The Blame Game
The blame has begun. The Republicans blame the Democrats for their involvement in Freddie and Fannie. The Democrats blame the Republicans for relaxing the financial regulations. The White House blames the Congress for not passing the necessary rules while the Congress blames the White House for not enforcing oversight.
The rest of the world blames the US. Even our ally, Germany blamed the US. The German Finance Minister Peer Steinbrück in echoing Chancellor Angela Merkel opined that “The United States, and let me emphasize, the United States is solely to be blamed for the financial crisis. They are the cause for the crisis and it is not Europe and it is not the Federal Republic of Germany.”
The Chancellor had earlier argued that the failure by the United to impose more stringent conditions on its banking sector dragged other nations into the credit crisis. She insisted that the Bush administration resisted German attempts to put greater regulation of the financial sector on the international agenda when she was the chair of the Group of Eight industrialized nations in 2007.
With the tax payers´ bailing out every company that can get a news outlet to carry its message, the public is blaming the CEOs. It is now a “sin” for the CEOs to spend money on independent agents who were top performers for their companies.
The Real Blame Belongs to the Risk Managers
There is enough blame to go around but when the final chapter of the current financial crisis is written, that chapter will need to put lots of blame on the Risk Managers. Why will it be the Risk Managers and not the CEOs that take the blame? Financial Services companies are in business because they can take risks. The name of their business is risk.
To be profitable, these companies must be able to write risks within their well thought out underwriting guidelines. It is one of the responsibilities of the CEOs to grow their businesses. The growth of businesses implies growth of risks. It is one of the responsibilities of the CROs and the Risk Managers to manage the risks even before the risks get through the front door or get on the company’s book of business.
What excuses will the Risk Managers in these companies that have failed or that are failing give to their fellow colleagues in other companies?
That these Risk Managers did not know what kind of exposure they were adding to their portfolio with the Subprime deals?
That there is no fore thought and serious analysis of how these Subprime loans will affect their balance sheet?
When these companies started taking on new types of risks, were the Risk Managers still stuck on using the same old approaches of measuring and managing these new risks as if they were like the old risks?
What happened to risk dependencies? What happened to assessment of the risk quantity?
Since the subprime loans started getting on the book, what were the Risk Managers doing until the loans imploded?
What type of risk control approaches were they using? What happened to the monitoring of the risk quality?
Whatever these Risk Managers were doing, there are abundant evidences today that they were not doing the right things. Is this like Monday morning quarterbacking? No!
Example is Citigroup that has lost more than $69 billion within the last few months. The Risk management in Citigroup was supposed to be independent with strong focus on managing the company’s diversities of risks but as Eric Dash and Julie Creswell pointed out, these “risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings - and executives´ multimillion-dollar bonuses - failed to rein them (the company's executives) in”
The Risk Managers will have to take the current financial crisis both as challenges and as well as opportunities. While different stakeholders will analyze the financial crisis differently, what is definitely and hopefully going to happen is that Risk Managers will take the opportunities offered by the financial and risk communities along with the support of G-20 to move the level of managing risks to a new height. – Stephen