Don’t blame bailouts for excessive risk taking, one researcher said May 29, 2014, during a daylong accounting conference at the University of Maryland’s Robert H. Smith School of Business.
Research presented at the third annual Journal of Accounting and Public Policy Conference in College Park, Md., shows how the expectation of a safety net — which comes with strings attached — actually reins in shareholders and managers with limited liability.
“Bailouts can undo the moral hazard created by limited liability and reduce risk-taking,” Boston University Professor Michael J. Smith told the audience of about 50 participants.
Overall, 12 researchers from 10 institutions presented papers at the event, which rotates annually among the Smith School, IE Business School and London School of Economics and Political Science. The 2014 theme was accounting and risk management.
Keynote speaker Cliff Rossi, Executive-in-Residence and Professor of the Practice at Smith, shared insights from his experience as chief risk officer at several of the largest financial services companies during the buildup to the 2008 housing crisis.
“I had a front row seat at the party and the funeral,” said Rossi, who spent time with Citigroup, Washington Mutual, Countrywide Bank, Freddie Mac and Fannie Mae.
Rossi said frequent job changes were the norm for people in his position, tasked with raising unwelcome concerns when banks started packaging subprime loans and redistributing their risks.
“The years leading up to the crisis were tough ones for chief risk officers,” he said.
New regulations have reshaped the financial services industry since the subprime crisis, but Rossi said lawmakers face a difficult task keeping up with the pace of change. “Markets move at a speed much faster than you can write policy,” Rossi said. “You are always going to run the risk of policy writing not being able to keep up with the speed of change.”
Other conference topics included the formation of risk management committees, investments in exchange rate mechanisms, and the rapid growth of financial derivatives.
After the paper presentations, an illusionist entertained participants during a reception and closing dinner. Conference organizers were Professors Alnoor Bhimani from the London School of Economics and Political Science, Salvador Carmona from the IE Business School in Madrid and Smith Professors Lawrence A. Gordon and Martin P. Loeb. Smith School Senior Associate Dean Michael Ball delivered the welcome remarks.
“This school has always had a strong research culture,” Ball said, referring to the schools top 25 research rankings.