The 2004 Basel II capital accords break down “risk management” into three basic categories: market, credit, and operational. As they routinely do, operational risks — the potential for man-made or machine-made losses — have plagued finance chiefs in 2009. But there can be little doubt that credit risks and market risks have been uppermost in their minds in the year now drawing to its end.
Indeed, the seizing up of capital markets over the course of the year provided a double dollop of market risk and credit risk. In print and online stories, the perils that stem from changes in market conditions — including changes in interest rates, exchange rates, and prices — were often spotlighted by CFO in 2009.
Executives worried, for instance, about too much concentration of risk in the market for credit-default swaps and other derivatives. Particularly troubling were the results of a Fitch Ratings survey we reported on in July: about 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies were held by a mere five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley.
But with the tightness of credit pervading the economy, stories spotlighting companies’ potential to become deadbeats also ran frequently. As Pam Krank, president of Credit Department, an accounts-receivable consulting and outsourcing firm, put it last fall: CFOs are “finally putting credit risk at the top of their lists” for the first time in her 18-plus years in business. What’s more, the availability of credit insurance has seemed vulnerable. The five biggest risk-bearing banks unearthed by Fitch accounted for more than 96% of companies’ exposure to credit derivatives.
This year, the financial world was roiled by “toxic assets,” the bad loans and securities that devastated bank balance sheets. Yet meanwhile, an operational risk, toxic environmental liabilities, threatened the financial health of some U.S. businesses. Accounting rules have enabled companies to conceal the full extent of these costs, encouraging minimal disclosure, even when management knows the total bill will be far higher, according to a story in the September CFO. That situation seemed likely to spawn a world of legal risk in the form of shareholder suits.
A slew of other perils, ranging from information technology to the economy to swine flu, also plagued executives this year. Here are 10 of CFO’s top stories about the witch’s brew of risk that was 2009.