Counterparty Risk Management Policy Group I  1999
Counterparty Risk Management Policy Group II 2005 (By “The Corrigan Group")
The Report of the CRMPG III 2008 (By E. Gerald Corrigan, Douglas J. Flint and Others)


The thinking of Policy Group I in 1999 was driven by two primary
considerations:

• First, there were expressed concerns about the “moral hazard” issues that would inevitably arise by virtue of direct regulation of hedge funds; and

• Second, the 1999 Policy Group strongly believed that many of the benefits of direct regulation could be achieved through indirect regulation.

Specifically, the 1999 Policy Group concluded that supervisors and regulators of already regulated institutions could — by working with those regulated institutions — achieve much of what could be achieved by direct regulation of hedge funds.

Bernanke, May 2006: "The primary mechanism for regulating excessive leverage and other aspects of risk-taking in a market economy is the discipline provided by creditors, counterparties, and investors. In the LTCM episode, ..."

"According to bank supervisors and most market participants, counterparty risk management has improved significantly since 1998. Some of this progress is due to industry-led efforts, such as two reports by the Counterparty Risk Management Policy Group (CRMPG) that lay out principles that institutions should use in measuring, monitoring, and managing risk."

The Report of the CRMPG III - August 6, 2008, Titled Containing Systemic Risk: The Road to Reform, is reviewed here: Wall Street Report Tries to Dissect Financial Meltdown

The report

• is by a group of Wall Street executives

• outlines how the industry failed to foresee the financial meltdown of the last year and what companies can do to improve risk management.

• provides suggestions about technical issues

• offers a bit of a mea culpa.

• says Wall Street failed to anticipate how wide-reaching problems with mortgage bonds would spread into seemingly distant corners of the financial markets

• attributes, both in the cover letter and in the body of the document, the root cause of financial market excesses to “collective human behavior” -- not to anything that could be changed like worldwide use of an irredeemable currency, not to repeal of regulatory protections enacted after the great depression, not to accounting laxity allowing off-balance sheet assets and liabilities and allowing bonuses on 15 years of (presumed) profits , not to moral hazard resulting from the existence of GSEs and the expanding envelope of “too big to fail” (or too well-connected to fail) entities, not to moral hazard resulting from market interventions, not to the Japanese Yen carry trade, not to central banks setting short-term interest rates lower than the rate of inflation, not to OTC derivatives which cannot be marked to market, not to a huge shadow banking system, .........

From http://www.nytimes.com/2008/03/23/business/23how.html?pagewanted=print

March 23, 2008

THREE years ago [2005] , many of Wall Street’s best and brightest gathered to assess the landscape of financial risk. Top executives from firms like Goldman Sachs, Lehman Brothers and Citigroup — calling themselves the Counterparty Risk Management Policy Group II — debated the likelihood of an event that could send a seismic wave across financial markets.

The group’s conclusion, detailed in a 153-page report, was that the chances of a systemic upheaval had declined sharply after the Long-Term Capital bailout. Members recommended some nips and tucks around the market’s edges, to ensure that trades were cleared and settled more efficiently. They also recommended that secretive hedge funds volunteer more information about their activities. Yet, over all, they concluded that financial markets were more stable than they had been just a few years earlier.

Few could argue. Wall Street banks were fat and happy. They were posting record profits and had healthy capital cushions. Money flowed easily as corporate default rates were practically nil and the few bumps and bruises that occurred in the market were readily absorbed.

More important, innovative products designed to mitigate risk were seen as having reduced the likelihood that a financial cataclysm could put the entire system at risk.

“With the 2005 report, my hope at the time was that that work would help in dealing with future financial shocks, and I confess to being quite frustrated that it didn’t do as much as I had hoped,” says E. Gerald Corrigan, a managing director at Goldman Sachs and a former New York Fed president, who was chairman of the policy group. “Still, I shudder to think what today would look like if not for the fact that some of the changes were, in fact, implemented.”

An excerpt from Will Silver Derivatives Sink Banks? By Patrick A. Heller December 14, 2010

... the banking industry established the Counterparty Risk Management Policy Group (CRMPG) as the means to self-regulate the activities of derivatives trading, including the clearinghouses. 

The CRMPG was established in January 1999 by 12 major commercial and investment banks. The signatories of the document establishing the conceptual framework of the CRMPG represented

• Goldman, Sachs,

• HSBC,

• Lehman Brothers,

• Morgan Stanley,

• Blue Mountain Capital Management,

• Blackrock,

• JPMorgan Chase,

• BNP Paribas,

• Bank of America,

• Merrill Lynch,

• Hamilton LLP, and

• Citigroup.

Henry Paulson, who later became Treasury secretary, and Mario Draghi, who was governor of the Bank of Italy and chair of the Financial Stability Forum, were also involved.

In addition to helping banks collude with each other, the CRMPG also made it easier for this cartel to prevent other entities from competing. For instance, Bank of New York Mellon, one of the nation’s largest banks, petitioned to join the cartel. It was rejected for supposedly having insufficient capital, though specific information on how this judgment was determined was never provided. 

The full list of members of the Counterparty Risk Management Group II, and their working groups:

Toward Greater Financial Stability: A Private Sector Perspective
July 27, 2005 vii

EXHIBIT I

Counterparty Risk Management Policy Group II

• E. Gerald Corrigan, Chairman

  • Managing Director    Office of the Chairman Goldman, Sachs & Co.

• Don M. Wilson III, Vice Chairman

  • Chief Risk Officer JPMorgan Chase & Co.

• David C. Bushnell, Vice Chairman

  • Senior Risk Officer Citigroup Inc.

Policy Group Members

Michael J. Alix
Senior Managing Director
Head of Global Credit Risk Management
Bear, Stearns & Co., Inc.

John G. Macfarlane III
Chief Operating Officer
Tudor Investment Corporation

Dr. Hugo Bänziger
Chief Risk Officer (Credit & Operational Risk)
Deutsche Bank

W. Allen Reed
President & Chief Executive Officer
General Motors Asset Management

Craig W. Broderick
Managing Director
Chief Credit Officer
Head of Credit, Market & Operational Risk
Goldman, Sachs & Co.

Edward J. Rosen, Esq.
Partner
Cleary Gottlieb Steen & Hamilton LLP

Scott C. Evans
Executive Vice President
Chief Investment Officer
TIAA-CREF

Thomas A. Russo
Vice Chairman and Chief Legal Officer
Lehman Brothers

Douglas J. Flint
Group Finance Director
HSBC Holdings plc

David H. Sidwell
Executive Vice President and CFO
Morgan Stanley

Christopher B. Hayward
Managing Director
Head of Holding Company Supervision
Chief Operating Officer - Corporate Risk Management
Merrill Lynch & Co., Inc.

Associate Member

Adam Gilbert
Managing Director
JPMorgan Chase & Co.

Secretariat

Pawel Adrjan
Associate
Goldman, Sachs & Co.

Pierre-Hugues Verdier, Esq.
Associate
Cleary Gottlieb Steen & Hamilton LLP

__________________________________________

The members of CRMPG II wish to thank Manar Zaher of Goldman Sachs for her efforts in support of this project. In addition, we would like to thank Goldman Sachs,

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