Risk in financial markets is nothing new, and neither is the all-consuming desire to avoid it. Ask Jiro Okochi when those now-famous risk-minimizers known as derivatives arrived on the scene, and he directs us back a bit farther than the mid-1980s, all the way, in fact, to the sixth century BCE, when the Greek philosopher Thalus predicted that the next year’s olive harvest would be particularly abundant. Thalus secured the rights to local olive presses for cheap. The next year, when his forecast proved accurate and demand for the presses soared, he rented them out at a higher price and made a killing. Okochi considers this an early example of an options contract — that is, a derivative in its infancy.
Derivatives are notoriously complicated, but Okochi not only understands them, he spends his days helping corporations and institutions manage them. He’s the co-founder and CEO of Reval, a New York-based financial technology firm that offers a range of software and services to help companies value derivatives, manage their risk, and adhere to increasingly intricate standard accounting rules.
Okochi says the idea for Reval coalesced in the late 1990s, a few years before the feverish dot-com boom went bust. He and a partner decided to combine their expertise in derivatives and web technology to help companies comply with highly complex derivative accounting requirements. In the decade since they launched, they’ve become a global firm with 200 employees and 350 worldwide clients, with names like Ford, Microsoft, UPS and Google. The firm has won numerous awards and is considered the industry’s leader.
Yet as a kid, heading a company wasn’t something Okochi could have envisioned. “My dad was an executive at Sony, and I never saw him,” he explains. Instead, Okochi was a fan of microscopes and chemistry sets, which may explain why he doesn’t quite fit the stereotype of a financial-industry CEO.
In a deliberate effort to plot a course different from his father’s, he ended up at Berkeley, where he studied genetics — unraveling the mysteries of African frogs and fruit flies. He planned to become a veterinarian, but after graduation another option appeared out of left field.
In the late 1980s the Japanese banking system was the most powerful in the world. Friends from Japan assured Okochi that if he wanted a job in finance, he could get one — never mind that he knew nothing about the financial markets. “If you look Japanese and speak Japanese,” they told him, “you can get a job on Wall Street.” So the summer after he graduated, he hopped on a cross-country flight with his head buried in a copy of Understanding Wall Street, and was soon working as a trader at a Wall Street investment bank. It was a stressful time to be a novice trader on Wall Street: this was the fall of 1987, just a month before the stock market crashed.
The current financial meltdown makes the ’87 crash look like a hiccup. Nevertheless, Okochi received an object lesson in the vicissitudes of the markets, a lesson that many in the financial world seem to have missed.
Okochi spent two years as a trader and then found his way into derivatives, which provided more of an intellectual challenge. For people outside the financial world, trying to understand how derivatives work can be daunting. Simply put, a derivative is any security whose value is derived from an underlying asset. They’re often used to guard or “hedge” against fluctuations in the market — changes in interest rates, currency exchange rates, or commodity prices. In the simplest derivative, an interest-rate swap, two parties agree to “swap” interest rates on their outstanding loans: a company with a fixed-rate loan will switch to an adjustable rate, and vice versa. Why? Because each company believes the swapped rate offers a better deal.
Derivatives can be very hard to value, a fact that led Warren Buffet to famously label them “weapons of mass destruction.” Okochi takes a more measured view, although he, too, resorts to a violent metaphor. “Let’s say a derivative is a gun. You can use a gun properly, never draw it, never pull the trigger. Or, you can use it to kill people.” In other words, derivatives aren’t to blame for the mess we’re in; people and vices like greed are. Okochi says the goal at Reval is to enable companies that use derivatives to hedge risk to do so intelligently.
As the company grows internationally, with offices in Europe, Australia, and Asia, Okochi does a lot of work overseas. Which means that he sometimes wakes up miles away from home and his two young children. But he emphasizes that his life is about more than work, and that Reval maintains a strict family-first policy. And it’s clear that he means it. His younger child, a boy named Finn, was born with Wiscott-Aldrich syndrome, a rare, usually fatal genetic disorder. Finn, now three, eventually underwent a bone-marrow transplant that doctors say has cured him. Finn was lucky to be matched with a part-Japanese bone marrow donor, as it can be difficult to find genetically compatible tissues for ethnic minorities. Okochi now encourages others, especially Asians, to register as potential bone marrow donors. He has held three bone marrow registration drives, including one at Cal with the ASUC.
A former genetics student, Okochi seems to be in awe of the gene technology that helped save his son’s life — a technology that manages risk of an entirely different kind.