risk Management

Napa, California to Robert Turner College & Career HS

Bachelor of Arts from U.C. Berkeley in 1979 Major: Math

Taught Math at Moreau High School Coached Football

M.B.A. from U.C. Berkeley in 1984 Major: Finance

Worked on Wall Street in New York City

Worked for Wells Fargo in San Francisco

A Semi-Famous Younger Brother: Gary Haugen

Mentoring Young People

Epic “Risk Management” Failure

Classic Risk Management Framework Identify and quantify your risk Do you have more risk than you want to take or can afford to take? If “No”, reevaluate if your circumstances change If “Yes”, obtain insurance to reduce your risk to an acceptable level

Insurance policies mitigate 1. General Liability Insurance: Every business, even if home-based, needs to have liability insurance.  The policy provides both defense and damages if you, your employees or your products or services cause or are alleged to have caused Bodily Injury or Property Damage to a third party. 2. Property Insurance:  If you own your building or have business personal property, including office equipment, computers, inventory or tools you should consider purchasing a policy that will protect you if you have a fire, vandalism, theft, smoke damage etc.  3. Commercial Auto Insurance: Commercial auto insurance protects a company’s vehicles. You can protect vehicles that carry employees, products or equipment.   4. Worker’s Compensation: Worker’s compensation provides insurance to employees who are injured on the job.

Derivative products mitigate 1. Commodity Risk: This is mostly insurable, and usually through the derivatives markets of futures and options.  That's the good news.  The bad news is that companies that are natural resource dependent have to be extra cautious in a volatile commodities market to make sure they hedge their price risks. 2. Interest Rate Risk:  Interest rate risk exists in an interest-bearing asset, such as a loan or a bond, due to the possibility of a change in the asset's value resulting from the variability of interest rates. Businesses manage interest rate risk using various interest rate derivative instruments.

Derivatives are analogous to prescription drugs

Managing Interest Rate Risk

Fed Raises Fed Funds Target Range by 0.25% on 12/16/2015 Previous Fed Funds Target Range: 0.00% - 0.25% New Fed Funds Target Range: 0.25% - 0.50%

Historically, the Fed Funds Rate has been much more volatile

Risk Management Case Study Borrowers want to refinance and lock-in, rock bottom long-term interest rates Bank wants to maintain and grow loan portfolio, but does not want to put long-term, low fixed rate loans on its books Win-Win solution 1. Bank makes floating rate loan to borrower 2. Borrower uses interest rate swap to synthetically fix rate. 23

Floating Rate Loan (5 years) Bank Lending Borrower Prime * Due to market fluctuations, all rates are subject to change until an agreement is executed 24

Interest Rate Swap (5 years) 4.00% Fixed Borrower Bank Derivatives Prime * Due to market fluctuations, all rates are subject to change until an agreement is executed 25

Floating Rate Loan With Swap 4.00% Fixed Bank Lending Borrower Bank Derivatives Prime Prime * Due to market fluctuations, all rates are subject to change until an agreement is executed 26

Characteristics of a Skillful Risk Manager Good understanding of math, probability and statistics Knowledge of human behavior Fear Greed Ability to embrace uncertainty. Uncertainty is what keeps life interesting! 27

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