Buffet to Start Firm that Quantifies Financial Risk

February 5, 2001 (PLANSPONSOR.com)- Managing risk may be undervalued, according to value manager Warren Buffett.

That may be why he agreed to start a new venture aimed at putting a numerical value on risk.
The new firm, to be launched with the help of former JP Morgan chief financial officer Peter Hancock, and a Goldman Sachs investment banker, Roberto Mendoza, will get a majority investment from General Re reinsurance subsidiary General Re Securities Holding, which manages the insurance company’s financial products operations.
Managing financial risk though quantitative models is becoming integral to both the insurance and derivatives business. Essentially, the huge over-the-counter options business has developed into customized insurance policies in which issuers, creditors, manufacturers, and the option packager share a portfolio of the multi-lateral risks going out years into the future. 

Putting a numeric value on those customized risks is the essence of the business in which payoffs can be huge, and mistakes wind up on the front pages.
Hancock was global head of derivatives at JP Morgan from 1990 to 1995.  Mendoza, the former JP Morgan vice chairman, is leaving Goldman Sachs after just eight months on the job to join the new company.
– Chuck Epstein      editors@plansponsor.com

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