February 9, 2022
The narrative around risk is changing, and not necessarily in the right direction for the market, innovation, and the entrepreneurial foundation of the US economy. Risk is something to be managed, not avoided. A person jumping out of a plane at 30,000 feet with out a parachute has no risk, the outcome is certain. The person jumping out of a plane at 30,000 feet with a parachute is in the risk management business because he desires certain outcomes, i.e. don’t land in a tree, don’t die.
Wisdom is understanding which risk can be managed and which should be avoided. Prudence is understanding how to manage risk effectively. The “prudent man” rule laid out in 1830 by Massachusetts Justice Samuel Putnam is not avoidance of all risk, but managing the risks while balancing the need to achieve a return, protect the corpus, and understanding the needs of the beneficiaries.
In a healthy market different people weigh risk differently and focus on different risks. When everyone focuses on the same risk we create very fat tails. Third party marks on assets allow better data to manage assets, this is also allows expansion of markets for infrequently traded assets. All banks balance sheets start out liquid, as they become less liquid they both generate return and incur risk. Managing that risk is key and pricing loans by selling pieces is an answer but better data/real time data that is verified on the collateral is the best answer. This is also true in private equity, private credit, CRE, and infrastructure. Inveniam delivers this with our partners like Apex Group Ltd, Cushman & Wakefield, Deloitte and Houlihan Lokey.
This is also true around managing regulatory risk. It is extremely hard to manage this risk without good data, or good guidelines from the regulators. Here is a good article from one of our advisors at Foley and Larnder, Patrick Daugherty.
These new DAO’s will become the new non-bank lenders, relying on verified data and marks on assets. This is the new CDO, CMBS, and CLO. Watch out for Innovators here like Zand and SEBA Bank AG.
Risk management is a distributed property, not a centralized policy… if people are going to be the primary agent of change in their own lives. This is important if we want to achieve certain outcomes for ourselves, our families, our communities, and our nation. This is Adam Smith’s “invisible hand” that drives the market, otherwise we become dependent on the heavy hand of the state. No risk = No innovation.