An addiction for risk at Anworth…

May 14, 2008

In yesterday’s NY Times, Andrew Ross Sorkin interviewed Citadel Investment Group founder Ken Griffin, a critic of risk management practices in the financial services industry. “We have a responsibility,” says Griffin, “to manage risk in a way that is prudent.”

A slightly different statement about risk management comes from the folks at Anworth Mortgage Asset Corporation (ANH), whose primary business is investing in agency mortgage-backed securities (i.e., the ones guaranteed by Fannie Mae and Freddie Mac).

In the risk factors section of its first quarter 10-Q filed Friday, Anworth gives this warning: “In an effort to earn greater amounts of incentive compensation under their Employment Agreement[s], as our executive officers evaluate different mortgage-related assets for our investment, there is a risk that they will cause us to assume more risk than is prudent.” (Anworth has included a version of this disclosure in its filings for the past couple of years, but the latest Q throws in some new language about the structure of a certain bonus pool.)

Whatever legal protection a company does or doesn’t get by cautioning investors that money may overstimulate its executives’ risk appetite (I leave that one to the lawyers), this disclosure certainly leaves a funny taste in one’s mouth. On the one hand, you can applaud Anworth management for facing up to its compensation temptations, the way you might admire someone who stands up at an AA meeting and acknowledges a drinking problem. After all, many companies create incentives that are thought to inspire risky behavior (especially on Wall Street), but few would come right out and say that.

On the other hand, if a firm really fears its compensation structure could lead to imprudent risk-taking, that seems like something to consider not merely disclosing, but changing.

Meanwhile, bravo to Anworth for showing up with good first quarter results, a feat these days for any company whose name contains the word “mortgage.”

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