Psst. Don't tell anybody, but Myron Scholes & Co. is busy hiring traders for a new firm. At the moment, there's no web site for Oak Hill Platinum Partners—at least nothing public—and there's no name plate in the lobby of the Park Avenue building that houses the company's new office. If asked, the doorman will direct you to the ninth floor, where a single laser-printed sign serves as the marquee. Inside, people are busily preparing for something...but what exactly?

Oak Hill Platinum appears to be the latest in a series of funds affiliated with Texas investor Robert Bass. Last April, Scholes was hired as a consultant to Bass' Oak Hill Partners, which operates a series of private equity partnerships. He was joined in October by Chifu Huang, a renowned swaps and derivatives modeler and fellow alumnus of Long-Term Capital Management, who is now a founding principal at Oak Hill Platinum.

Rumor has it that the new fund will have its own take on fixed-income arbitrage strategies, with less emphasis on one-way bets and more attention to liquidity risk.

Scholes, however, is probably spending most of his time working from the firm's Menlo Park, Calif., office.

By Robert Hunter

When Gerald Corrigan left his post as president of the Federal Reserve Bank of New York in 1993 to take a position as senior adviser at Goldman Sachs, most people expected he would keep a low profile at the legendarily press-shy investment bank.

Corrigan had earned a reputation as a cranky regulator keen on quieting the increasingly jubilant swaps markets. In a 1992 speech before the Bank for International Settlements' Basel Committee on Banking Supervision, which he chaired at the time, Corrigan warned of the dangers of derivatives in no uncertain terms. "I have to ask,” he said, "whether some of the specific purposes for which swaps are now being used may be quite at odds with an appropriately conservative view of the purpose of a swap, thereby introducing new elements of risk or distortion into the marketplace—including possible distortion to the balance sheets and income statements of financial and nonfinancial institutions alike.”

Since that time, he has softened his views on derivatives but has become an even more ardent advocate of risk management, representing Goldman on the Counterparty Risk Management Policy Group and supporting all of the international risk management efforts undertaken in recent years.

Last month, Corrigan, now a managing director and partner, as well as head of risk management at Goldman, reiterated his beliefs in a speech before the International Swaps and Derivatives Association in Amsterdam. Corrigan examined the major financial shocks of the last 20 years, boiled down their similarities and looked ahead to the future.

He said it's likely that the periodic bouts of global financial instability that have surfaced over the past two decades—which were more numerous and of far greater magnitude than those in the preceding 35 years of the post-war period—will continue for the broadly foreseeable future. The challenge for financial institutions: to manage their affairs to reduce the frequency of such events and to manage problems better when they do arise, thus limiting the carnage and reducing systemic risk. Corrigan noted that markets have, in general, shown great resiliency in sorting out financial shocks, as long as the threat of serious By Robert Hunter

When Gerald Corrigan left his post as president of the Federal Reserve Bank of New York in 1993 to take a position as senior adviser at Goldman Sachs, most people expected he would keep a low profile at the legendarily press-shy investment bank.

Corrigan had earned a reputation as a cranky regulator keen on quieting the increasingly jubilant swaps markets. In a 1992 speech before the Bank for International Settlements' Basel Committee on Banking Supervision, which he chaired at the time, Corrigan warned of the dangers of derivatives in no uncertain terms. "I have to ask,” he said, "whether some of the specific purposes for which swaps are now being used may be quite at odds with an appropriately conservative view of the purpose of a swap, thereby introducing new elements of risk or distortion into the marketplace—including possible distortion to the balance sheets and income statements of financial and nonfinancial institutions alike.”

Since that time, he has softened his views on derivatives but has become an even more ardent advocate of risk management, representing Goldman on the Counterparty Risk Management Policy Group and supporting all of the international risk management efforts undertaken in recent years.

Last month, Corrigan, now a managing director and partner, as well as head of risk management at Goldman, reiterated his beliefs in a speech before the International Swaps and Derivatives Association in Amsterdam. Corrigan examined the major financial shocks of the last 20 years, boiled down their similarities and looked ahead to the future.

