We spend our careers as risk professionals establishing policy and practices designed to foster risk acknowledgement, risk analysis and risk-informed decision-making. The specific threats are often from the standard litany of credit defaults, market volatility, operational screw-ups, and business overreach. But today I believe we are facing a type of risk that is harder to quantify and increasingly dangerous, a phenomenon I call “financial vulgarity.”
To understand it we must look beyond our Bloomberg terminals to the culture around us. American society is awash in trends that lack substance and dignity: profanity-laced public discourse, the demolition of the White House East Wing, private clubs offering political access for $50,000 initiation fees, and the abrupt transactional nature of student visa cancellations.
What does financial vulgarity look like? It generally appears as a product or strategy driven by hype rather than some fundamental utility.
We see financial vulgarity in corporate treasuries or SPACs that are “stuffed” with crypto assets, such as bitcoin. These are often presented as modern diversification, but in reality introduce massive non-operating volatility into what should be the safest part of the balance sheet. In some cases such as Strategy (formerly Microstrategy), they distract from falling financial data visualization software revenue.
Brenda Boultwood
We see it in the “gold hype” replacing traditional hedging, and the political pressure on Federal Reserve independence. We see it in the Real Estate Investment Trust (REIT) sector, where a pivot to AI data centers has offset declines in office and hotel investments.
Perhaps most concerning for conduct risk is the fast-moving proposal to sell private equity (PE) to unqualified retail investors through their pension portfolio. “Mom and pop” investors often lack the capacity to absorb a 10-year (or longer) lock-up in an investment driven purely by asset refunding to the PE originators, and by exorbitant fee generation rather than customer suitability.
The Sixth-Sense Fallacy
When a CEO or board steers clear of these questionable trends, the market often praises their “sixth sense” or business instincts. We hear about the genius leader who “just knew” not to put bitcoin on the balance sheet or who opted to forgo a government event invitation to ensure the brand’s long-term integrity.
As risk managers, we should be wary of the idea of the heroic leader. Relying on the intuition of a “smart person” is not a risk management strategy; it is a key person risk and contributes to a “great man” view of the role of business management. Instincts are hard to audit, hard to replicate, and prone to failure when the fear of missing out (FOMO) kicks in.
To protect an organization from financial vulgarity, we cannot rely on a gut feeling. We need a risk governance framework that compels deliberate and informed decisions about risk. We need to operationalize common sense.
The Role of Risk Appetite
The most effective tool to combat financial vulgarity is enterprise risk management (ERM), especially in the risk appetite statement (RAS). Too often, the RAS is treated as a compliance exercise, a document filed away in a drawer. But when used correctly, it is a strategic filter. It is a mechanism that allows an organization to properly view a situation as best for “risk avoidance.” The organization can just say “no” to vulgarities.
By defining the boundaries of acceptable risk before a hype cycle begins, we remove the emotion from the decision. Let’s look at some temporal and hopefully ephemeral examples.
Operationalize Risk Appetite to Block Financial Vulgarities
Crypto Treasury
Whether it’s the pressure to chase yield, take one-time gains to meet a quarterly earnings target, or more permanently pump returns, pressure on the corporate treasury is a constant. A weak risk management framework relies on the CFO to say, “I don’t think crypto is a good idea.” A strong risk management framework relies on a pre-defined mandate.
Instead of banning specific assets, the RAS should focus on volatility, liquidity and an asset’s ability to maintain value. An illustrative RAS could read: “The organization has zero appetite for principal loss in its cash management portfolio. One hundred percent of fixed-income holdings must be denominated in G7 currencies or investment grade sovereign debt equivalents with strong intraday trading liquidity and T+1 settlements.”
The result would be to filter out crypto (or any other meme or speculative asset) because it fails the liquidity and sovereign tests. The decision is structural, not emotional.
AI Infrastructure Investment
Investment strategy drift is a major risk when a market is hot. When a traditional REIT looks to AI data center investments to pump its net asset value, ERM should step in with a framework promoting investment competencies and strategic alignment.
The illustrative RAS could read: “This asset manager has a low appetite for entering new asset classes where it does not possess established in-house operational expertise. Any expansion into a new asset class requires a minimum of three years internal track record or a fully integrated joint venture with a qualified partner with a similar record.”
The risk management outcome is to force the portfolio management team to prove it has the substance to back up the strategy. It allows a cooling-off period and prevents the “vulgar” pursuit of trend for the trend’s sake.
Predatory Retail Sales
Selling private equity to unqualified retail investors is a classic conflict of interest. While it may be legal, it introduces significant reputational and conduct risks. It is a blatant attempt to refund private equity investors sitting on failed, illiquid portfolios.
An illustrative RAS could read: “Our retirement fund has zero appetite for products where the liquidity profile of the asset is misaligned with the lifecycle needs of the target customer segment. Illiquid alternative investments may only be marketed to Qualified Purchasers (based on the 2021 SEC order).”
The effect is to establish a standard code of conduct, unaffected by market hype. It protects the fund’s reputation by ensuring product suitability is prioritized over fee income.
Parting Thoughts
Clearly, as risk managers, we should view ourselves as guardians of good taste and organizational logevity. The parallel between the degradation of our culture and the degradation of our financial products is real. As society accepts more “vulgarity,” the pressure on our organizations will only increase.
We cannot control the culture at large. We cannot stop the performative demolition of the East Wing or the erosion of public discourse. But we can control the culture within our organization.
By treating ERM not just as a checklist but as a strategic definition of who we are, we provide a vital service. We replace the mythical “sixth sense” with a tangible framework. We empower our Boards and business leaders to look at a lucrative but nonsensical opportunity and say, “No, this does not fit our risk appetite.”
The ability to remain disciplined is the ultimate competitive advantage. It is time for risk practitioners to view themselves not just as defenders of capital, but as custodians of organizational common sense. The “sixth sense” of great-man leadership is a myth. The cycle is reality.
When the music stops and crypto seizes up, the meme-asset SPACs are valueless, the AI-branded data centers sit empty, and the lawsuits begin, the organizations that maintained their dignity will be the ones left standing.
Brenda Boultwood is the Distinguished Visiting Professor, Admiral Crowe Chair, in the Economics Department at the United States Naval Academy. The views expressed in this article are her own and should not be attributed to the United States Naval Academy, the U.S. Navy or the U.S. Department of Defense.
She is the former Director of the Office of Risk Management at the International Monetary Fund. She has previously served as a board member at both the Committee of Chief Risk Officers (CCRO) and GARP, and is also the former senior vice president and chief risk officer at Constellation Energy. She held a variety of business, risk management, and compliance roles at JPMorgan Chase and Bank One.
Topics: Enterprise, Data, Metrics