Thursday, December 14, 2017

Keeping an eye out for the next financial disaster

It's Mike Bodson's job to spot the next Lehman Brothers, the next Wall Street meltdown lurking in the markets.

And he has strong incentive to do a good job. After all, he's the one who will have to clean up the mess afterward.

As president and CEO of Depository Trust & Clearing Corp. (DTCC), Bodson oversees what has long been a hidden cog in making Wall Street run. DTCC, which is owned by Wall Street firms, is responsible for clearing the bulk of U.S. securities trades.

From its headquarters in New York and a smaller-scale version of the company replicated in an uber-secure complex in New Tampa, DTCC handles 100 million transactions a day through equity stock trades, a stunning $1.7 quadrillion a year in volume.

These days, Bodson, 54, is closely watching everything from the Libor scandal to JP­Morgan Chase's multibillion-dollar trading blunder. During a recent visit to the company's 500-strong workforce in Tampa, Bodson talked with the Tampa Bay Times about market scandals, rebuilding trust in Wall Street traders, and preparing for the next big financial threats.

What's your financial background?

I had been at Morgan Stanley for 20 years. When I retired, I was global head of operations for institutional asset management and retail — all parts of the business.

So you came out of retirement to join DTCC?

I did retirement poorly. I took a lot of golf lessons and learned to hit a ball further out of bounds than I ever thought possible. I missed Wall Street, honestly. I missed the intellectual stimulation. I missed working in New York. I missed the people. I guess there are some people that could turn it off, but I was still in my 40s and wasn't ready to give up Wall Street.

Prior to working at DTCC, I had been off for about a year. I've been with DTCC now a little over five years. I joined in 2007 and was executive managing director, basically running all the businesses. I did that until about two years ago and became chief operating officer. … In April of this year, I was elected CEO.

Your company is still somewhat in the shadows.

For a time, we were the best-kept secret on Wall Street. People who worked on Wall Street 30 years didn't even know we existed, and that was by design. We don't do advertising. We call ourselves a benevolent monopoly, a monopoly by design. We don't want to go out there and flaunt what we do.

But aren't you becoming more vocal?

We have a government relations office in Washington and people in Brussels and London. Post-2008, Wall Street has become much more under the scrutiny of not just regulators but politicians. We think it's important people understand the value proposition we bring. We spend a lot of time educating politicians.

What is DTCC's role and how has that evolved?

We have two core businesses. One is the clearing and settlement business, which is the support of the U.S. cash securities market, be it stocks, corporate bonds, treasuries, mortgage-backed agencies. It's all about lowering the level of risk in the marketplace. So when a Lehman occurs or an MF Global occurs, we are taking on the exposure. The rest of Wall Street can continue on its way and we help wind down all the open transactions.

So when Lehman happened, Wall Street didn't immediately seize up.

How much in securities did you wind down after Leh­man's implosion?

Oh, about $500 billion in gross positions. We were shopping the book around. What happened is we had the opposite of what people had on their books. We're usually on the exact wrong market position, but we got out of it very successfully. And we got out of MF Global without a hitch.

Any prediction on who might be the next Lehman Brothers?

Ha! I would never be able to admit it if I did. Actually, we have admitted that in the years leading up to 2008, we had three stress scenarios and the three firms we picked were Bear Stearns, Lehman Brothers and a third I can't tell you about. They're still in existence. But we picked two out of the three firms to actually collapse. Number three is still there and doing okay.

Companies aside, what specific types of transactions or industries are you most concerned about?

I'm going to answer that slightly differently. I think what Peregrine (Financial Group) and MF Global and Bernie Madoff showed us is that sometimes you just have to go back to the basics. Confirming a bank account back to a bank. You can try to find a needle in the haystack and try to overanalyze the market. But sometimes you just have to step back. … The most obvious answer is the one sitting right in front of your face.

Let's get back to operations. What's your second core business?

The other business we're in is supporting derivatives. We have a joint venture. … What happened with Lehman created a whole new change. During Lehman's crisis there were newspaper articles talking about the amount of payments on credit default swaps and the numbers (cited) were $50 billion, $100 billion, $200 billion, $400 billion. The numbers were so big, people were thinking, "How are we going to pay for this?"

Because we had 85 percent of the positions in our trade warehouse, we knew the real number was about $6 billion. So we publicized it and took the anxiety level right out of the marketplace.

What's the difference between the financial near-meltdown of 2008 and the current unrest and instability in the markets?

In 2008 it was a financial crisis because of a lot of decisions made by financial firms, by politicians, by regulators. We were dealing with something that was almost a hard fact of the economy slowing down and the financial meltdown. It was almost a black and white situation. It was dire and people were very concerned about whether we'd get out of it. But it was like something you had trained for.

This one is a crisis of trust and confidence. We have to become a more open and transparent market. This is tough. … It's going to be a long, tough slog of proving that we're worthy of trust as a business.

How are you increasing trust and transparency?

We publicize information about what the largest positions are out there. Once a week we go out and publish it. As Dodd-Frank rolls out, we'll be out in a near real-time basis. So the public will be able to see where there's concentrations of risk. They'll be able to see in a marketplace that previously was pretty opaque.

Regulators have access to this database. So if I'm a French regulator wondering about French banks trading on Greek debt and what their exposure is, they can contact us and we can give them the information. It's not going to tell them as much, "Here's a problem." But it allows them to start asking the right questions.

Would this have given regulators a clearer idea of Chase's exposure earlier in the process?

Yes. That's exactly the point. As they learn how to use these tools, they can see positions building up and they can go in and ask questions. Is this a true hedge or not?

With Chase, I can't (speculate) on what went down, but obviously there was a misunderstanding of what was happening. It was a failure of risk management but the details are still unknown.

Branching outside Manhattan, you came to Tampa post-9/11, making this operation key to protecting financial data in the case of future terrorist attacks. How has the experiment worked out?

It's played out fantastically. We started with around 300 people. We're now upward of 500 people. A deep, deep talent pool.

Pretty much all functions of the company are represented down here. We just transferred down our head of information security. … While we started with operations, now it's basically a small version of our entire company.

We're hiring not only from local universities, but tapping into the armed forces. Here the growth has been much faster than the rest of the company.

So Tampa is ready to step in if there's a crisis?

We have a concentration of leadership still in New York. One thing we look at is who else we could bring down here. That, God forbid, if something happens in New York we have leadership beyond Eric (Miller, head of DTCC's Southern Business Center), who could step in and run the firm.

The sexy part is always talking about what causes (a crisis). I don't care what causes it. The question is what happens if I lose my computer system? What happens if I lose access? And then preparing for that.

Jeff Harrington can be reached at [email protected]

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