He said it's likely that the periodic bouts of global financial instability that have surfaced over the past two decades—which were more numerous and of far greater magnitude than those in the preceding 35 years of the post-war period—will continue for the broadly foreseeable future. The challenge for financial institutions: to manage their affairs to reduce the frequency of such events and to manage problems better when they do arise, thus limiting the carnage and reducing systemic risk. Corrigan noted that markets have, in general, shown great resiliency in sorting out financial shocks, as long as the threat of serious credit problems isn't present. But when it is, "behavior changes in the direction of self-reinforcing tendencies toward risk aversion and market illiquidity.”

The problem

There are three general kinds of market shocks, he said—sovereign financial shocks, financial market shocks and financial institution shocks. The sovereign financial shocks of the 1980s had two common attributes: macro policy failures in the industrial world and emerging-market countries, particularly in Latin America, and huge credit exposures to the countries by a small number of international banks. The countries themselves were beset by high government intervention into the economy, big budget deficits, high inflation, huge external debt and barriers to free competition. The policy responses to these problems were mostly holding actions, culminating with the Brady bond program in Latin America, that were designed not to rebuild from the bottom up but merely to bandage gaping wounds and move on.

"Once a major financial market disturbance takes hold, phenomena begin to feed on themselves, making it difficult...to design and execute risk mitigation strategies and tactics.”

The sovereign shocks of the 1990s, by contrast, were far more structural than macroeconomic, the primary debtors were from the private sector, and the financial instruments were far more diverse. These shocks had four common denominators: the presence of a fixed-exchange-rate system, large current account deficits, large amounts of unsecured short-term currency borrowing via the interbank market, and weak and unstable domestic banking systems. Many countries, he said, had one or two of these attributes, but when three or four were present, the results were usually disastrous. The prescription for these problems generally boiled down to large-scale support from the International Monetary Fund. Many regulators believe more of the burden should have been shared by the private sector.

In terms of financial market shocks, Corrigan says there are three generally common characteristics: the distinction between market risk and credit risk blurs or disappears; market liquidity across a range of markets dries up, or disappears altogether as it did in 1998; and collateral and margin quickly become inadequate, leading to ugly problems in counterparty netting arrangements. "Once a major financial market disturbance takes hold,” he said, "these three phenomena begin to feed on themselves, thereby adding to the market pressures and making it difficult...to design and execute risk mitigation strategies and tactics.”

As for financial institution shocks, Corrigan offered a list of common denominators that can be called the Six C's: inadequate capital relative to risk, large credit losses, excessive concentrations of credit or market risk, serious weakness in the control environment, insufficient discipline of operating costs, and the breakdown of corporate culture and values. He stressed that the Six C's aren't universally applicable, and that external shocks can play a major role in financial institution shocks as well, but said "when most—and certainly when all—of [these factors] are present, serious problems will follow.”

The solution

Corrigan noted that, in terms of sovereign financial crises, emerging-market countries are making progress in their macroeconomic and structural policy agendas, providing hope that investors will become more discriminating in these regions. But, he says, a great deal remains to be done on the structural side, especially in terms of domestic banking systems and the structural foundations of accounting, banking supervision, and legal and judicial systems. "The most important thing we can do,” he says, "is promote growth and stability in our economies while keeping our markets open and receptive to the cross-border flow of goods, services and capital.”

In terms of financial market and financial institution shocks, a two-pronged approach is necessary. The public sector must continue the onslaught of projects that followed the 1998 near-meltdown. "I have every expectation that the changes will be evolutionary, not revolutionary,” he said, "but in order to ensure that result, private institutions must be at the point of efforts to build a more effective and more stable financial system.”

Corrigan also trumpeted the Counterparty Risk Management Policy Group's recent recommendations of industry best practices, designed, he said, to strengthen the "plumbing” of the financial system.

"Since financial instability yields few, if any, safe harbors,” he concluded, "we will all have a responsibility to do our part in fostering the goal of greater stability.”

Clearly, Corrigan has already done more than his share.

