact on profits, if those specific business lines hit a rough patch or key members generating that business resign.   • Explore the possible diversification of revenue streams.     • Take steps to compensate for the business line, while also diversifying and growing other areas of the company.     HR issues Senior management defections           • There is a risk when clients associate a firm only with one senior manager who controls all aspects of an account.     • Significant number/key staff departing for more autonomy, flexibility and/or compensation.   • Firms could present their clients with a “team” which has the ability to provide quality service, instead of relying on the lead account manager.     • Know which staff/personnel are most profitable to the firm and compensate them accordingly to retain them.     • Review your firm’s staff development processes, working environment and/or compensation structure.     • Think about investing in staff through various means such as education.     Business continuity Business interruptions           • What do you do when your office/operations are rendered inaccessible for days or months - how you would go about providing seamless service to clients?     • What plans are in place for staffing options and reorganisations if key employees leave?   • Develop robust and practical business continuity management plans that go beyond IT disaster recovery.     • If you are unsure as to where to start, the services of professional consultants may be of value.

Risk management in place of overt avarice worked for J.P. Morgan. In a 15 January 2009 press release, Jamie Dimon was in the relatively enviable position of being able to declare:

“We are doing our part to help stabilize the financial markets and hasten recovery. We assumed risk and expended resources to assimilate Bear Stearns and Washington Mutual. We continued to lend in a safe and sound manner… J.P. Morgan Chase’s management team is working diligently to manage through this very difficult business climate, and to position the franchise to benefit when the economy eventually recovers.”

Note: J.P. Morgan’s Full-Year 2008 Net Income was reported at US$5.6 Billion.

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