Those timeless questions: an interview with Don M. Wilson III, chief risk officer, J.P. Morgan Chase

RMA Journal, The, Nov, 2003 by Beverly J. Foster

There is electricity in the air on the 15th floor of 270 Park Avenue in Manhattan. It's no small wonder that Don Wilson exudes intensity and a sense of urgency. As J.P. Morgan Chase's new chief risk officer, he has a daily diet of risks that run the spectrum--asset classes, consumer, private equity, off-balance-sheet, securities process ... virtually every risk possible in a financial services environment. "Diversification is our first line of defense," he says, acknowledging a lesson learned by the firm in the past few years. "Know thy customer" and "know thy risk" are others.

Wilson's strengths have come with him both from the corporate banking and the trading side of the business. In this interview with RMA President and CEO Maury Hartigan, Wilson shares his cardinal rules of risk management, how he is able to apply his broad experience to the challenge of addressing risks across the organization, and his belief in the timeless need to be consistent and comprehensive in defining, adding, correlating, stressing, and limiting risk.

MHH: Having known you many years, I can attest to your broad experience in lending, trading, and management. What parts of your experience will you use as you take on the role of chief risk officer at J.P. Morgan Chase?

DMW: Each experience has been different, but there are commonalties as well. My lending experience has taught me that numbers are necessary but not sufficient for understanding risk. To understand risk is to know the people with whom we are dealing and the character of the institutions those people represent. Judgments about integrity are not conducive to hard math and black-and-white analysis; they come from the ability to see beyond the numbers to know the motives as well as the mathematics of transactions.

My trading experience has taught me the necessity to look beyond the individual risks of a particular risk position. We must add up the risks and then answer such questions as:

* Is the firm's risk appetite consistent with the aggregate risks?

* How are the various portfolios of risk correlated? Within our trading business, positions are marked-to-market daily, and we add up gross risk and take account of portfolio effects to arrive at net risk positions. We regularly stress-test those gross and net positions to understand "what if." Bankers are sometimes not as disciplined in their lending portfolios as they are in their trading portfolios.

MHH: Do you feel your trading experience has resulted in priorities that may differ from those of other chief risk officers?

DMW: I'll have the opportunity to transfer knowledge and experience from one set of portfolio activities to another. Certainly, it will be a top priority to apply the thinking, the technology, the math, and the rigor to our credit portfolios that we have found useful in our marked-to-market trading portfolios.

For many years, we've been a leader in the growth and application of the derivatives product set across a variety of asset classes. That product set has excellent applicability, to the hedging of credit risk in our loan portfolios. It is a regimen of risk management that helps both credit issuers and credit investors improve credit liquidity and transferability, and the products and disciplines have worked well in the recent difficult credit environment.

MHH: How will your experiences and the applications being used intersect with the strategic planning process at J.P. Morgan Chase? Will the modern disciplines--the cardinal rules of risk management--influence strategic planning?

DMW: The pillars of our risk management are "know thy customer" and "know thy risk." The first is the knowledge not only of what our customers need but also why they need it and how our products will be used and portrayed. The second pillar is the management of transaction risk and concentration risk.

We need to be consistent and comprehensive in defining, adding, correlating, stressing, and limiting the firm's broad array of risk portfolios. We need to be more generic and more enterprise-wide in our thinking and our disciplines. For instance, streams of risk cut across the client and product segments of our breadth of extension-of-credit activities: payments, custody, derivatives, equity, card, mortgage, and private banking. We must continually ask ourselves three questions:

1. How much risk is enough?

2. What's the risk correlated with?

3. In a stress scenario, is the pain tolerable?

The answers to these questions are then subject to two basic constraints: a AA debt rating and our tolerance for earnings volatility. We also take account of the firm's appetite for market share in our product, client, geography, and industry franchises.

High leverage as a financial matter and narrow margins as an operating matter drive a need for a diversified asset structure, a diversified capital structure, and a diversified earnings structure. An important lesson the firm has learned over the past two years is the pain associated with concentrations of risk.