• The International Swaps and Derivatives Association has announced a number of appointments. Keith Bailey, managing director at Merrill Lynch Capital Services in New York, has been elected chairman. The following have been elected new directors: Damian Kissane, COO of Deutsche Bank in London; Kazuhiko Koshikawa, senior vice president at Sanwa Bank in Tokyo; Robert Mark, senior executive vice president and chief risk officer at Canadian Imperial Bank of Commerce in Toronto; and Stephen Targett, general manager of the global markets division at National Australia Bank in Melbourne. The following have been re-elected directors: Suneel Bakhshi, head of trading and distribution for central and Eastern Europe, the Middle East, India and Africa at Salomon Smith Barney/Citibank in London; Douglas Bongartz-Renaud, adjunct director and global head of GFXO sales at ABN Amro in Amsterdam; Henning Brutell, senior manager at Dresdner Bank in Frankfurt; Mark Haedicke, managing director and general counsel at Enron Capital & Trade Resources Corp. in Houston; George James, head of global fixed-income derivatives at Morgan Stanley Dean Witter in New York; Jonathan Moulds, head of global rates at Bank of America in London and Chicago; Dennis Oakley, managing director at Chase Manhattan Bank in New York; and Luciano Steve, head of fixed income at Banca Commerciale Italiana in Milan.
• Ronald Tanemura has been named managing director and head of Goldman Sachs' credit derivatives group. He previously headed Deutsche Bank's credit derivatives desk in London.
• Bank of America Securities has added a few names to its equity financial products group. Scott Draper, former director and co-head of the listed options trading desk at Salomon Smith Barney, joined the firm as principal and senior U.S. volatility trader; Nathanial Newlin, former senior U.S. index trader at JP Morgan, has joined as principal and senior derivatives trader of index products; and Nick Perry, a former options trader and principal at JP Morgan, has been named vice president and institutional equity options block trader.
• Luc Bertrand has been named president and chief executive of the Montreal Exchange. He had been vice president and managing director at National Bank Financial.
• RateXchange named Philip Rice, former vice president and treasurer at Transamerica Corp., executive vice president and CFO.
• Rod Beckstom, former chairman of the board of MKIRisk, has been appointed chairman of the board of Privada.
• Liffe announced that Dan Casey, former COO of mpct Solutions, is managing director of marketing and development for the exchange's electronic platform Liffe Connect.
• Stephen Gutteridge has been appointed executive vice president at the International Petroleum Exchange. He had been a managing director at Seeboard.
• Bank of America has named Michiaki Tanaka head of its asset-back bond desk in Japan. He had been a vice president in Citibank's securitization group in Japan.
• Jeff Lubin has joined Warburg Dillon Read as head of the European high-yield desk. He had been head of European high-yield capital markets and syndicate and global head of emerging-market corporates at Deutsche Bank.
• Enterprise Risk Solutions has made a few hires. Curtis Tange, who had been in Oliver Wyman & Co.'s emerging-markets practice, has been named vice president; Andrew Hickman, previously vice president in risk measurement and management at Credit Suisse Financial Products, has been named head of research and development; and Sumit Paul-Choudhury, a former journalist, has been named editorial director.
• MatchbookFX.com has named Mark Smith CEO. He was previously a director at the firm.
• Pierre-Henri Denain, formerly of General Re Financial Products, has been named head of derivatives marketing at CDC-Marches.
• Deutsche Bank has appointed Richard Evans chief risk officer for its investment banking, global corporates and institutions groups. He had been vice chairman of the risk management committee and global head of business risk monitoring and management at JP Morgan in New York.
• RBC Dominion Securities has hired Ali Mehmet-Alkan as a director and head of repackaging in its global credit derivatives group. He had been a founding member of Deutsche Bank's repackaging group.
• Dresdner Kleinwort Benson has hired Ulf Bacher as head of global fixed-income repo trading in Frankfurt. He had been head of Goldman Sachs' European repo desk in London.
• Christiane Elsenbach has been appointed an equity derivatives marketer at Morgan Stanley Dean Witter. She had been a marketer at Paribas.